Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 08/03/2012 16:43:46)
Table of Contents

 

 

FORM 10-Q

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2012

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 001-35258

 

 

DUNKIN’ BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-4145825

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

130 Royall Street

Canton, Massachusetts 02021

(Address of principal executive offices) (zip code)

(781) 737-3000

(Registrants’ telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

 

 

Indicate by check mark whether the registrant has (1) 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    YES   x     NO   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x       Smaller Reporting Company   ¨

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 July 30, 2012, 120,497,131 shares of common stock of the registrant were outstanding.

 

 

 


Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

             Page      
Part I. – Financial Information   

Item 1.

  Financial Statements      3   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      20   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      34   

Item 4.

  Controls and Procedures      34   
Part II. – Other Information   

Item 1.

  Legal Proceedings      35   

Item 1A.

  Risk Factors      35   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      36   

Item 3.

  Defaults Upon Senior Securities      36   

Item 4

  Mine Safety Disclosures      36   

Item 5.

  Other Information      36   

Item 6.

  Exhibits      36   
  Signatures      37   

 

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Table of Contents

Part I.        Financial Information

Item 1.       Financial Statements

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

     June 30,
2012
      December 31,  
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 218,685        246,715   

Accounts receivable, net of allowance for doubtful accounts of $2,468 and $2,713 as of June 30, 2012 and December 31, 2011, respectively

     39,955        37,122   

Notes and other receivables, net of allowance for doubtful accounts of $1,374 and $2,321 as of June 30, 2012 and December 31, 2011, respectively

     9,482        21,665   

Assets held for sale

     1,560        1,266   

Deferred income taxes, net

     48,655        48,387   

Restricted assets of advertising funds

     30,537        31,017   

Prepaid expenses and other current assets

     23,462        20,302   
  

 

 

   

 

 

 

Total current assets

     372,336        406,474   
  

 

 

   

 

 

 

Property and equipment, net of accumulated depreciation of $112,002 and $103,541 as of June 30, 2012 and December 31, 2011, respectively

     183,896        185,360   

Investments in joint ventures

     164,316        164,636   

Goodwill

     891,481        890,992   

Other intangible assets, net

     1,493,588        1,507,219   

Restricted cash

     421        269   

Other assets

     68,418        69,068   
  

 

 

   

 

 

 

Total assets

   $ 3,174,456        3,224,018   
  

 

 

   

 

 

 

Liabilities and Equity

  

Current liabilities:

    

Current portion of long-term debt

   $ 16,000        14,965   

Capital lease obligations

     352        232   

Accounts payable

     8,175        9,651   

Income taxes payable, net

     18,766        15,630   

Liabilities of advertising funds

     46,133        50,547   

Deferred income

     24,423        24,918   

Other current liabilities

     166,801        200,597   
  

 

 

   

 

 

 

Total current liabilities

     280,650        316,540   
  

 

 

   

 

 

 

Long-term debt, net

     1,442,274        1,453,344   

Capital lease obligations

     7,327        4,928   

Unfavorable operating leases acquired

     20,198        21,440   

Deferred income

     17,148        16,966   

Deferred income taxes, net

     569,728        578,660   

Other long-term liabilities

     82,014        86,204   
  

 

 

   

 

 

 

Total long-term liabilities

     2,138,689        2,161,542   
  

 

 

   

 

 

 

Commitments and contingencies (note 11)

    

Stockholders’ equity:

    

Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     —          —     

Common stock, $0.001 par value; 475,000,000 shares authorized; 120,468,873 and 120,136,631 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     120        119   

Additional paid-in capital

     1,445,710        1,478,291   

Treasury stock, at cost

     (25     —     

Accumulated deficit

     (707,628     (752,075

Accumulated other comprehensive income

     14,766        19,601   
  

 

 

   

 

 

 

Total stockholders’ equity of Dunkin’ Brands

     752,943        745,936   

Noncontrolling interests

     2,174        —     
  

 

 

   

 

 

 

Total equity

     755,117        745,936   
  

 

 

   

 

 

 

Total liabilities, common stock, and equity

   $     3,174,456              3,224,018   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

         Three months ended         Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 

Revenues:

      

Franchise fees and royalty income

   $     105,928        98,139        201,972        184,098   

Rental income

     26,002        24,143        48,941        46,274   

Sales of ice cream products

     28,442        25,225        51,165        47,941   

Other revenues

     12,015        9,465        22,681        17,872   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     172,387                156,972             324,759             296,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

      

Occupancy expenses—franchised restaurants

     12,912        12,917        25,832        25,205   

Cost of ice cream products

     19,971        18,696        36,789        33,820   

General and administrative expenses, net

     84,026        54,057        141,866        107,943   

Depreciation

     7,333        6,096        13,522        12,222   

Amortization of other intangible assets

     6,783        7,023        13,648        14,105   

Impairment charges

     377        404        386        1,057   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     131,402        99,193        232,043        194,352   

Equity in net income of joint ventures

     5,153        4,015        8,617        4,797   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,138        61,794        101,333        106,630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     139        150        257        265   

Interest expense

     (16,690     (28,958     (33,386     (62,840

Loss on debt extinguishment and refinancing transactions

     —          (5,165     —          (16,172

Other gains (losses), net

     (267     (64     (207     412   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (16,818     (34,037     (33,336     (78,335
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     29,320        27,757        67,997        28,295   

Provision for income taxes

     11,101        10,595        23,864        12,856   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income including noncontrolling interests

     18,219        17,162        44,133        15,439   

Net loss attributable to noncontrolling interests

     (278     —          (314     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Dunkin’ Brands

   $ 18,497        17,162        44,447        15,439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

        

Class L—basic and diluted

   $ n/a        0.83        n/a        1.68   

Common—basic

     0.15        (0.04     0.37        (0.55

Common—diluted

     0.15        (0.04     0.36        (0.55

Cash dividends declared per common share

     0.15        —          0.30        —     

See accompanying notes to unaudited consolidated financial statements.

 

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

     Three months ended      Six months ended  
     June 30,
2012
    June 25,
2011
     June 30,
2012
    June 25,
2011
 

Net income including noncontrolling interests

   $ 18,219        17,162         44,133        15,439   

Other comprehensive income (loss), net:

         

Effect of foreign currency translation

     1,315        3,019         (3,221     8,052   

Other

     (178     125         (1,614     49   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,137        3,144         (4,835     8,101   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     19,356        20,306         39,298        23,540   

Comprehensive loss attributable to noncontrolling interests

     (278     —           (314     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Dunkin’ Brands

   $     19,634            20,306             39,612            23,540   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Six months ended  
     June 30,
2012
    June 25,
2011
 

Cash flows from operating activities:

    

Net income including noncontrolling interests

   $ 44,133        15,439   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     27,170        26,327   

Amortization of deferred financing costs and original issue discount

     2,637        3,323   

Loss on debt extinguishment and refinancing transactions

     —          16,172   

Impact of unfavorable operating leases acquired

     (1,216     (1,698

Deferred income taxes

     (13,504     726   

Impairment charges

     386        1,057   

Provision for (recovery of) bad debt

     (751     625   

Share-based compensation expense

     2,830        447   

Equity in net income of joint ventures

     (8,617     (4,797

Dividends received from joint ventures

     4,389        5,237   

Other, net

     389        (1,040

Change in operating assets and liabilities:

    

Accounts, notes, and other receivables, net

     10,086        26,567   

Other current assets

     (3,188     2,880   

Accounts payable

     (957     2,450   

Other current liabilities

     (33,608     (48,764

Liabilities of advertising funds, net

     (3,934     (1,801

Income taxes payable, net

     896        2,764   

Deferred income

     (319     (2,678

Other, net

     86        (4,741
  

 

 

   

 

 

 

Net cash provided by operating activities

     26,908        38,495   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property and equipment

     (9,748     (9,136

Other, net

     (1,745     913   
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,493     (8,223
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of long-term debt

     —          250,000   

Repayment of long-term debt

     (10,441     (254,750

Payment of deferred financing and other debt-related costs

     —          (16,951

Dividends paid on common stock

     (36,114     —     

Other, net

     3,140        2,908   
  

 

 

   

 

 

 

Net cash used in financing activities

     (43,415     (18,793
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     (30     35   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (28,030     11,514   

Cash and cash equivalents, beginning of period

     246,715        134,100   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $      218,685                145,614   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for income taxes

   $ 37,149        9,367   

Cash paid for interest

     30,455        62,053   

Noncash investing activities:

    

Property and equipment included in accounts payable and accrued expenses

     1,067        627   

Purchase of leaseholds in exchange for capital lease obligations

     2,703        —     

See accompanying notes to unaudited consolidated financial statements.

 

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Description of Business and Organization

Dunkin’ Brands Group, Inc. (“DBGI”), together with its consolidated subsidiaries, is one of the world’s largest franchisors of restaurants serving coffee and baked goods as well as ice cream within the quick service restaurant segment of the restaurant industry. We develop, franchise, and license a system of both traditional and nontraditional quick service restaurants and, in limited circumstances, own and operate individual locations. Through our Dunkin’ Donuts brand, we develop and franchise restaurants featuring coffee, donuts, bagels, and related products. Through our Baskin-Robbins brand, we develop and franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, our subsidiaries located in Canada and the United Kingdom manufacture and/or distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in various international markets.

Throughout these financial statements, “Dunkin’ Brands,” “the Company,” “we,” “us,” “our,” and “management” refer to DBGI and its consolidated subsidiaries taken as a whole.

(2) Summary of Significant Accounting Policies

(a) Unaudited Financial Statements

The consolidated balance sheet as of June 30, 2012, the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2012 and June 25, 2011, and the consolidated statements of cash flows for the six months ended June 30, 2012 and June 25, 2011, are unaudited.

The accompanying consolidated financial statements include the accounts of DBGI and its consolidated subsidiaries and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. All significant transactions and balances between subsidiaries and affiliates have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with U.S. GAAP have been recorded. Such adjustments consisted only of normal recurring items. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K, as amended.

(b) Fiscal Year

The Company operates and reports financial information on a 52-week (or 53-week) year on a 13-week (or 14-week) quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13 th (or 14 th ) Saturday of each quarter. The data periods contained within our three- and six-month periods ended June 30, 2012 and June 25, 2011 reflect the results of operations for the 13-week and 26-week periods ended on those dates. Operating results for the three- and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2012.

(c) Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended.

 

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(d) Fair Value of Financial Instruments

The carrying amounts of accounts receivable, notes and other receivables, assets and liabilities related to the advertising funds, accounts payable, and other current liabilities approximate fair value because of their short-term nature. For long-term receivables, we review the creditworthiness of the counterparty on a quarterly basis, and adjust the carrying value as necessary. We believe the carrying value of long-term receivables of $4.3 million and $4.8 million as of June 30, 2012 and December 31, 2011, respectively, approximates fair value.

Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 are summarized as follows (in thousands):

 

     Quoted prices
in active
markets for
identical assets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
 

Assets:

     

Mutual funds

   $             2,725         —       
  

 

 

    

 

 

 

Total assets

   $ 2,725         —       
  

 

 

    

 

 

 

Liabilities:

     

Deferred compensation liabilities

   $ —           7,378     
  

 

 

    

 

 

 

Total liabilities

   $ —                     7,378     
  

 

 

    

 

 

 

The mutual funds and deferred compensation liabilities primarily relate to the Dunkin’ Brands, Inc. Non-Qualified Deferred Compensation Plan (“NQDC Plan”), which allows for pre-tax salary deferrals for certain qualifying employees. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, as defined under U.S. GAAP, because their inputs are derived principally from observable market data by correlation to the hypothetical investments. The Company holds mutual funds, as well as money market funds, to partially offset the Company’s liabilities under the NQDC Plan as well as other benefit plans. The changes in the fair value of the mutual funds are derived using quoted prices in active markets for the specific funds. As such, the mutual funds are classified within Level 1, as defined under U.S. GAAP.

The carrying value and fair value of long-term debt was $1.458 billion and $1.441 billion, respectively, as of June 30, 2012. The fair value of our term loans is estimated based on current bid prices for our term loans. As such, our term loans are classified within Level 2, as defined under U.S. GAAP.

(e) Concentration of Credit Risk

The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees and royalty income. In addition, we have note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. At

 

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June 30, 2012 and December 31, 2011, one master licensee accounted for approximately 19% and 17%, respectively, of total accounts receivable, net, which was primarily due to the timing of orders and shipments of ice cream to the master licensee. No other individual franchisee or master licensee accounts for more than 10% of total revenues or accounts and notes receivable.

(f) Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. This guidance was effective for the Company beginning in fiscal year 2012, and will be applied when performing our annual impairment test in the third quarter of 2012. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

(g) Subsequent Events

Subsequent events have been evaluated through the date these consolidated financial statements were filed.

(3) Franchise Fees and Royalty Income

Franchise fees and royalty income consisted of the following (in thousands):

 

     Three months ended      Six months ended  
     June 30,
2012
     June 25,
2011
     June 30,
2012
     June 25,
2011
 

Royalty income

   $ 98,498         91,313         187,629         170,668   

Initial franchise fees, including renewal income

     7,430         6,826         14,343         13,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchise fees and royalty income

   $     105,928                 98,139                 201,972                 184,098   
  

 

 

    

 

 

    

 

 

    

 

 

 

The changes in franchised and company-owned points of distribution were as follows:

 

     Three months ended     Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 

Systemwide Points of Distribution

        

Franchised points of distribution—beginning of period

     16,843        16,266        16,763        16,162   

Franchises opened

     288        314        569        594   

Franchises closed

     (150     (174     (348     (361

Net transfers (to) from company-owned points of distribution

     (1     —          (4     11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchised points of distribution in operation—end of period

     16,980        16,406        16,980        16,406   

Company-owned points of distribution—end of period

     36        21        36        21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total systemwide points of distribution—end of period

             17,016                16,427                17,016                16,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

(4) Goodwill and Other Intangible Assets

The changes in the gross carrying amount of goodwill from December 31, 2011 to June 30, 2012 are primarily due to goodwill acquired related to the acquisition of company-owned points of distribution and the impact of foreign currency fluctuations.

 

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Other intangible assets at June 30, 2012 consisted of the following (in thousands):

 

     Weighted
average
    amortization    
period
(years)
     Gross
carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Definite-lived intangibles:

          

Franchise rights

     20       $ 383,784         (129,268     254,516   

Favorable operating leases acquired

     15         80,858         (35,049     45,809   

License rights

     10         6,230         (3,937     2,293   

Indefinite-lived intangible:

          

Trade names

     N/A         1,190,970         —          1,190,970   
     

 

 

    

 

 

   

 

 

 
      $     1,661,842                 (168,254             1,493,588   
     

 

 

    

 

 

   

 

 

 

Other intangible assets at December 31, 2011 consisted of the following (in thousands):

 

     Weighted
average
    amortization    
period
(years)
     Gross
carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Definite-lived intangibles:

          

Franchise rights

     20       $ 383,786         (119,091     264,695   

Favorable operating leases acquired

     14         83,672         (34,725     48,947   

License rights

     10         6,230         (3,623     2,607   

Indefinite-lived intangible:

          

Trade names

     N/A         1,190,970         —          1,190,970   
     

 

 

    

 

 

   

 

 

 
      $     1,664,658                 (157,439             1,507,219   
     

 

 

    

 

 

   

 

 

 

The changes in the gross carrying amounts of other intangible assets from December 31, 2011 to June 30, 2012 are primarily due to the impact of foreign currency fluctuations, the impairment of favorable operating leases acquired resulting from lease terminations, and intangibles acquired related to the acquisition of company-owned points of distribution. Impairment of favorable operating leases acquired totaled $316 thousand and $206 thousand for the three months ended June 30, 2012 and June 25, 2011, respectively, and $317 thousand and $217 thousand for the six months ended June 30, 2012 and June 25, 2011, respectively, and is included within impairment charges in the consolidated statements of operations.

Total estimated amortization expense for fiscal years 2012 through 2016 is presented below (in thousands). The amount reflected below for fiscal year 2012 includes year-to-date amortization.

 

Fiscal year:

  

2012

   $ 26,867   

2013

     26,234   

2014

     25,631   

2015

     25,276   

2016

     22,335   

The impact of our unfavorable leases acquired resulted in an increase in rental income and a decrease in rental expense as follows (in thousands):

 

     Three months ended      Six months ended  
     June 30,
2012
        June 25,   
2011
     June 30,
2012
     June 25,
2011
 

Increase in rental income

   $ 263         448         528         822   

Decrease in rental expense

     337         398         688         876   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total increase in operating income

   $         600                 846                 1,216                 1,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(5) Debt

Borrowings under the senior credit facility of Dunkin’ Brands, Inc. (“DBI”), a subsidiary of DBGI, bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.5%, (b) the prime rate, (c) the LIBOR rate plus 1.0%, and (d) 2.0% or (2) a LIBOR rate provided that LIBOR shall not be lower than 1.0%. The applicable margin under the term loan facility is 2.0% for loans based upon the base rate and 3.0% for loans based upon the LIBOR rate. The effective interest rate for term loans, including the amortization of original issue discount and deferred financing costs, was 4.4% at June 30, 2012.

Repayments are required to be made under the term loans equal to approximately $15.0 million per calendar year, payable in quarterly installments through September 2017, with the remaining principal balance due in November 2017. Additionally, following the end of each fiscal year, the Company is required to prepay an amount equal to 25% of excess cash flow (as defined in the senior credit facility) for such fiscal year. If DBI’s leverage ratio, which is a measure of DBI’s outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the credit facility), is less than 4.00x, no excess cash flow payments are required. Under the terms of the senior credit facility, the first excess cash flow payment was due in the first quarter of fiscal year 2012 based on fiscal year 2011 excess cash flow and leverage ratio. In December 2011, the Company made an additional principal payment of $11.8 million that was applied to the 2011 excess cash flow payment due in the first quarter of 2012. Based on fiscal year 2011 excess cash flow, considering all payments made, the excess cash flow payment required in the first quarter of 2012 was $2.4 million. The excess cash flow payments may be applied to required principal payments. However, the Company intends on making quarterly payments of $4.0 million, which are reflected in the current portion of long-term debt at June 30, 2012. Other events and transactions, such as certain asset sales and incurrence of debt, may trigger additional mandatory prepayments.

(6) Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

 

     June 30,
2012
         December 31,    
2011
 

Gift card/certificate liability

   $ 95,443         144,965   

Accrued salary and benefits

     25,019         31,001   

Accrued legal liabilities (see note 11(d))

     26,314         4,658   

Accrued professional costs

     2,915         3,427   

Accrued interest

     330         659   

Other

     16,780         15,887   
  

 

 

    

 

 

 

Total other current liabilities

   $     166,801                 200,597   
  

 

 

    

 

 

 

(7) Segment Information

The Company is strategically aligned into two global brands, Dunkin’ Donuts and Baskin-Robbins, which are further segregated between U.S. operations and international operations. As such, the Company has determined that it has four operating segments, which are its reportable segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. Dunkin’ Donuts U.S., Baskin-Robbins U.S., and Dunkin’ Donuts International primarily derive their revenues through royalty income, franchise fees, and rental income. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement. Baskin-Robbins International primarily derives its revenues from the manufacturing and sales of ice cream products, as well as royalty income, franchise fees, and license fees. The operating results of each segment are regularly reviewed and evaluated separately by the Company’s senior management, which includes, but is not limited to, the chief executive officer. Senior management primarily evaluates the performance of its segments

 

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and allocates resources to them based on earnings before interest, taxes, depreciation, amortization, impairment charges, loss on debt extinguishment and refinancing transactions, foreign currency gains and losses, other gains and losses, and unallocated corporate charges referred to as segment profit. When senior management reviews a balance sheet, it is at a consolidated level. The accounting policies applicable to each segment are consistent with those used in the consolidated financial statements.

Subsequent to December 31, 2011 and as part of fiscal year 2012 management reporting, retail sales for Dunkin’ Donuts U.S. company-owned restaurants are now included in the Dunkin’ Donuts U.S. segment revenues. Prior to fiscal year 2012, retail sales for Dunkin’ Donuts U.S. company-owned restaurants were excluded from segment revenues. Additionally, revenue and segment profit for Baskin-Robbins’ sales to United States military locations located internationally were previously included in the Baskin-Robbins International segment, but are now included within the Baskin-Robbins U.S. segment. Revenues for Dunkin’ Donuts U.S. and revenues and segment profit for Baskin-Robbins U.S. and Baskin-Robbins International in the tables below have been restated to reflect these changes for all periods presented. There was no impact to Dunkin’ Donuts U.S. segment profit as the net operating income earned from company-owned restaurants was previously included in segment profit.

Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenue earned through arrangements with third parties in which our brand names are used and revenue generated from online training programs for franchisees that are not allocated to a specific segment. Revenues by segment were as follows (in thousands):

 

     Revenues  
     Three months ended      Six months ended  
     June 30,
2012
     June 25,
2011
     June 30,
2012
     June 25,
2011
 

Dunkin’ Donuts U.S.

   $ 122,606         110,226         233,660         208,734   

Dunkin’ Donuts International

     3,870         3,831         7,818         7,700   

Baskin-Robbins U.S.

     12,740         12,822         22,592         22,273   

Baskin-Robbins International

     30,106         26,939         54,347         51,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reportable segment revenues

     169,322         153,818         318,417         289,902   

Other

     3,065         3,154         6,342         6,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $     172,387                 156,972                 324,759                 296,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses included in “Corporate and other” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services. Segment profit by segment was as follows (in thousands):

 

     Segment profit  
     Three months ended     Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 

Dunkin’ Donuts U.S.

   $ 89,918        82,605        169,859        153,312   

Dunkin’ Donuts International

     1,933        3,150        5,094        6,331   

Baskin-Robbins U.S.

     8,860        7,101        14,317        11,576   

Baskin-Robbins International

     11,842        10,279        19,124        18,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segment profit

           112,553        103,135        208,394        189,485   

Corporate and other

     (51,922     (27,818     (79,505     (55,471

Interest expense, net

     (16,551     (28,808     (33,129     (62,575

Depreciation and amortization

     (14,116     (13,119     (27,170     (26,327

Impairment charges

     (377     (404     (386     (1,057

Loss on debt extinguishment and refinancing transactions

     —          (5,165     —          (16,172

Other gains, net

     (267     (64     (207     412   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 29,320                27,757                67,997                28,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Equity in net income of joint ventures is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Income included in “Other” in the segment profit table below represents the reduction of depreciation and amortization expense reported by BR Korea Co., Ltd. (“BR Korea”) as the Company recorded an impairment charge in fiscal year 2011 related to the underlying goodwill, intangible assets, and long-lived assets of BR Korea. Equity in net income of joint ventures by reportable segment was as follows (in thousands):

 

     Equity in net income of joint ventures  
     Three months ended      Six months ended  
     June 30,
2012
     June 25,
2011
     June 30,
2012
     June 25,
2011
 

Dunkin’ Donuts International

   $ 510         505         1,383         893   

Baskin-Robbins International

     3,533         3,510         5,344         3,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reportable segments

     4,043         4,015         6,727         4,797   

Other

     1,110         —           1,890         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity in net income of joint ventures

   $       5,153                 4,015                 8,617                 4,797   
  

 

 

    

 

 

    

 

 

    

 

 

 

(8) Stockholders’ Equity

(a) Public Offering

On April 4, 2012, certain existing stockholders sold 26,400,000 shares of our common stock at a price of $29.50 per share, less underwriting discounts and commissions, in a secondary public offering. Additionally, the underwriters exercised their option to purchase an additional 3,960,000 shares, which were also sold by certain existing stockholders. The Company did not receive any proceeds from the sales of shares by the existing stockholders. The Company incurred approximately $914 thousand of expenses in connection with the offering during the first quarter of fiscal year 2012. Additionally, the Company recorded share-based compensation expense of approximately $1.3 million during the three months ended June 30, 2012, related to approximately 1.0 million stock options granted to employees that were not eligible to vest until the sale or disposition of the shares held by our Sponsors (as defined in note 12(b)) that were sold in the secondary offering (performance condition).

(b) Equity Incentive Plans

The Company’s 2006 Executive Incentive Plan, as amended, (the “2006 Plan”) provides for the grant of stock-based and other incentive awards. A maximum of 12,191,145 shares of common stock may be delivered in satisfaction of awards under the 2006 Plan, of which a maximum of 5,012,966 shares may be awarded as nonvested (restricted) shares and a maximum of 7,178,179 may be delivered in satisfaction of stock options.

The Dunkin’ Brands Group, Inc. 2011 Omnibus Long-Term Incentive Plan (the “2011 Plan”) was adopted in July 2011, and is the only plan under which the Company currently grants awards. A maximum of 7,000,000 shares of common stock may be delivered in satisfaction of awards under the 2011 Plan.

During the six months ended June 30, 2012, the Company granted options to purchase 517,900 shares of common stock and 16,381 restricted stock units to employees and directors under the 2011 Plan. The stock options vest in equal annual amounts over a four-year period subsequent to the grant date, and have a maximum contractual term of ten years. The restricted stock units vest in equal annual amounts over a one-year or three-year period subsequent to the grant date.

Total compensation expense related to all share-based awards was $2.2 million and $206 thousand for the three months ended June 30, 2012 and June 25, 2011, respectively, and $2.8 million and $447 thousand for the six months ended June 30, 2012 and June 25, 2011, respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.

 

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(c) Accumulated Other Comprehensive Income

The changes in the components of accumulated other comprehensive income were as follows (in thousands):

 

     Effect of foreign
currency
translation
            Other             Accumulated
other
comprehensive
income
 

Balance at December 31, 2011

   $ 20,910        (1,309     19,601   

Current period changes

     (3,221     (1,614     (4,835
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $     17,689                (2,923             14,766   
  

 

 

   

 

 

   

 

 

 

(d) Dividends

The Company paid quarterly dividends of $0.15 per share of common stock on March 28, 2012 and May 16, 2012 totaling approximately $18.0 million and $18.1 million, respectively. On July 26, 2012, we announced that our board of directors approved the next quarterly dividend of $0.15 per share of common stock payable August 24, 2012.

(9) Earnings per Share

The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share amounts):

 

     Three months ended     Six months ended  
     June 30,
2012
     June 25,
2011
    June 30,
2012
     June 25,
2011
 

Net income attributable to Dunkin’ Brands—basic and diluted

   $ 18,497         17,162        44,447         15,439   

Allocation of net income (loss) to common stockholders (1) :

          

Class L—basic and diluted

   $ n/a         18,983        n/a         38,314   

Common—basic (2)

     18,467         (1,821     44,334         (22,875

Common—diluted (2)

     18,467         (1,821     44,354         (22,875

Weighted average number of common shares:

          

Class L—basic and diluted

     n/a         22,866,486        n/a         22,841,801   

Common—basic

     120,095,118         41,522,343        119,888,657         41,446,342   

Common—diluted

     121,985,524             41,522,343        121,650,852             41,446,342   

Earnings (loss) per common share:

          

Class L—basic and diluted

   $ n/a         0.83        n/a         1.68   

Common—basic

     0.15         (0.04     0.37         (0.55

Common—diluted

     0.15         (0.04     0.36         (0.55

 

(1) As the Company had both Class L and common stock outstanding during the three and six months ended June 25, 2011 and Class L had preference with respect to all distributions, earnings per share is calculated using the two-class method, which requires the allocation of earnings to each class of common stock. The numerator in calculating Class L basic and diluted earnings per share is the Class L preference amount accrued at 9% per annum during the three and six months ended June 25, 2011.

 

(2)

Net income allocated to common shareholders for the three months ended June 30, 2012 excludes $30 thousand for basic and diluted earnings per share, and $113 thousand and $93 thousand for basic and diluted

 

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  earnings per share, respectively, for the six months ended June 30, 2012, that is allocated to participating securities. Participating securities consist of unvested (restricted) shares that contain a nonforfeitable right to participate in dividends. No net loss was allocated to participating securities for the three and six months ended June 25, 2011 as the participating securities do not participate in losses.

The weighted average number of common shares in the common diluted earnings per share calculation for the three and six months ended June 25, 2011 excludes all restricted stock and stock options outstanding, as they would be antidilutive. The weighted average number of common shares in the common diluted earnings per share calculation for all periods excludes all performance-based restricted stock and stock options outstanding for which the performance criteria were not yet met as of the fiscal period end. As of June 30, 2012, there were approximately 224,000 common restricted stock awards and approximately 1,211,000 options to purchase common stock that were performance-based and for which the performance criteria were not yet met. There were no Class L common stock equivalents outstanding during the three and six months ended June 25, 2011.

(10) Income Taxes

During the first quarter of fiscal year 2011, the Company recognized deferred tax expense of $1.9 million due to enacted changes in future state income tax rates. This change in enacted tax rates affects the tax rate expected to be in effect in future periods when the deferred tax assets and liabilities reverse. Additionally, the Company recorded a net tax benefit of $0.8 million and $2.6 million during the three and six months ended June 30, 2012, respectively, primarily related to the reversal of reserves for uncertain tax positions for which settlement with the taxing authorities was reached during the respective periods.

The federal income tax returns of the Company for fiscal years 2006, 2007, 2008, and 2009 are currently under audit by the Internal Revenue Service (“IRS”), and the IRS has proposed adjustments for fiscal years 2006 and 2007 to increase our taxable income as it relates to our gift card program, specifically to record taxable income upon the activation of gift cards. We have filed a protest to the IRS’ proposed adjustments. If the IRS were to prevail in this matter the proposed adjustments would result in additional taxable income of approximately $58.9 million for fiscal years 2006 and 2007 and approximately $27.2 million of additional federal and state taxes and interest owed, net of federal and state benefits. If the IRS prevails, a cash payment would be required and the additional taxable income would represent temporary differences that will be deductible in future years. Therefore, the potential tax expense attributable to the IRS adjustments for 2006 and 2007 would be limited to $3.6 million, consisting of federal and state interest, net of federal and state benefits. In addition, if the IRS were to prevail in respect of fiscal years 2006 and 2007 it is likely to make similar claims for years subsequent to fiscal 2007 and the potential additional federal and state taxes and interest owed, net of federal and state benefits, for fiscal years 2008, 2009 and 2010, computed on a similar basis to the IRS method used for fiscal years 2006 and 2007, and factoring in the timing of our gift card uses and activations, would be approximately $19.9 million. The corresponding potential tax expense impact attributable to these later fiscal years, 2008 through 2010, would be approximately $1.0 million. During the fourth quarter of 2011, representatives of the Company met with the IRS appeals officer. Based on that meeting, the Company proposed a settlement related to this issue and is awaiting a response from the IRS. If our settlement proposal is accepted as presented, we expect to make a cash tax payment in an amount that is less than the amounts proposed by the IRS to cumulatively adjust our tax method of accounting for our gift card program through the tax year ended December 25, 2010. No assurance can be made that a settlement can be reached, or that we will otherwise prevail in the final resolution of this matter. An unfavorable outcome from any tax audit could result in higher tax costs, penalties, and interests, thereby negatively and adversely impacting our financial condition, results of operations, or cash flows.

(11) Commitments and Contingencies

(a) Lease Commitments

The Company is party to various leases for property, including land and buildings, leased automobiles, and office equipment under non-cancelable operating and capital lease arrangements.

 

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(b) Guarantees

The Company has established agreements with certain financial institutions whereby the Company’s franchisees can obtain financing with terms of approximately three to ten years for various business purposes. Substantially all loan proceeds are used by the franchisees to finance store improvements, new store development, new central production locations, equipment purchases, related business acquisition costs, working capital, and other costs. In limited instances, the Company guarantees a portion of the payments and commitments of the franchisees, which is collateralized by the store equipment owned by the franchisee. Under the terms of the agreements, in the event that all outstanding borrowings come due simultaneously, the Company would be contingently liable for $5.2 million and $6.9 million at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012 and December 31, 2011, there were no amounts under such guarantees that were due. The fair value of the guarantee liability and corresponding asset recorded on the consolidated balance sheets was $737 thousand and $781 thousand, respectively, at June 30, 2012 and $754 thousand and $874 thousand, respectively, at December 31, 2011. The Company assesses the risk of performing under these guarantees for each franchisee relationship on a quarterly basis. As of June 30, 2012 and December 31, 2011, the Company had recorded reserves for such guarantees of $466 thousand and $390 thousand, respectively.

The Company has entered into a third-party guarantee with a distribution facility of franchisee products that ensures franchisees will purchase a certain volume of product over a ten-year period. As product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. As of June 30, 2012 and December 31, 2011, the Company was contingently liable for $7.4 million and $7.8 million, respectively, under this guarantee. Based on current internal forecasts, the Company believes the franchisees will achieve the required volume of purchases, and therefore, the Company would not be required to make payments under this agreement unless we terminate the contract early. The Company has also entered into a third-party guarantee with this distribution facility that ensures franchisees will sell a certain volume of product each year over a four-year period. As of June 30, 2012, the Company was contingently liable for $7.5 million under this guarantee. Based on current internal forecasts, the Company believes the franchisees will achieve the required volume of sales, and therefore, the Company would not be required to make payments under this agreement. Additionally, the Company has various supply chain contracts that provide for purchase commitments or exclusivity, the majority of which result in the Company being contingently liable upon early termination of the agreement or engaging with another supplier. Based on prior history and the Company’s ability to extend contract terms, we have not recorded any liabilities related to these commitments. As of June 30, 2012 and December 31, 2011, we were contingently liable under such supply chain agreements for approximately $20.2 million and $23.9 million, respectively.

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants and the guarantee of certain other leases, we are contingently liable on certain lease agreements. These leases have varying terms, the latest of which expires in 2026. As of June 30, 2012 and December 31, 2011, the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $7.0 million and $10.5 million, respectively. Our franchisees are the primary lessees under the majority of these leases. The Company generally has cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of nonpayment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, we do not believe it is probable that the Company will be required to make payments under such leases, and we have not recorded a liability for such contingent liabilities.

(c) Letters of Credit

At June 30, 2012 and December 31, 2011, the Company had standby letters of credit outstanding for a total of $11.1 million and $11.2 million, respectively. There were no amounts drawn down on these letters of credit.

(d) Legal Matters

In May 2003, a group of Dunkin’ Donuts franchisees from Quebec, Canada filed a lawsuit against the Company on a variety of claims, based on events which primarily occurred 10 to 15 years ago, including but not limited to,

 

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alleging that the Company breached its franchise agreements and provided inadequate management and support to Dunkin’ Donuts franchisees in Quebec (“Bertico litigation”). On June 22, 2012, the Quebec Superior Court found for the plaintiffs and issued a judgment against the Company in the amount of approximately $C16.4 million (approximately $15.9 million), plus costs and interest, representing loss in value of the franchises and lost profits. During the three months ended June 30, 2012, the Company increased its estimated liability related to the Bertico litigation by $20.7 million to $24.6 million as of June 30, 2012, reflecting the judgment amount and estimated plaintiff legal costs and interest. The Company had previously recorded an estimated liability of approximately $3.9 million, representing the Company’s best estimate within the range of losses which could be incurred in connection with this matter. The Company strongly disagrees with the decision reached by the Court and believes the damages awarded were unwarranted. As such, the Company is vigorously appealing the decision.

The Company is engaged in several other matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. At June 30, 2012 and December 31, 2011, contingent liabilities, excluding the Bertico litigation, totaling $1.8 million and $736 thousand, respectively, were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the potential loss which may be incurred in connection with these matters. While the Company intends to vigorously defend its positions against all claims in these lawsuits and disputes, it is reasonably possible that the losses in connection with these matters could increase by up to an additional $2.0 million based on the outcome of ongoing litigation or negotiations.

(12) Related-Party Transactions

(a) Advertising Funds

At June 30, 2012 and December 31, 2011, the Company had a net payable of $15.6 million and $19.5 million, respectively, to the various advertising funds.

To cover administrative expenses of the advertising funds, the Company charges each advertising fund a management fee for items such as facilities, accounting services, information technology, data processing, product development, legal, administrative support services, and other operating expenses, which amounted to $1.4 million and $1.5 million for the three months ended June 30, 2012 and June 25, 2011, respectively, and $2.9 million and $3.0 million for the six months ended June 30, 2012 and June 25, 2011, respectively. Such management fees are reflected in the consolidated statements of operations as a reduction in general and administrative expenses, net.

(b) Sponsors

Through the first quarter of fiscal year 2012, DBGI was majority-owned by investment funds affiliated with Bain Capital Partners, LLC, The Carlyle Group, and Thomas H. Lee Partners, L.P. (collectively, the “Sponsors”).

On April 4, 2012, certain existing stockholders, including the Sponsors, sold a total of 30,360,000 shares of our common stock (see note 8(a)). Subsequent to this sale of shares, each of the Sponsors owned approximately 10% of our outstanding common stock and each Sponsor continues to have one representative on the board of directors.

Prior to the closing of the Company’s initial public offering on August 1, 2011, the Company was charged an annual management fee by the Sponsors of $1.0 million per Sponsor, payable in quarterly installments. The Company recognized $750 thousand and $1.5 million of expense related to Sponsor management fees during the three and six months ended June 25, 2011, respectively, which is included in general and administrative expenses, net in the consolidated statements of operations.

 

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At June 30, 2012 and December 31, 2011, certain affiliates of the Sponsors held $53.5 million and $64.8 million, respectively, of term loans, net of original issue discount, issued under the Company’s senior credit facility. The terms of these loans are identical to all other term loans issued to lenders in the senior credit facility.

Our Sponsors have a substantial interest in our Company as well as several other entities. The existence of such common ownership and management control could result in differences within our operating results or financial position than if the entities were autonomous; however, we believe such transactions were negotiated at arms-length. The Company made payments to entities under common control totaling approximately $726 thousand and $538 thousand during the three months ended June 30, 2012 and June 25, 2011, respectively, and $928 thousand and $603 thousand during the six months ended June 30, 2012 and June 25, 2011, respectively, primarily for the purchase of training services and leasing of restaurant space. At June 30, 2012 and December 31, 2011, the Company had a net payable of $145 thousand and $127 thousand, respectively.

We have entered into an investor agreement with the Sponsors and also entered into a registration rights and a coordination agreement with certain shareholders, including the Sponsors. Pursuant to these agreements, subject to certain exceptions and conditions, our Sponsors may require us to register their shares of common stock under the Securities Act, and they will have the right to participate in certain future registrations of securities by us.

(c) Joint Ventures

The Company received royalties from its joint ventures as follows (in thousands):

 

     Three months ended      Six months ended  
     June 30,
2012
     June 25,
2011
     June 30,
2012
     June 25,
2011
 

B-R 31 Ice Cream Co., Ltd. (“BR Japan”)

   $ 621         753         1,151         1,101   

BR Korea Co., Ltd. (“BR Korea”)

     927         785         1,767         1,654   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $       1,548                 1,538                 2,918                 2,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012 and December 31, 2011, the Company had $1.2 million and $1.0 million, respectively, of royalties receivable from its joint ventures which were recorded in accounts receivable, net of allowance for doubtful accounts, in the consolidated balance sheets.

The Company made net payments to its joint ventures totaling approximately $355 thousand and $352 thousand during the three months ended June 30, 2012 and June 25, 2011, respectively, and $699 thousand and $460 thousand during the six months ended June 30, 2012 and June 25, 2011, respectively, primarily for the purchase of ice cream products and incentive payments.

(d) Board of Directors

Certain family members of one of our directors hold an ownership interest in an entity that owns and operates Dunkin’ Donuts restaurants and holds the right to develop additional restaurants under store development agreements. The Company received royalty, rental and other payments from this entity of $339 thousand and $632 thousand for the three and six months ended June 30, 2012, respectively, and $157 thousand during the three and six months ended June 25, 2011. During the three and six months ended June 30, 2012, the Company recognized $80 thousand of income related to a store development agreement with this entity. All material terms of the franchise and store development agreements with this entity are consistent with other unrelated franchisees in the market.

(13) Closure of Manufacturing Plant

During the three months ended June 30, 2012, the Company’s board of directors approved a plan to close the Peterborough, Ontario, Canada manufacturing plant, which supplies ice cream to certain of the brand’s

 

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international markets, in October 2012. Ice cream that had been produced in Peterborough will shift to existing third-party partner suppliers. During the three months ended June 30, 2012, the Company recorded costs related to the plant closure of $3.7 million, including $1.1 million of accelerated depreciation on property, plant, and equipment, $1.9 million of ongoing termination benefits, and $0.7 million of other costs related to the closing and transition. The accelerated depreciation is included in depreciation in the consolidated statements of operations, while all other costs are included in general and administrative expenses, net in the consolidated statements of operations. The Company expects to incur a total reduction to operating income associated with the plant closing and transition of between $16 million and $18 million.

(14) Subsequent Events

On July 25, 2012, our board of directors approved a share repurchase program of up to $500 million of outstanding shares of our common stock. Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. This repurchase authorization expires two years from the date of approval. No shares have been repurchased pursuant to the program.

 

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements contained herein are not based on historical fact and are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These risk and uncertainties include, but are not limited to: the ongoing level of profitability of franchisees and licensees; changes in working relationship with our franchisees and licensees and the actions of our franchisees and licensees; our master franchisees’ relationships with sub-franchisees; the strength of our brand in the markets in which we compete; changes in competition within the quick service restaurant segment of the food industry; changes in consumer behavior resulting from changes in technologies or alternative methods of delivery; economic and political conditions in the countries where we operate; our substantial indebtedness; our ability to protect our intellectual property rights; consumer preferences, spending patterns and demographic trends; the success of our growth strategy and international development; changes in commodity and food prices, particularly coffee, dairy products and sugar, and the other operating costs; shortages of coffee; failure of our network and information technology systems; interruptions or shortages in the supply of products to our franchisees and licensees; the impact of food borne-illness or food safety issues or adverse public or medial opinions regarding the health effects of consuming our products; our ability to collect royalty payments from our franchisees and licensees; uncertainties relating to litigation; the ability of our franchisees and licensees to open new restaurants and keep existing restaurants in operation; our ability to retain key personnel; any inability to protect consumer credit card data and catastrophic events.

Forward-looking statements reflect management’s analysis as of the date of this quarterly report. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our most recent annual report on Form 10-K. Except as required by applicable law, we do not undertake to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

Introduction and Overview

We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin’ Donuts and Baskin-Robbins brands. With over 17,000 points of distribution in 55 countries, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of June 30, 2012, Dunkin’ Donuts had 10,169 global points of distribution with restaurants in 38 U.S. states and the District of Columbia and in 31 foreign countries. Baskin-Robbins had 6,847 global points of distribution as of the same date, with restaurants in 44 U.S. states and the District of Columbia and in 45 foreign countries.

We are organized into four reporting segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We generate revenue from four primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream products to franchisees in certain international markets, and (iv) other income including fees for the licensing of our brands for products sold in non-franchised outlets, the licensing of the right to manufacture Baskin-Robbins ice cream sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, revenue from our company-owned restaurants, and online training fees.

 

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Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With only 36 company-owned points of distribution as of June 30, 2012, we are less affected by store-level costs and profitability and fluctuations in commodity costs than other QSR operators.

Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For the six months ended June 30, 2012, franchisee contributions to the U.S. advertising funds were $161.8 million.

We operate and report financial information on a 52- or 53-week year on a 13-week quarter (or 14-week fourth quarter, when applicable) basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday of the fourth quarter, when applicable). The data periods contained within the three- and six-month periods ended June 30, 2012 and June 25, 2011 reflect the results of operations for the 13-week and 26-week periods ended on those dates. Operating results for the three- and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2012.

Selected Operating and Financial Highlights

 

     Three months ended     Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 

Franchisee-reported sales (in millions):

        

Dunkin’ Donuts U.S.

   $     1,574.9        1,463.2        3,021.1        2,762.2   

Dunkin’ Donuts International

     164.9        162.4        325.4        315.5   

Baskin-Robbins U.S.

     158.7        150.5        272.7        253.4   

Baskin-Robbins International

     374.5        352.2        637.5        588.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total franchisee-reported sales

   $ 2,273.0                2,128.3                4,256.7                3,919.1   

Systemwide sales growth

     6.9     6.9     8.7     6.2

Comparable store sales growth:

        

Dunkin’ Donuts U.S.

     4.0     3.8     5.5     3.4

Dunkin’ Donuts International (1)

     3.5     n/a        3.1     n/a   

Baskin-Robbins U.S.

     4.6     (2.8 )%      6.4     (1.9 )% 

Baskin-Robbins International (1)

     1.5     n/a        4.0     n/a   

Total revenues (in thousands)

   $ 172,387        156,972        324,759        296,185   

Operating income (in thousands)

     46,138        61,794        101,333        106,630   

Adjusted operating income (in thousands)

     78,937        69,221        141,920        121,792   

Net income attributable to Dunkin’ Brands (in thousands)

     18,497        17,162        44,447        15,439   

Adjusted net income (in thousands)

     40,325        24,717        70,948        34,239   

 

(1) Comparable store sales growth data was not available for our international segments until fiscal year 2012.

Our financial results are largely driven by changes in systemwide sales, which include sales by all points of distribution, whether owned by Dunkin’ Brands or by its franchisees and licensees. While we do not record sales by franchisees or licensees as revenue, we believe that this information is important in obtaining an understanding of our financial performance. We believe systemwide sales growth and franchisee-reported sales information aid in understanding how we derive royalty revenue, assists readers in evaluating our performance relative to competitors, and indicates the strength of our franchised brands. Comparable store sales growth represents the growth in average weekly sales for restaurants that have been open at least 54 weeks that have reported sales in the current and comparable prior year week.

 

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Overall growth in systemwide sales of 6.9% and 8.7% for the three and six months ended June 30, 2012, respectively, resulted from the following:

 

 

Dunkin’ Donuts U.S. systemwide sales growth of 7.8% and 9.6% for the three and six months ended June 30, 2012, respectively, as a result of 241 net new restaurants opened since June 25, 2011 and comparable store sales growth of 4.0% and 5.5%, respectively, driven by both increases in average ticket and transactions. Increases in transactions and average ticket resulted from strong beverage sales growth, especially in cold beverages, differentiated breakfast and afternoon sandwich offerings, sales of K-Cup portion packs, and a focused marketing campaign.

 

 

Dunkin’ Donuts International systemwide sales growth of 1.5% and 3.1% for the three and six months ended June 30, 2012, respectively, driven primarily by increased sales in the Middle East and Asia.

 

 

Baskin-Robbins U.S. systemwide sales growth of 5.5% and 7.6% for the three and six months ended June 30, 2012, respectively, resulted primarily from comparable store sales growth of 4.6% and 6.4%, respectively, driven by product news, custom cake sales, and new beverages.

 

 

Baskin-Robbins International systemwide sales growth of 6.3% and 8.4% for the three and six months ended June 30, 2012, respectively, primarily as a result of increased sales in South Korea and Japan.

The increase in total revenues of approximately $15.4 million, or 9.8%, for the three months ended June 30, 2012 as compared to the comparable period of 2011 primarily resulted from increased franchise fees and royalty income of $7.8 million, increased sales of ice cream products of $3.2 million, and a $2.6 million increase in other revenues resulting from additional company-owned restaurants. The increase in total revenues of approximately $28.6 million, or 9.6%, for the six months ended June 30, 2012 as compared to the comparable period of 2011 primarily resulted from increased franchise fees and royalty income of $17.9 million, a $4.8 million increase in other revenues resulting from additional company-owned restaurants, and increased sales of ice cream products of $3.2 million.

Operating income for the three months ended June 30, 2012 decreased $15.7 million, or 25.3%, from the comparable period of the prior year. This decrease resulted primarily from a $20.7 million increase in the legal reserve related to the Bertico litigation and $3.7 million of costs associated with the announced closure of our ice cream manufacturing plant in Peterborough, Ontario, Canada, offset by the $7.8 million increase in franchise fees and royalty income. Operating income for the six months ended June 30, 2012 decreased $5.3 million, or 5.0%, from the comparable period of the prior year primarily from the increase in the Bertico legal reserve and the costs associated with the announced closure of our ice cream manufacturing plant, offset by the $17.9 million increase in franchise fees and royalty income.

Adjusted operating income increased $9.7 million, or 14.0%, for the three months ended June 30, 2012 primarily as a result of the increase in revenues and continued general and administrative expense leverage. Adjusted operating income increased $20.1 million, or 16.5%, for the six months ended June 30, 2012 driven by the $17.9 million increase in franchise fees and royalty income and a $3.8 million increase in equity in net income from joint ventures.

Net income increased $1.3 million for the three months ended June 30, 2012 resulting from a $12.3 million decrease in interest expense and a $5.2 million decrease in loss on debt extinguishment and refinancing transactions due to costs recorded in the prior year resulting from the upsizing and repricing of long-term debt, offset by the $15.7 million decrease in operating income. Net income increased $29.0 million for the six months ended June 30, 2012 resulting from a $29.5 million decrease in interest expense and a $16.2 million decrease in loss on debt extinguishment and refinancing transactions, offset by an $11.0 million increase in tax expense and the $5.3 million decrease in operating income.

Adjusted net income increased $15.6 million for the three months ended June 30, 2012 primarily as a result of a $12.3 million decrease in interest expense and a $9.7 million increase in adjusted operating income, offset by a $6.4 million increase in income tax expense resulting from the higher profit. Adjusted net income increased

 

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$36.7 million for the six months ended June 30, 2012 primarily as a result of a $29.5 million decrease in interest expense and a $20.1 million increase in adjusted operating income, offset by a $12.6 million increase in income tax expense resulting from the higher profit.

Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, impairment charges, and other non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies. Adjusted operating income and adjusted net income are reconciled from operating income and net income determined under GAAP as follows:

 

     Three months ended     Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 
     (In thousands)  

Operating income

   $     46,138        61,794        101,333        106,630   

Adjustments:

        

Amortization of other intangible assets

     6,783        7,023        13,648        14,105   

Impairment charges

     377        404        386        1,057   

Secondary offering costs

     1,281        —          2,195        —     

Peterborough plant closure costs (1)

     3,678        —          3,678        —     

Bertico litigation (2)

     20,680        —          20,680        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income

   $ 78,937        69,221        141,920        121,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Dunkin’ Brands

   $ 18,497        17,162        44,447        15,439   

Adjustments:

        

Amortization of other intangible assets

     6,783        7,023        13,648        14,105   

Impairment charges

     377        404        386        1,057   

Secondary offering costs

     1,281        —          2,195        —     

Peterborough plant closure costs (1)

     3,678        —          3,678        —     

Bertico litigation (2)

     20,680        —          20,680        —     

Loss on debt extinguishment and refinancing transactions

     —          5,165        —          16,172   

Tax impact of adjustments, excluding Bertico litigation (3)

     (4,848     (5,037     (7,963     (12,534

Tax impact of Bertico adjustment (4)

     (6,123     —          (6,123     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 40,325        24,717        70,948        34,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents costs incurred related to the announced closure of the Baskin-Robbins ice cream manufacturing plant in Peterborough, Canada, including $1.9 million of severance-related charges, $1.1 million of accelerated depreciation, and other transition-related costs.

 

(2) Represents the incremental legal reserve recorded related to the Quebec Superior Court’s ruling in the Bertico litigation, in which the Court found for the Plaintiffs and issued a judgment against Dunkin’ Brands in the amount of approximately $C16.4 million, plus costs and interest.

 

(3) Tax impact of adjustments, excluding the Bertico litigation, calculated at a 40% effective tax rate for each period presented.

 

(4) Tax impact of Bertico litigation adjustment calculated as if the incremental reserve had not been recorded. The tax impact includes $3.9 million representing the actual direct tax benefit expected to be realized, as well as a $2.2 million tax benefit recorded in the second quarter of 2012 that is expected to fully reverse in the third and fourth quarters of 2012 based on interim tax provision requirements.

 

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Earnings per share

Earnings per share and diluted adjusted earnings per pro forma common share were as follows:

 

     Three months ended     Six months ended  
     June 30,
2012
     June 25,
2011
    June 30,
2012
     June 25,
2011
 

Earnings (loss) per share:

          

Class L—basic and diluted

   $ n/a         0.83        n/a         1.68   

Common—basic

     0.15         (0.04     0.37         (0.55

Common—diluted

     0.15         (0.04     0.36         (0.55

Diluted adjusted earnings per pro forma common share

     0.33         0.25        0.58         0.35   

On August 1, 2011, the Company completed an initial public offering in which 22,250,000 shares of common stock were sold at an initial public offering price of $19.00 per share. Immediately prior to the offering, each share of the Company’s Class L common stock converted into approximately 2.4338 shares of common stock. The number of common shares used in the calculation of diluted adjusted earnings per pro forma common share for the three and six months ended June 25, 2011 gives effect to the conversion of all outstanding shares of Class L common stock at the conversion factor of 2.4338 common shares for each Class L share, as if the conversion was completed at the beginning of that fiscal period. The calculation of diluted adjusted earnings per pro forma common share also includes the dilutive effect of common restricted shares and stock options, using the treasury stock method. No pro forma adjustments have been made to the number of common shares used in the calculation of diluted adjusted earnings per pro forma common share for the three or six months ended June 30, 2012, as all Class L common stock had converted to common shares prior to the beginning of that fiscal period. Diluted adjusted earnings per pro forma common share is calculated using adjusted net income, as defined above.

 

24


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Diluted adjusted earnings per pro forma common share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per pro forma common share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per pro forma common share should not be considered as an alternative to earnings (loss) per share derived in accordance with GAAP. Diluted adjusted earnings per pro forma common share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per pro forma common share is appropriate to provide additional information to investors to compare our performance prior to and after the completion of our initial public offering and related conversion of Class L shares into common, as well as to provide investors with useful information regarding our historical operating results. The following table sets forth the computation of diluted adjusted earnings per pro forma common share:

 

     Three months ended     Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 
     (In thousands, except share and per share data)  

Adjusted net income available to common shareholders:

        

Adjusted net income

   $ 40,325        24,717        70,948        34,239   

Less: Adjusted net income allocated to participating securities

     (71     (236     (142     (328
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income available to common shareholders

   $ 40,254        24,481        70,806        33,911   

Pro forma weighted average number of common shares—diluted:

        

Weighted average number of Class L shares

     —          22,866,486        —          22,841,801   

Class L conversion factor

     —          2.4338        —          2.4338   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of converted Class L shares

     —          55,653,044        —          55,592,963   

Weighted average number of common shares

     120,095,118        41,522,343        119,888,657        41,446,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma weighted average number of common shares—basic

     120,095,118        97,175,387        119,888,657        97,039,305   

Incremental dilutive common shares (1)

     1,890,406        804,081        1,762,195        402,041   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma weighted average number of common shares—diluted

     121,985,524        97,979,468        121,650,852        97,441,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted adjusted earnings per pro forma common share

   $ 0.33        0.25        0.58        0.35   

 

(1) Represents the dilutive effect of restricted shares and stock options, using the treasury stock method.

 

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Results of operations

Consolidated results of operations

 

     Three months ended     Six months ended  
     June  30,
2012
     June  25,
2011
     Increase
(Decrease)
    June  30,
2012
     June  25,
2011
     Increase
(Decrease)
 
           $      %           $      %  
     (In thousands, except percentages)     (In thousands, except percentages)  

Franchise fees and royalty income

   $ 105,928         98,139         7,789         7.9   $ 201,972         184,098         17,874         9.7

Rental income

     26,002         24,143         1,859         7.7     48,941         46,274         2,667         5.8

Sales of ice cream products

     28,442         25,225         3,217         12.8     51,165         47,941         3,224         6.7

Other revenues

     12,015         9,465         2,550         26.9     22,681         17,872         4,809         26.9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 172,387         156,972         15,415         9.8   $ 324,759         296,185         28,574         9.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues for the three and six months ended June 30, 2012 increased $15.4 million, or 9.8%, and $28.6 million, or 9.6%, respectively. The increase in total revenues was driven by an increase in franchise fees and royalty income of $7.8 million and $17.9 million for the three and six month periods, respectively, mainly as a result of Dunkin’ Donuts U.S. systemwide sales growth. Sales of ice cream products also increased $3.2 million in both the three and six month periods driven by strong sales in the Middle East. Other revenues also contributed $2.6 million and $4.8 million to the overall increase in revenues for the three and six month periods, respectively, driven by an increase in sales at company-owned restaurants due to the acquisition of restaurants since the prior year.

 

     Three months ended     Six months ended  
     June  30,
2012
     June  25,
2011
     Increase
(Decrease)
    June  30,
2012
     June  25,
2011
     Increase
(Decrease)
 
           $     %           $     %  
     (In thousands, except percentages)  

Occupancy expenses-franchised restaurants

   $ 12,912         12,917         (5     0.0   $ 25,832         25,205         627        2.5

Cost of ice cream products

     19,971         18,696         1,275        6.8     36,789         33,820         2,969        8.8

General and administrative expenses, net

     84,026         54,057         29,969        55.4     141,866         107,943         33,923        31.4

Depreciation and amortization

     14,116         13,119         997        7.6     27,170         26,327         843        3.2

Impairment charges

     377         404         (27     (6.7 )%      386         1,057         (671     (63.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

   $ 131,402         99,193         32,209        32.5   $ 232,043         194,352         37,691        19.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Equity in net income of joint ventures

     5,153         4,015         1,138        28.3     8,617         4,797         3,820        79.6

Operating income

   $ 46,138         61,794         (15,656     (25.3 )%    $ 101,333         106,630         (5,297     (5.0 )% 

Occupancy expenses for franchised restaurants for the three and six months ended June 30, 2012 remained consistent with the prior year, with fluctuations resulting from higher sales at locations with sales-based rent and changes in lease reserves recorded for closed locations.

Net margin on ice cream products for the three months ended June 30, 2012 increased $1.9 million, or 29.7%, from the prior year primarily as a result of the increased volume to the Middle East. Net margin on ice cream products for the six months ended June 30, 2012 remained consistent with the prior year as overall volumes remained consistent.

General and administrative expenses for the three and six months ended June 30, 2012 were impacted by an incremental legal reserve of $20.7 million recorded upon the Canadian court’s ruling in June 2012 in the Bertico litigation. Also impacting general and administrative expenses in the three and six months ended June 30, 2012 were $2.5 million of costs associated with the announced closure of our ice cream manufacturing plant in Canada, consisting primarily of severance and other transition-related costs. General and administrative expenses

 

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for the three and six months ended June 30, 2012 also include $1.3 million and $2.2 million, respectively, of transaction costs and incremental share-based compensation related to the secondary offering that was completed in April 2012.

Excluding the items noted above, general and administrative expenses increased $5.6 million, or 10.4%, and $8.5 million, or 7.9%, for the three and six months ended June 30, 2012, respectively. These increases in general and administrative expenses were primarily driven by $4.1 million and $8.4 million increases in personnel costs for the three and six month periods, respectively, related to continued investments in our Dunkin’ Donuts U.S. contiguous growth strategy and higher projected incentive compensation payouts. Also contributing to the increase in general and administrative expenses was $2.1 million and $3.8 million of additional company-owned restaurant costs for the three and six month periods, respectively, due to the acquisition of restaurants since the prior year. For the six months ended June 30, 2012, these increases were offset by a $3.5 million decline in professional and legal expenses.

Depreciation and amortization for the three and six months ended June 30, 2012 increased $1.0 million and $0.8 million, respectively, from the prior year comparable periods. These increases resulted primarily from $1.1 million of accelerated depreciation recorded in the current year resulting from the announced closure of the ice cream manufacturing plant in Canada by October 2012.

As a result of the announced closure of our ice cream manufacturing plant, the Company expects to incur a total reduction to operating income associated with the plant closing and transition of between $16 million and $18 million in fiscal year 2012, of which $4 million is non-cash, accelerated depreciation on existing plant assets. Additionally, the Company expects to realize annual pre-tax savings in cost of ice cream products of approximately $4 million to $5 million beginning in fiscal year 2013.

The decrease in impairment charges for the three and six months ended June 30, 2012 resulted from the timing of lease terminations in the ordinary course, which results in the write-off of favorable lease intangible assets and leasehold improvements.

Equity in net income of joint ventures increased $1.1 million and $3.8 million for the three and six months ended June 30, 2012, respectively, driven primarily by a reduction of $1.1 million and $1.9 million, respectively, in depreciation and amortization expense reported for South Korea. The reduction in depreciation in amortization expense resulted from the impairment charge recorded by the Company in fiscal year 2011 related to the underlying goodwill, intangible assets, and long-lived assets of the South Korea joint venture. The remaining increase in equity in net income of joint ventures for the six months ended June 30, 2012 was driven by strong performance in our South Korea and Japan joint ventures’ Baskin-Robbins businesses in the first quarter of 2012. The Japan joint venture was also negatively impacted in the prior year by the March 2011 earthquake and tsunami.

 

     Three months ended     Six months ended  
     June  30,
2012
     June  25,
2011
     Increase
(Decrease)
    June  30,
2012
     June  25,
2011
    Increase
(Decrease)
 
           $     %          $     %  
     (In thousands, except percentages)  

Interest expense, net

   $ 16,551         28,808         (12,257     (42.5 )%    $ 33,129         62,575        (29,446     (47.1 )% 

Loss on debt extinguishment

     —           5,165         (5,165     (100.0 )%      —           16,172        (16,172     (100.0 )% 

Other losses (gains), net

     267         64         203        317.2     207         (412     619        150.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other expense

   $ 16,818         34,037         (17,219     (50.6 )%    $ 33,336         78,335        (44,999     (57.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The decrease in net interest expense for the three and six months ended June 30, 2012 resulted primarily from the repayment of higher-rate senior notes with proceeds from term loan upsizing transactions in February and May

 

27


Table of Contents

2011 and the Company’s initial public offering completed in August 2011. Additionally, the Company further reduced interest expense by re-pricing its outstanding term loans in conjunction with the February and May 2011 upsize transactions.

The loss on debt extinguishment and refinancing transactions for the three and six months ended June 25, 2011 resulted from the term loan upsize and re-pricing transactions and related repayments of senior notes completed in the first and second quarters of 2011. No similar transactions occurred during the three or six months ended June 30, 2012.

The increase in other losses, net, for the three and six months ended June 30, 2012 resulted primarily from additional foreign exchange losses due to unfavorable fluctuations in the U.S. dollar against the Canadian dollar as compared to the corresponding periods in the prior year.

 

     Three months ended     Six months ended  
     June 30,
2012
    June 25,
2011
    June 30,
2012
    June 25,
2011
 
     ($ in thousands, except percentages)  

Income before income taxes

   $ 29,320        27,757        67,997        28,295   

Provision for income taxes

     11,101        10,595        23,864        12,856   

Effective tax rate

     37.9     38.2     35.1     45.4

The effective tax rate for the three months ended June 30, 2012 was consistent with the prior year at approximately 38%. The effective tax rate for the six months ended June 30, 2012 was favorably impacted by a net tax benefit of approximately $2.6 million primarily related to the reversal of reserves for uncertain tax positions for which settlement with the taxing authorities was reached during the period. The higher effective tax rate for the six months ended June 25, 2011 was primarily attributable to enacted increases in state tax rates, which resulted in additional deferred tax expense of approximately $1.9 million in the prior year. The effective tax rate for the six months ended June 25, 2011 was also impacted by reduced income before income taxes, driven by the loss on debt extinguishment and refinancing transaction, which magnified the impact of permanent and other tax differences.

Operating segments

We operate four reportable operating segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We evaluate the performance of our segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization, impairment charges, foreign currency gains and losses, other gains and losses, and unallocated corporate charges, referred to as segment profit. Segment profit for the Dunkin’ Donuts International and Baskin-Robbins International segments include equity in net income from joint ventures. For reconciliations to total revenues and income before income taxes, see the notes to our consolidated financial statements. Revenues for all segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues not included in segment revenues include revenue earned through arrangements with third parties in which our brand names are used and revenue generated from online training programs for franchisees that are not allocated to a specific segment.

Subsequent to December 31, 2011 and as part of fiscal year 2012 management reporting, retail sales for Dunkin’ Donuts U.S. company-owned restaurants are now included in the Dunkin’ Donuts U.S. segment revenues. Prior to fiscal year 2012, retail sales for Dunkin’ Donuts U.S. company-owned restaurants were excluded from segment revenues. Additionally, revenue and segment profit for Baskin-Robbins’ sales to United States military locations located internationally were previously included in the Baskin-Robbins International segment, but are now included within the Baskin-Robbins U.S. segment. Revenues for Dunkin’ Donuts U.S. and revenues and segment profit for Baskin-Robbins U.S. and Baskin-Robbins International in the tables below have been restated to reflect these changes for all periods presented. There was no impact to Dunkin’ Donuts U.S. segment profit as the net operating income earned from company-owned restaurants was previously included in segment profit.

 

28


Table of Contents

Dunkin’ Donuts U.S.

 

     Three months ended     Six months ended  
     June  30,
2012
     June  25,
2011
     Increase
(Decrease)
    June  30,
2012
     June  25,
2011
     Increase
(Decrease)
 
           $      %           $      %  
     (In thousands, except percentages)  

Royalty income

   $ 84,897         78,321         6,576         8.4   $ 162,749         147,626         15,123         10.2

Franchise fees

     6,363         5,580         783         14.0     12,569         10,790         1,779         16.5

Rental income

     24,789         22,665         2,124         9.4     46,464         43,329         3,135         7.2

Other revenues

     6,557         3,660         2,897         79.2     11,878         6,989         4,889         70.0
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 122,606         110,226         12,380         11.2   $ 233,660         208,734         24,926         11.9

Segment profit

   $ 89,918         82,605         7,313         8.9   $ 169,859         153,312         16,547         10.8

The increases in Dunkin’ Donuts U.S. revenues for the three and six months ended June 30, 2012 were primarily driven by increases in royalty income of $6.6 million and $15.1 million, respectively, as a result of increases in systemwide sales for each period. Also contributing to the increases in Dunkin’ Donuts U.S. revenues were increases in other revenues of $2.9 million and $4.9 million for the three and six month periods, respectively, driven by incremental sales from acquisitions of company-owned restaurants. Increases in rental income of $2.1 million and $3.1 million for the three and six month periods, respectively, also contributed to the increase in Dunkin’ Donuts U.S. revenues.

The increase in Dunkin’ Donuts U.S. segment profit for the three and six months ended June 30, 2012 of $7.3 million and $16.5 million, respectively, was driven by the increases in total revenues of $12.4 million and $24.9 million, respectively. Offsetting the increase in revenues were increases in professional fees, legal, and other general and administrative costs of $2.9 million and $3.5 million for the three and six month periods, respectively, primarily due to incremental costs of sales related to company-owned restaurants acquired. Also offsetting the increase in revenues were increases in personnel costs and travel of $2.1 million and $4.2 million for the three and six month periods, respectively, related to investment in our Dunkin’ Donuts U.S. contiguous growth strategy and higher projected incentive compensation payouts.

Dunkin’ Donuts International

 

     Three months ended     Six months ended  
     June  30,
2012
    June  25,
2011
    Increase
(Decrease)
    June  30,
2012
     June  25,
2011
    Increase
(Decrease)
 
         $     %          $     %  
     (In thousands, except percentages)  

Royalty income

   $ 3,266        3,191        75        2.4   $ 6,724         6,297        427        6.8

Franchise fees

     595        567        28        4.9     866         1,240        (374     (30.2 )% 

Rental income

     36        79        (43     (54.4 )%      81         164        (83     (50.6 )% 

Other revenues

     (27     (6     (21     (350.0 )%      147         (1     148        n/m   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

   $ 3,870        3,831        39        1.0   $ 7,818         7,700        118        1.5

Segment profit

   $ 1,933        3,150        (1,217     (38.6 )%    $ 5,094         6,331        (1,237     (19.5 )% 

Revenues for Dunkin’ Donuts International remained consistent for the three months ended June 30, 2012 as compared to the prior year comparable period. Dunkin’ Donuts International revenues for the six months ended June 30, 2012 also remained consistent with the prior year, with a $0.4 million increase in royalty income driven by the increase in systemwide sales being offset by a decrease of $0.4 million in franchise fees as the prior year included a deposit retained from a former licensee in Mexico.

 

29


Table of Contents

Segment profit for Dunkin’ Donuts International decreased $1.2 million for both the three and six months ended June 30, 2012. These declines were driven by increases in personnel costs and travel of $0.6 million and $0.8 million for the three and six month periods, respectively, and increases in professional, legal, and other general and administrative costs of $0.5 million and $0.8 million for the three and six month periods, respectively. For the six months ended June 30, 2012, these increases in expenses were offset by an increase in income from the South Korea joint venture of $0.5 million.

Baskin-Robbins U.S.

 

     Three months ended     Six months ended  
     June  30,
2012
     June  25,
2011
     Increase
(Decrease)
    June  30,
2012
     June  25,
2011
     Increase
(Decrease)
 
           $     %           $     %  
     (In thousands, except percentages)  

Royalty income

   $ 7,999         7,509         490        6.5   $ 13,813         12,617         1,196        9.5

Franchise fees

     195         299         (104     (34.8 )%      365         675         (310     (45.9 )% 

Rental income

     1,024         1,184         (160     (13.5 )%      2,067         2,402         (335     (13.9 )% 

Sales of ice cream products

     1,155         1,022         133        13.0     2,103         1,928         175        9.1

Other revenues

     2,367         2,808         (441     (15.7 )%      4,244         4,651         (407     (8.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 12,740         12,822         (82     (0.6 )%    $ 22,592         22,273         319        1.4

Segment profit

   $ 8,860         7,101         1,759        24.8   $ 14,317         11,576         2,741        23.7

Revenues for Baskin-Robbins U.S. for the three months ended June 30, 2012 remained flat with the prior year, with the increase in royalty income of $0.5 million driven by the increase in systemwide sales being offset by a decrease of $0.4 million in other revenues driven primarily by a decline in licensing income. Baskin-Robbins U.S. revenues increased $0.3 million, or 1.4%, for the six months ended June 30, 2012 primarily from an increase of $1.2 million in royalty income driven by the increase in systemwide sales. This increase was offset by declines in other revenues of $0.4 million, franchise fees of $0.3 million, and rental income of $0.3 million.

Baskin-Robbins U.S. segment profit for the three and six months ended June 30, 2012 increased $1.8 million and $2.7 million, respectively. These segment profit increases resulted primarily from decreases in other general and administrative expenses of $1.6 million and $2.2 million for the three and six month periods, respectively, driven by costs incurred in the prior year related to the roll-out of a new point-of-sale system for Baskin-Robbins franchisees and additional contributions made to the Baskin-Robbins advertising fund to support brand-building advertising in the prior year. The remaining increase in Baskin-Robbins U.S. segment profit for the six months ended June 30, 2012 primarily resulted from the increase in revenues.

Baskin-Robbins International

 

     Three months ended     Six months ended  
     June  30,
2012
     June  25,
2011
    Increase
(Decrease)
    June  30,
2012
     June  25,
2011
     Increase
(Decrease)
 
          $     %           $     %  
     (In thousands, except percentages)  

Royalty income

   $ 2,336         2,292        44        1.9   $ 4,343         4,128         215        5.2

Franchise fees

     277         380        (103     (27.1 )%      543         725         (182     (25.1 )% 

Rental income

     136         153        (17     (11.1 )%      285         304         (19     (6.3 )% 

Sales of ice cream products

     27,287         24,203        3,084        12.7     49,062         46,013         3,049        6.6

Other revenues

     70         (89     159        (178.7 )%      114         25         89        356.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $     30,106         26,939        3,167        11.8   $     54,347         51,195         3,152        6.2

Segment profit

   $ 11,842         10,279        1,563        15.2   $ 19,124         18,266         858        4.7

 

30


Table of Contents

Baskin-Robbins International revenues increased $3.2 million for both the three and six months ended June 30, 2012, primarily as a result of increases in sales of ice cream products of $3.1 million and $3.0 million for the three and six month periods, respectively, driven by strong sales to the Middle East.

Baskin-Robbins International segment profit increased $1.6 million for the three months ended June 30, 2012 primarily due to a $1.9 million increase in net margin on ice cream sales driven by the increase in volume to the Middle East.

Baskin-Robbins International segment profit increased $0.9 million for the six months ended June 30, 2012 primarily due to a $1.4 million increase in joint venture income resulting from strong performance in our South Korea joint venture’s Baskin-Robbins business, as well as increased income from the Japan joint venture as the prior year reflects a negative impact of the March 2011 earthquake and tsunami on our Japan joint venture’s results. Offsetting this increase in segment profit was an increase in professional, legal, and other general and administrative costs of $0.4 million.

Liquidity and Capital Resources

As of June 30, 2012, we held $218.7 million of cash and cash equivalents, which included $83.3 million of cash held for advertising funds and reserved for gift card/certificate programs. In addition, as of June 30, 2012, we had a borrowing capacity of $88.9 million under our $100.0 million revolving credit facility. During the six months ended June 30, 2012, net cash provided by operating activities was $26.9 million, as compared to net cash provided by operating activities of $38.5 million for the six months ended June 25, 2011. Net cash provided by operating activities for the six months ended June 30, 2012 includes a decrease of $39.8 million in cash held for advertising funds and reserved for gift card/certificate programs, which was primarily driven by seasonality of our gift card program. Excluding cash held for advertising funds and reserved for gift card/certificate programs, we generated $57.0 million of free cash flow during the six months ended June 30, 2012, calculated as follows (in thousands):

 

     Six months ended
June 30, 2012
 

Net cash provided by operating activities

   $     26,908   

Plus: Decrease in cash held for advertising funds and reserved for gift card/certificate programs

     39,826   

Less: Additions to property and equipment

     (9,748
  

 

 

 

Free cash flow

   $ 56,986   
  

 

 

 

Net cash provided by operating activities of $26.9 million during the six months ended June 30, 2012 was primarily driven by net income of $44.1 million, increased by depreciation and amortization of $27.2 million, and dividends received from joint ventures of $4.4 million, offset by $30.9 million of changes in operating assets and liabilities and $17.8 million of other net non-cash reconciling adjustments. The $30.9 million of changes in operating assets and liabilities was primarily driven by the seasonality of our gift card program, offset by the increase in the legal reserve for the Bertico litigation. During the six months ended June 30, 2012, we invested $9.7 million in capital additions to property and equipment. Net cash used in financing activities was $43.4 million during the six months ended June 30, 2012, driven primarily by dividend payments of $36.1 million and $10.4 million in repayments of long-term debt. In March 2012, the Company announced the initiation of a regular cash dividend to shareholders, paying the initial two quarterly dividends of $0.15 per share on March 28, 2012 and May 16, 2012.

The senior credit facility is guaranteed by certain of Dunkin’ Brands, Inc.’s wholly-owned domestic subsidiaries and includes a term loan facility and a revolving credit facility. The aggregate borrowings available under the senior secured credit facility are approximately $1.6 billion, consisting of a full-drawn approximately $1.5 billion term loan facility and an undrawn $100.0 million revolving credit facility under which there was $88.9 million in

 

31


Table of Contents

available borrowings and $11.1 million of letters of credit outstanding as of June 30, 2012. The senior credit facility requires principal amortization repayments to be made on term loan borrowings equal to approximately $15.0 million per calendar year, payable in quarterly installments through September 2017. The final scheduled principal payment on the outstanding borrowings under the term loan is due in November 2017. Additionally, following the end of each fiscal year, the Company is required to prepay an amount equal to 25% of excess cash flow (as defined in the senior credit facility) for such fiscal year. If DBI’s leverage ratio, which is a measure of DBI’s outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the credit facility), is less than 4.00x, no excess cash flow payments are required. Under the terms of the senior credit facility, the first excess cash flow payment was due in the first quarter of fiscal year 2012 based on fiscal year 2011 excess cash flow and leverage ratio. In December 2011, the Company made an additional principal payment of $11.8 million that was applied to the 2011 excess cash flow payment due in the first quarter of 2012. Based on fiscal year 2011 excess cash flow, considering all payments made, the excess cash flow payment required in the first quarter of 2012 was $2.4 million. The excess cash flow payments may be applied to required principal payments. However, the Company intends on making quarterly payments of $4.0 million, which are reflected in the current portion of long-term debt at June 30, 2012.

Borrowings under the term loan bear interest, payable at least quarterly. Borrowings under the revolving credit facility (excluding letters of credit) bear interest, payable at least quarterly. We also pay a 0.5% commitment fee per annum on the unused portion of the revolver. The fee for letter of credit amounts outstanding is 3.0%. The revolving credit facility expires in November 2015. As of June 30, 2012, borrowings under the senior credit facility bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.5%, (b) the prime rate (c) the LIBOR rate plus 1.0%, and (d) 2.0% or (2) a LIBOR rate provided that LIBOR shall not be lower than 1.0%. The applicable margin under the senior credit facility is 2.0% for loans based upon the base rate and 3.0% for loans based upon the LIBOR rate.

The senior credit facility requires us to comply on a quarterly basis with certain financial covenants, including a maximum ratio (the “leverage ratio”) of debt to adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and a minimum ratio (the “interest coverage ratio”) of adjusted EBITDA to interest expense, each of which becomes more restrictive over time. For the second quarter of fiscal year 2012, the terms of the senior credit facility require that we maintain a leverage ratio of no more than 8.25 to 1.00 and a minimum interest coverage ratio of 1.55 to 1.00. The leverage ratio financial covenant will become more restrictive over time and will require us to maintain a leverage ratio of no more than 6.25 to 1.00 by the second quarter of fiscal year 2017. The interest coverage ratio financial covenant will also become more restrictive over time and will require us to maintain an interest coverage ratio of no less than 1.95 to 1.00 by the second quarter of fiscal year 2017. Failure to comply with either of these covenants would result in an event of default under our senior credit facility unless waived by our senior credit facility lenders. An event of default under our senior credit facility can result in the acceleration of our indebtedness under the facility. Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants contained in our senior credit facility, including our leverage ratio. Adjusted EBITDA is defined in our senior credit facility as net income/(loss) before interest, taxes, depreciation and amortization and impairment of long-lived assets, as adjusted for the items summarized in the table below. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term adjusted EBITDA varies from others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP, as a measure of operating performance or as an alternative to cash flows as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations we rely primarily on our GAAP results. However, we believe that presenting adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financing covenants. As of June 30, 2012, we were in compliance with our senior credit facility financial covenants, including a leverage ratio of 4.11 to 1.00 and an interest coverage ratio of 4.83 to 1.00, which were calculated for the twelve months ended June 30, 2012 based upon the adjustments to EBITDA, as

 

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Table of Contents

provided for under the terms of our senior credit facility. The following is a reconciliation of our net income to such adjusted EBITDA for the twelve months ended June 30, 2012 (in thousands):

 

     Twelve months ended
June 30, 2012
 

Net income attributable to Dunkin’ Brands

   $ 63,136   

Interest expense

     75,618   

Income tax expense

     43,379   

Depreciation and amortization

     53,365   

Impairment charges

     1,389   

Korea joint venture impairment, net (a)

     18,776   
  

 

 

 

EBITDA

     255,663   

Adjustments:

  

Non-cash adjustments (b)

     30,500   

Transaction costs (c)

     2,185   

Sponsor management fees (d)

     14,920   

Loss on debt extinguishment and refinancing transactions (e)

     18,050   

Severance charges (f)

     3,345   

Other (g)

     7,338   
  

 

 

 

Total adjustments

     76,338   
  

 

 

 

Adjusted EBITDA

   $     332,001   
  

 

 

 

 

(a) Represents an impairment of the investment in the Korea joint venture of $19.8 million, less a reduction in depreciation and amortization, net of tax, of $1.0 million resulting from the allocation of the impairment charge to the underlying intangible and long-lived assets of the joint venture during the three months ended December 31, 2011.

 

(b) Represents non-cash adjustments, including stock compensation expense, legal reserves, and other non-cash gains and losses.

 

(c) Represents direct and indirect cost and expenses related to the Company’s refinancing, initial public offering, and secondary offering transactions.

 

(d) Represents annual fees paid to the Sponsors under a management agreement, which terminated upon the consummation of the initial public offering in July 2011, and includes $14.7 million in fees related to such termination.

 

(e) Represents gains/losses recorded and related transaction costs associated with the refinancing and repayment of long-term debt, including the write-off of deferred financing costs and original issue discount, as well as pre-payment premiums.

 

(f) Represents severance and related benefits costs associated with non-recurring reorganizations.

 

(g) Represents one-time costs and fees associated with entry into new markets, costs associated with various franchisee-related information technology investments and one-time market research programs, and the net impact of other non-recurring and individually insignificant adjustments.

Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and amounts available under our revolving credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. We believe that we will be able to meet these obligations even if we experience no growth in sales or profits. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our revolving credit facility or otherwise to enable us to service our

 

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indebtedness, including our senior secured credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability 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.

Recently Issued Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. This guidance was effective for the Company beginning in fiscal year 2012, and will be applied when performing our annual impairment test in the third quarter of 2012. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the foreign exchange or interest rate risks discussed in Part II, Item  7A “Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K.

Item 4.       Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

During the quarterly period ended June 30, 2012, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

 

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Part II.        Other Information

Item 1.       Legal Proceedings

In May 2003, a group of Dunkin’ Donuts franchisees from Quebec, Canada filed a lawsuit against the Company on a variety of claims, based on events which primarily occurred 10 to 15 years ago, including but not limited to, alleging that the Company breached its franchise agreements and provided inadequate management and support to Dunkin’ Donuts franchisees in Quebec (“Bertico litigation”). On June 22, 2012, the Quebec Superior Court found for the plaintiffs and issued a judgment against the Company in the amount of approximately $C16.4 million (approximately $15.9 million), plus costs and interest, representing loss in value of the franchises and lost profits. During the three months ended June 30, 2012, the Company increased its estimated liability related to the Bertico litigation by $20.7 million to $24.6 million as of June 30, 2012, reflecting the judgment amount and estimated plaintiff legal costs and interest. The Company had previously recorded an estimated liability of approximately $3.9 million, representing the Company’s best estimate within the range of losses which could be incurred in connection with this matter. The Company strongly disagrees with the decision reached by the Court and believes the damages awarded were unwarranted. As such, the Company is vigorously appealing the decision.

The Company is engaged in several other matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. At June 30, 2012 and December 31, 2011, contingent liabilities, excluding the Bertico litigation, totaling $1.8 million and $736 thousand, respectively, were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the potential loss which may be incurred in connection with these matters. While the Company intends to vigorously defend its positions against all claims in these lawsuits and disputes, it is reasonably possible that the losses in connection with these matters could increase by up to an additional $2.0 million based on the outcome of ongoing litigation or negotiations.

Item 1A.       Risk Factors.

Except as set forth below, there have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011:

We are subject to certain phase-in provisions of the NASDAQ Marketplace Rules and, as a result, we will not immediately be subject to certain corporate governance requirements.

The Sponsors no longer control a majority of the voting power of our outstanding common stock. As a result, we are not a “controlled company” within the meaning of the corporate governance standards of The NASDAQ Global Select Market. However, we are entitled to rely on phase-in provisions for certain corporate governance requirements, including:

 

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors;

 

the requirement that we have a compensation committee that is composed entirely of independent directors; and

 

the requirement that we have a majority of independent directors on our board of directors.

We may continue to utilize these phase-in provisions. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The NASDAQ Global Select Market for up to the expiration of the phase-in period on April 4, 2013.

 

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Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

On July 25, 2012, our board of directors approved a share repurchase program of up to $500 million of outstanding shares of our common stock. Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. This repurchase authorization expires two years from the date of approval. No shares have been repurchased pursuant to the program.

Item 3.       Defaults Upon Senior Securities

None.

Item 4.       Mine Safety Disclosures

None.

Item 5.       Other Information

None.

Item 6.       Exhibits

(a) Exhibits:

 

31.1    Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Ex. 101.INS* XBRL Instance Document

Ex. 101.SCH* XBRL Taxonomy Extension Schema Document

Ex. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document

Ex. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document

Ex. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

Ex. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

 

* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

 

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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, thereunto duly authorized.

DUNKIN’ BRANDS GROUP, INC.

 

Date: August 3, 2012   By:  

/s/ Nigel Travis

   

Nigel Travis,

Chief Executive Officer

 

37

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER, DUNKIN’ BRANDS GROUP, INC.

I, Nigel Travis, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Dunkin’ Brands Group, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 3, 2012

   

/s/ Nigel Travis

Date    

Nigel Travis

Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER, DUNKIN’ BRANDS GROUP, INC.

I, Paul Carbone, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Dunkin’ Brands Group, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 3, 2012

   

/s/ Paul Carbone

Date    

Paul Carbone

Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dunkin’ Brands Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2012, as filed with the Securities and Exchange Commission (the “Report”), I, Nigel Travis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

 

  1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Nigel Travis

Nigel Travis

Chief Executive Officer

Dated: August 3, 2012

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Dunkin’ Brands Group, Inc. and will be retained by Dunkin’ Brands Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dunkin’ Brands Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2012, as filed with the Securities and Exchange Commission (the “Report”), I, Paul Carbone, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

 

  1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Paul Carbone

Paul Carbone

Chief Financial Officer

Dated: August 3, 2012

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Dunkin’ Brands Group, Inc. and will be retained by Dunkin’ Brands Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.