Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 08/07/2013 17:31:34)
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 29, 2013
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
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
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 31, 2013 , 106,355,213 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.
Item 2.
Item 3.
Item 4.
 
Part II. – Other Information
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2

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 29,
2013
 
December 29,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
176,999

 
252,618

Accounts receivable, net of allowance for doubtful accounts of $2,155 and $2,483 as of June 29, 2013 and December 29, 2012, respectively
43,279

 
32,407

Notes and other receivables, net of allowance for doubtful accounts of $942 and $1,204 as of June 29, 2013 and December 29, 2012, respectively
15,946

 
20,649

Assets held for sale
1,994

 
2,400

Deferred income taxes, net
47,197

 
47,263

Restricted assets of advertising funds
33,824

 
31,849

Prepaid income taxes
4,713

 
10,825

Prepaid expenses and other current assets
20,701

 
21,769

Total current assets
344,653

 
419,780

Property and equipment, net of accumulated depreciation of $105,254 and $109,747 as of June 29, 2013 and December 29, 2012, respectively
178,027

 
181,172

Equity method investments
159,786

 
174,823

Goodwill
891,868

 
891,900

Other intangible assets, net
1,466,199

 
1,479,784

Restricted cash
316

 
367

Other assets
79,687

 
69,687

Total assets
$
3,120,536

 
3,217,513

Liabilities and Stockholders’ Equity
 
Current liabilities:
 
 
 
Current portion of long-term debt
$

 
26,680

Capital lease obligations
375

 
371

Accounts payable
12,118

 
16,256

Liabilities of advertising funds
46,056

 
45,594

Deferred income
23,865

 
24,683

Other current liabilities
175,826

 
239,931

Total current liabilities
258,240

 
353,515

Long-term debt, net
1,827,845

 
1,823,278

Capital lease obligations
7,235

 
7,251

Unfavorable operating leases acquired
17,964

 
19,061

Deferred income
15,573

 
15,720

Deferred income taxes, net
570,168

 
569,126

Other long-term liabilities
65,478

 
79,587

Total long-term liabilities
2,504,263

 
2,514,023

Commitments and contingencies (note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at June 29, 2013 and December 29, 2012, respectively

 

Common stock, $0.001 par value; 475,000,000 shares authorized;106,740,752 issued and 106,333,752 outstanding at June 29, 2013; and 106,146,984 shares issued and outstanding at December 29, 2012
107

 
106

Additional paid-in capital
1,219,331

 
1,251,498

Treasury stock, at cost
(16,756
)
 

Accumulated deficit
(849,507
)
 
(914,094
)
Accumulated other comprehensive income
1,773

 
9,141

Total stockholders’ equity of Dunkin’ Brands
354,948

 
346,651

Noncontrolling interests
3,085

 
3,324

Total stockholders’ equity
358,033

 
349,975

Total liabilities and stockholders’ equity
$
3,120,536

 
3,217,513


See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Revenues:
 
 
 
 
 
Franchise fees and royalty income
$
112,794

 
105,928

 
216,559

 
201,972

Rental income
25,055

 
26,002

 
47,487

 
48,941

Sales of ice cream products
32,809

 
28,442

 
56,389

 
51,165

Sales at company-owned restaurants
6,240

 
5,966

 
12,011

 
10,793

Other revenues
5,590

 
6,049

 
11,900

 
11,888

Total revenues
182,488

 
172,387

 
344,346

 
324,759

Operating costs and expenses:
 
 
 
 
 
Occupancy expenses—franchised restaurants
12,820

 
12,912

 
25,596

 
25,832

Cost of ice cream products
24,302

 
19,971

 
40,288

 
36,789

Company-owned restaurant expenses
5,940

 
6,130

 
11,595

 
10,946

General and administrative expenses, net
62,193

 
77,896

 
116,584

 
130,920

Depreciation
5,522

 
7,333

 
11,370

 
13,522

Amortization of other intangible assets
6,565

 
6,783

 
13,147

 
13,648

Impairment charges
107

 
377

 
355

 
386

Total operating costs and expenses
117,449

 
131,402

 
218,935

 
232,043

Net income of equity method investments
4,782

 
5,153

 
7,869

 
8,617

Other operating income
6,984

 

 
6,984

 

Operating income
76,805

 
46,138

 
140,264

 
101,333

Other income (expense):
 
 
 
 
 
Interest income
91

 
139

 
205

 
257

Interest expense
(19,886
)
 
(16,690
)
 
(40,718
)
 
(33,386
)
Loss on debt extinguishment and refinancing transactions

 

 
(5,018
)
 

Other losses, net
(813
)
 
(267
)
 
(1,203
)
 
(207
)
Total other expense
(20,608
)
 
(16,818
)
 
(46,734
)
 
(33,336
)
Income before income taxes
56,197

 
29,320

 
93,530

 
67,997

Provision for income taxes
15,487

 
11,101

 
29,159

 
23,864

Net income including noncontrolling interests
40,710

 
18,219

 
64,371

 
44,133

Net loss attributable to noncontrolling interests
(102
)
 
(278
)
 
(239
)
 
(314
)
Net income attributable to Dunkin’ Brands
$
40,812

 
18,497

 
64,610

 
44,447

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.38

 
0.15

 
0.61

 
0.37

Common—diluted
0.38

 
0.15

 
0.60

 
0.36

Cash dividends declared per common share
0.19

 
0.15

 
0.38

 
0.30

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Net income including noncontrolling interests
$
40,710

 
18,219

 
64,371

 
44,133

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense of $240 and $374 for the three and six months ended June 29, 2013, respectively
(5,898
)
 
1,315

 
(16,703
)
 
(3,221
)
Unrealized gains on interest rate swaps, net of deferred tax expense of $5,737 and $6,299 for the three and six months ended June 29, 2013, respectively
8,437

 

 
9,216

 

Other, net
99

 
(178
)
 
119

 
(1,614
)
Total other comprehensive income (loss)
2,638

 
1,137

 
(7,368
)
 
(4,835
)
Comprehensive income including noncontrolling interests
43,348

 
19,356

 
57,003

 
39,298

Comprehensive loss attributable to noncontrolling interests
(102
)
 
(278
)
 
(239
)
 
(314
)
Comprehensive income attributable to Dunkin’ Brands
$
43,450

 
19,634

 
57,242

 
39,612

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Six months ended
 
June 29,
2013
 
June 30,
2012
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
64,371

 
44,133

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
24,517

 
27,170

Amortization of deferred financing costs and original issue discount
2,473

 
2,637

Loss on debt extinguishment and refinancing transactions
5,018

 

Impact of unfavorable operating leases acquired
(1,072
)
 
(1,216
)
Deferred income taxes
(5,812
)
 
(13,504
)
Impairment charges
355

 
386

Recovery of bad debt
(186
)
 
(751
)
Share-based compensation expense
3,661

 
2,830

Net income of equity method investments
(7,869
)
 
(8,617
)
Dividends received from equity method investments
5,527

 
4,389

Gain on sale of joint venture
(6,984
)
 

Other, net
(706
)
 
389

Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
(4,969
)
 
10,086

Other current assets
1,012

 
(3,188
)
Accounts payable
(158
)
 
(957
)
Other current liabilities
(63,358
)
 
(33,608
)
Liabilities of advertising funds, net
(1,043
)
 
(3,934
)
Income taxes payable, net
(5,935
)
 
896

Deferred income
(958
)
 
(319
)
Other, net
1,673

 
86

Net cash provided by operating activities
9,557

 
26,908

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(12,507
)
 
(9,748
)
Proceeds from sale of joint venture
7,200

 

Other, net
(1,522
)
 
(1,745
)
Net cash used in investing activities
(6,829
)
 
(11,493
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(19,157
)
 
(10,441
)
Payment of deferred financing and other debt-related costs
(6,157
)
 

Dividends paid on common stock
(40,450
)
 
(36,114
)
Repurchases of common stock
(16,756
)

(25
)
Exercise of stock options
4,642

 
1,265

Other, net
(208
)
 
1,900

Net cash used in financing activities
(78,086
)
 
(43,415
)
Effect of exchange rates on cash and cash equivalents
(261
)
 
(30
)
Decrease in cash and cash equivalents
(75,619
)
 
(28,030
)
Cash and cash equivalents, beginning of period
252,618

 
246,715

Cash and cash equivalents, end of period
$
176,999

 
218,685

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
41,732

 
37,149

Cash paid for interest
49,804

 
30,455

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,890

 
1,067

Purchase of leaseholds in exchange for capital lease obligations
173

 
2,703


See accompanying notes to unaudited consolidated financial statements.

6


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 leading 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, we distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in certain 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 29, 2013 , the consolidated statements of operations and comprehensive income for the three and six months ended June 29, 2013 and June 30, 2012 , and the consolidated statements of cash flows for the six months ended June 29, 2013 and June 30, 2012 , 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 29, 2012 , included in the Company’s Annual Report on Form 10-K.
(b) Fiscal Year
The Company operates and reports financial information on a 52 - or 53 -week year on a 13 -week quarter 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 when applicable with respect to the fourth fiscal quarter). The data periods contained within our three- and six-month periods ended June 29, 2013 and June 30, 2012 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 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2013 .
(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 periods then ended.
(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 $7.0 million and $5.8 million as of June 29, 2013 and December 29, 2012 , 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

7


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 29, 2013 and December 29, 2012 are summarized as follows (in thousands):
 
June 29, 2013
 
December 29, 2012
 
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Total
 
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
$
2,083

 

 
2,083

 
2,505

 

 
2,505

Interest rate swaps

 
12,706

 
12,706

 

 

 

Total assets
$
2,083

 
12,706

 
14,789

 
2,505

 

 
2,505

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
$

 
7,683

 
7,683

 

 
7,379

 
7,379

Interest rate swaps

 

 

 

 
2,809

 
2,809

Total liabilities
$

 
7,683

 
7,683

 

 
10,188

 
10,188

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 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 Company uses readily available market data to value its interest rate swaps, such as interest rate curves and discount factors. Additionally, the fair value of derivatives includes consideration of credit risk in the valuation. The Company uses a potential future exposure model to estimate this credit valuation adjustment (“CVA”). The inputs to the CVA are largely based on observable market data, with the exception of certain assumptions regarding credit worthiness which make the CVA a Level 3 input, as defined under U.S. GAAP. As the magnitude of the CVA is not a significant component of the fair value of the interest rate swaps as of June 29, 2013 , it is not considered a significant input and the derivatives are classified as Level 2.
The carrying value and estimated fair value of long-term debt as of June 29, 2013 and December 29, 2012 were as follows (in thousands):
 
June 29, 2013
 
December 29, 2012
 
Carrying Value
 
Estimated fair value
 
Carrying Value
 
Estimated fair value
Financial liabilities:
 
 
 
 
 
 
 
Term loans
$
1,827,845

 
1,832,023

 
1,849,958

 
1,878,980

The estimated fair value of our term loans is estimated based on current bid prices for our term loans. Judgment is required to develop these estimates. As such, our term loans are classified within Level 2, as defined under U.S. GAAP.
(e) Derivative Instruments and Hedging Activities
The Company uses derivative instruments to hedge interest rate risks.  These derivative contracts are entered into with financial institutions.  The Company does not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use.
We record all derivative instruments on our consolidated balance sheets at fair value.  For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Any ineffective portion of the gain or loss on the derivative instrument for a cash flow

8


hedge is recorded in the consolidated statements of operations immediately. Cash flows associated with the Company's interest rate swap agreements are classified as cash flows from operating activities in the consolidated statements of cash flows which is consistent with the classification of cash flows of the underlying hedged item. See note 6 for a discussion of the Company's use of derivative instruments, management of credit risk inherent in derivative instruments, and fair value information.
(f) 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, royalty income, and sales of ice cream products. 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 June 29, 2013 , one master licensee accounted for approximately 15.0% of total accounts and notes receivable, which was primarily due to the timing of orders and shipments of ice cream to the master licensee. At December 29, 2012 , no individual franchisee or master licensee accounted for more than 10% of accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for the three and six months ended June 29, 2013 or the three or six months ended June 30, 2012 .
(g) Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance which requires disclosure of significant amounts reclassified out of accumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance was adopted by the Company in fiscal year 2013. The adoption of this guidance did not have a material impact on the Company s consolidated financial statements.
In December 2011, the FASB issued guidance which enhanced existing disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. In January 2013, the FASB issued new guidance to clarify that the guidance issued in December 2011 on offsetting financial assets and financial liabilities was limited to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria or subject to a master netting arrangement or similar agreement. It further clarifies that ordinary trade receivables and other receivables are not in the scope of the existing guidance. This guidance was adopted by the Company in fiscal year 2013. The adoption of this guidance did not have a material impact on the Company s consolidated financial statements.
(h) Reclassifications
The Company has revised the presentation of certain captions within the consolidated statements of operations to separately present sales at company-owned restaurants and company-owned restaurant expenses. In prior periods, these sales and expenses were presented in other revenues and general and administrative expenses, net, respectively. Prior period financial statements have been revised to conform to the current period presentation. The revisions had no impact on total revenues, operating income, income before income taxes, or net income.
(i) 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 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Royalty income
$
106,254

 
98,498

 
199,476

 
187,629

Initial franchise fees, including renewal income
6,540

 
7,430

 
17,083

 
14,343

Total franchise fees and royalty income
$
112,794

 
105,928

 
216,559

 
201,972


9


The changes in franchised and company-owned points of distribution were as follows:
 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution—beginning of period
17,537

 
16,843

 
17,424

 
16,763

Franchised points of distribution—opened
300

 
288

 
544

 
569

Franchised points of distribution—closed
(149
)
 
(150
)
 
(280
)
 
(348
)
Net transfers to company-owned points of distribution

 
(1
)
 

 
(4
)
Franchised points of distribution in operation—end of period
17,688

 
16,980

 
17,688

 
16,980

Company-owned points of distribution—end of period
30

 
36

 
30

 
36

Total systemwide points of distribution—end of period
17,718

 
17,016

 
17,718

 
17,016

(4) Goodwill and Other Intangible Assets
The change in the gross carrying amount of goodwill from December 29, 2012 to June 29, 2013 is due to the impact of foreign currency fluctuations.
Other intangible assets at June 29, 2013 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
 
$
383,604

 
(149,601
)
 
234,003

Favorable operating leases acquired
15
 
76,494

 
(36,934
)
 
39,560

License rights
10
 
6,230

 
(4,564
)
 
1,666

Indefinite-lived intangible:
 
 
 
 
 
 
 
Trade names
N/A
 
1,190,970

 

 
1,190,970

 
 
 
$
1,657,298

 
(191,099
)
 
1,466,199

Other intangible assets at December 29, 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
 
$
384,065

 
(139,677
)
 
244,388

Favorable operating leases acquired
15
 
77,653

 
(35,207
)
 
42,446

License rights
10
 
6,230

 
(4,250
)
 
1,980

Indefinite-lived intangible:
 
 
 
 
 
 
 
Trade names
N/A
 
1,190,970

 

 
1,190,970

 
 
 
$
1,658,918

 
(179,134
)
 
1,479,784

The changes in the gross carrying amounts of other intangible assets from December 29, 2012 to June 29, 2013 are primarily due to the impairment of favorable operating leases acquired resulting from lease terminations and the impact of foreign currency fluctuations. Impairment of favorable operating leases acquired totaled $77 thousand and $316 thousand for the three months ended June 29, 2013 and June 30, 2012 , respectively, and $281 thousand and $317 thousand for the six months ended June 29, 2013 and June 30, 2012 , respectively, and is included within impairment charges in the consolidated statements of operations. Total estimated amortization expense for fiscal years 2013 through 2017 is presented below (in thousands). The

10


amount reflected below for fiscal year 2013 includes year-to-date amortization.
Fiscal year:
 
2013
$
26,081

2014
25,483

2015
25,157

2016
22,237

2017
21,458

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 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Increase in rental income
$
252

 
263

 
506

 
528

Decrease in rental expense
280

 
337

 
566

 
688

Total increase in operating income
$
532

 
600

 
1,072

 
1,216

(5) Debt
In February 2013, Dunkin’ Brands, Inc. (“DBI”), a subsidiary of DBGI, amended its senior credit facility, resulting in a reduction of the interest rates and an extension of the maturity dates for both the term loans and the revolving credit facility.
Subsequent to the amendment, the term loans 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 1.75% for loans based upon the base rate and 2.75% for loans based upon the LIBOR rate. The amendment extended the maturity of the term loans to February 2020 . The effective interest rate for term loans, including the amortization of original issue discount and deferred financing costs, was 4.0% at June 29, 2013 .
Subsequent to the amendment, borrowings under the revolving 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, and (c) the LIBOR rate plus 1.0% , or (2) a LIBOR rate. The applicable margin under the revolving credit facility is 1.5% for loans based upon the base rate and 2.5% for loans based upon the LIBOR rate. In addition, we are required to pay a 0.5% commitment fee per annum on the unused portion of the revolver and a fee for letter of credit amounts outstanding of 2.5% . The amendment extended the maturity of the revolving credit facility to February 2018 .
In connection with the amendment, certain lenders, holding $214.3 million of term loans, exited the term loan lending syndicate. The principal of the exiting lenders was replaced with additional loans from both existing and new lenders. As a result, during the first quarter of 2013, the Company recorded a loss on debt extinguishment and refinancing transactions of $5.0 million , including $3.9 million related to the write-off of original issuance discount and deferred financing costs and $1.1 million of fees paid to third parties. The amended term loans were issued with an original issue discount of 0.25% , or $4.6 million , which was recorded as a reduction to long-term debt. Total debt issuance costs incurred and capitalized in connection with the amendment were $375 thousand .
Repayments are required to be made under the term loans equal to approximately $19.0 million per calendar year, payable in quarterly installments through December 2019, with the remaining principal balance due in February 2020. 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 senior credit facility), is no greater than 4.75 x, no excess cash flow payments are required. If DBI's leverage ratio is greater than 5.50 x, the Company is required to prepay an amount equal to 50% of excess cash flow. During the six months ended June 29, 2013 , the Company made total principal payments of $19.2 million . Based on all payments made, including the required excess cash flow payment in the first quarter of 2013, no additional principal payments are required in the next twelve months, though the Company may elect to make voluntary payments. Other events and transactions, such as certain asset sales and incurrence of debt, may trigger additional mandatory prepayments.


11


(6) Derivative Instruments and Hedging Transactions
The Company is exposed to global market risks, including the effect of changes in interest rates, and may use derivative instruments to mitigate the impact of these changes. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures to be hedged and does not hold or issue derivatives for trading purposes. The Company’s hedging instruments consist solely of interest rate swaps at June 29, 2013 . The Company s risk management objective and strategy with respect to the interest rate swaps is to limit the Company s exposure to increased interest rates on its variable rate debt by reducing the potential variability in cash flow requirements relating to interest payments on a portion of its outstanding debt. The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all relationships between hedging instruments and hedged items.
In September 2012, the Company entered into variable-to-fixed interest rate swap agreements with three counterparties to hedge the risk of increases in cash flows (interest payments) attributable to increases in three-month LIBOR above 1.0% , the designated benchmark interest rate being hedged, through November 2017. The notional value of the swaps totals $900.0 million , and the Company is required to make quarterly payments on the notional amount at a fixed average interest rate of approximately 1.37% , resulting in a total interest rate of approximately 4.12% on the hedged amount when considering the applicable margin in effect at June 29, 2013 . In exchange, the Company receives interest on the notional amount at a variable rate based on a three-month LIBOR spot rate, subject to a 1.0% floor. Interest is settled quarterly on a net basis with each counterparty. The swaps have been designated as hedging instruments and are classified as cash flow hedges. They are recognized on the Company s consolidated balance sheets at fair value and classified based on the instruments maturity dates. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to other comprehensive income (loss) and/or current earnings.
The fair values of derivatives instruments consisted of the following (in thousands):
 
June 29,
2013
 
December 29,
2012
 
Consolidated Balance Sheet Classification
Interest rate swaps - asset
$
12,706

 

 
Other assets
Total fair values of derivative instruments - asset
$
12,706

 

 
 
 
 
 
 
 
 
Interest rate swaps - liability
$

 
2,809

 
Other long-term liabilities
Total fair values of derivative instruments - liability
$

 
2,809

 
 

The tables below summarizes the effects of derivative instruments on the consolidated statements of operations and comprehensive income for the three months ended June 29, 2013 :
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income
Interest rate swaps
 
$
13,328

 
$
(846
)
 
Interest expense
 
$
14,174

Income tax effect
 
(5,395
)
 
342

 
Provision for income taxes
 
(5,737
)
Net of income taxes
 
$
7,933

 
$
(504
)
 
 
 
$
8,437


The tables below summarizes the effects of derivative instruments on the consolidated statements of operations and comprehensive income for the six months ended June 29, 2013 :
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income
Interest rate swaps
 
$
13,823

 
$
(1,692
)
 
Interest expense
 
$
15,515

Income tax effect
 
(5,602
)
 
697

 
Provision for income taxes
 
(6,299
)
Net of income taxes
 
$
8,221

 
$
(995
)
 
 
 
$
9,216

There was no ineffectiveness of the interest rate swaps during the three and six months ended June 29, 2013 , and therefore, ineffectiveness had no impact on the consolidated statements of operations. As of June 29, 2013 and December 29, 2012 , $19 thousand and $864 thousand , respectively, of interest expense related to interest rate swaps is accrued in other current liabilities in the consolidated balance sheets. During the next twelve months, the Company estimates that $3.4 million will be reclassified from accumulated other comprehensive income as an increase to interest expense based on current projections of LIBOR.

12



The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its hedging instruments. To mitigate counterparty credit risk, the Company only enters into contracts with major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of its counterparties. At  June 29, 2013 , all of the counterparties to the interest rate swaps had investment grade ratings. To date, all counterparties have performed in accordance with their contractual obligations.

The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of June 29, 2013 , the Company has not posted any collateral related to these agreements. The Company holds one derivative instrument with each of its derivative counterparties, each of which is settled net with the respective counterparties in accordance with the swap agreements. There is no offsetting of these financial instruments on the consolidated balance sheets. As of June 29, 2013 , the termination value of derivatives is a net asset position of $ 13.3 million , which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements.
(7) Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
June 29,
2013
 
December 29,
2012
Gift card/certificate liability
$
80,721

 
145,981

Gift card breakage liability
17,157

 

Accrued salary and benefits
20,042

 
31,136

Accrued legal liabilities (see note 12(d))
26,543

 
27,305

Accrued interest
1,482

 
13,564

Accrued professional costs
2,286

 
2,996

Other
27,595

 
18,949

Total other current liabilities
$
175,826

 
239,931

The decrease in the gift card/certificate liability is driven primarily by the seasonality of our gift card program. Additionally, during the three months ended June 29, 2013 , the Company determined that sufficient historical redemption patterns existed to revise breakage estimates related to unredeemed Dunkin’ Donuts gift cards. Based on historical redemption rates, breakage is estimated and recognized over time in proportion to actual gift card redemptions. The Company recognizes breakage as income only up to the amount of gift card program costs. Any incremental breakage is committed to fund future initiatives that will benefit the gift card program, and is recorded as gift card breakage liability within other current liabilities in the consolidated balance sheets.
The decrease in accrued salary and benefits is primarily due to bonus payments made during the first quarter of 2013 related to fiscal year 2012.
(8) 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. Dunkin’ Donuts U.S. also derives revenue through retail sales at company-owned restaurants. 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 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 and allocates resources to them based on earnings before interest, taxes, depreciation, amortization, impairment charges, loss on debt extinguishment and refinancing transactions, 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.

13


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 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Dunkin’ Donuts U.S.
$
128,672

 
122,606

 
248,306

 
233,660

Dunkin’ Donuts International
3,931

 
3,870

 
8,554

 
7,818

Baskin-Robbins U.S.
12,489

 
12,740

 
22,101

 
22,592

Baskin-Robbins International
34,917

 
30,106

 
60,345

 
54,347

Total reportable segment revenues
180,009

 
169,322

 
339,306

 
318,417

Other
2,479

 
3,065

 
5,040

 
6,342

Total revenues
$
182,488

 
172,387

 
344,346

 
324,759

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 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Dunkin’ Donuts U.S.
$
87,055

 
89,918

 
173,910

 
169,859

Dunkin’ Donuts International
1,587

 
1,933

 
4,145

 
5,094

Baskin-Robbins U.S.
7,955

 
8,860

 
13,721

 
14,317

Baskin-Robbins International
19,434

 
11,842

 
28,753

 
19,124

Total reportable segment profit
116,031

 
112,553

 
220,529

 
208,394

Corporate and other
(27,032
)
 
(51,922
)
 
(55,393
)
 
(79,505
)
Interest expense, net
(19,795
)
 
(16,551
)
 
(40,513
)
 
(33,129
)
Depreciation and amortization
(12,087
)
 
(14,116
)
 
(24,517
)
 
(27,170
)
Impairment charges
(107
)
 
(377
)
 
(355
)
 
(386
)
Loss on debt extinguishment and refinancing transactions

 

 
(5,018
)
 

Other gains (losses), net
(813
)
 
(267
)
 
(1,203
)
 
(207
)
Income before income taxes
$
56,197

 
29,320

 
93,530

 
67,997

Net income of equity method investments 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 long-lived assets of BR Korea. Net income of equity method investments by reportable segment was as follows (in thousands):
 
Net income of equity method investments
 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Dunkin’ Donuts International
$
368

 
510

 
254

 
1,383

Baskin-Robbins International
4,126

 
3,533

 
6,664

 
5,344

Total reportable segments
4,494

 
4,043

 
6,918

 
6,727

Other
288

 
1,110

 
951

 
1,890

Total net income of equity method investments
$
4,782

 
5,153

 
7,869

 
8,617



14


(9) Stockholders’ Equity
(a) Treasury Stock
During the three months ended June 29, 2013 , the Company repurchased a total of 407,000 shares of common stock at a weighted average price of $41.16 per share from existing stockholders. The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $16.8 million during the three months ended June 29, 2013 , based on the fair market value of the shares on the date of repurchase and direct costs incurred.
(b) Equity Incentive Plans
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 29, 2013 , the Company granted options to purchase 1,177,999 shares of common stock and 92,943 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 stock options were granted at a price of $37.26 per share and have a grant-date fair value of $9.92 per share. The restricted stock units generally 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 $2.0 million and $2.2 million for the three months ended June 29, 2013 and June 30, 2012 , respectively, and $3.7 million and $2.8 million for the six months ended June 29, 2013 and June 30, 2012 , respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.
(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
 
Unrealized losses on interest rate swaps
 
Unrealized loss on pension plan
 
Other        
 
Accumulated
other
comprehensive
income
Balance at December 29, 2012
$
14,914

 
(1,655
)
 
(2,486
)
 
(1,632
)
 
9,141

Other comprehensive income (loss) (1)
(16,703
)
 
9,216

 
35

 
84

 
(7,368
)
Balance at June 29, 2013
$
(1,789
)
 
7,561

 
(2,451
)
 
(1,548
)
 
1,773


(1)  
The Company reclassified $995 thousand from accumulated other comprehensive income into the consolidated statements of operations related to the interest rate swaps for the six months ended June 29, 2013 (see note 6). Additionally, the Company reclassified $35 thousand from accumulated other comprehensive income into the consolidated statements of operations related to The Baskin-Robbins Employees’ Pension Plan for the six months ended June 29, 2013 , of which $48 thousand is included in general and administrative expenses, net, and $13 thousand is included in provision for income taxes.
(d) Noncontrolling Interests
The changes in the components of noncontrolling interests from December 29, 2012 to June 29, 2013 were as follows (in thousands):
Balance at December 29, 2012
$
3,324

Net loss attributable to noncontrolling interests
(239
)
Balance at June 29, 2013
$
3,085

(e) Dividends
The Company paid quarterly dividends of $0.19 per share of common stock on February 20, 2013 and June 6, 2013 totaling approximately $20.2 million and $20.3 million , respectively. On July 25, 2013 , we announced that our board of directors approved the next quarterly dividend of $0.19 per share of common stock payable September 4, 2013 to shareholders of record as of the close of business on August 26, 2013 .


15


(10) 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 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Net income attributable to Dunkin’ Brands—basic and diluted
$
40,812

 
18,497

 
64,610

 
44,447

Allocation of net income to common stockholders:
 
 
 
 
 
 
 
Common—basic (1)
40,812

 
18,467

 
64,610

 
44,334

Common—diluted (1)
40,812

 
18,467

 
64,610

 
44,354

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
106,485,078

 
120,095,118

 
106,365,758

 
119,888,657

Common—diluted
108,211,994

 
121,985,524

 
108,185,485

 
121,650,852

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.38

 
0.15

 
0.61

 
0.37

Common—diluted
0.38

 
0.15

 
0.60

 
0.36

 
(1)  
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 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 income was allocated to participating securities for the three and six months ended June 29, 2013 .
The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,726,916 and 1,890,406 restricted shares and stock options for the three months ended June 29, 2013 and June 30, 2012 , respectively, and includes the dilutive effect of 1,819,727 and 1,762,195 restricted shares and stock options for the six months ended June 29, 2013 and June 30, 2012 , respectively, using the treasury stock method. 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 29, 2013 , there were no common restricted stock awards or stock options that were performance-based and for which the performance criteria were not yet met. 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. Additionally, the weighted average number of common shares in the common diluted earnings per share calculation excludes 1,376,193 and 716,657 stock options for the three months ended June 29, 2013 and June 30, 2012 , respectively, and 1,571,791 and 569,703 stock options for the six months ended June 29, 2013 and June 30, 2012 , respectively, as they would be antidilutive.
(11) Income Taxes
Income tax expense and the effective tax rate were $15.5 million and 27.6% , respectively, for the three months ended June 29, 2013 , and $11.1 million and 37.9% , respectively, for the three months ended June 30, 2012 . Income tax expense and the effective tax rate were $29.2 million and 31.2% , respectively, for the six months ended June 29, 2013 , and $23.9 million and 35.1% , respectively, for the six months ended June 30, 2012 .
The effective rate may fluctuate from quarter to quarter for various reasons, including discrete items, such as the settlement or resolution of specific federal and state tax issues. During the three and six months ended June 29, 2013, the Company recorded a net tax benefit of $5.2 million , primarily related to the reversal of reserves of $8.4 million for uncertain tax positions for which settlement with the taxing authorities was reached, offset by tax expense of $2.9 million primarily due to an increase in our overall state tax rate resulting from a shift in estimated apportionment of income within state jurisdictions. 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.
Tax authorities periodically audit the Company. We record reserves for identified exposures and evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements, which may impact our ultimate payment for such exposures. During the six months ended June 29, 2013 , the Company made cash payments of approximately $4.1 million

16


representing tax, penalty, and interest due on settlements with taxing authorities. These amounts were fully accrued as of December 29, 2012 and did not impact the effective rate.
(12) 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 noncancelable operating and capital lease arrangements.
(b) Guarantees
Financial Guarantees
The Company has established agreements with certain financial institutions whereby the Company’s franchisees can obtain financing with terms of approximately 3 to 10 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 $4.1 million and $4.7 million at June 29, 2013 and December 29, 2012 , respectively. At June 29, 2013 and December 29, 2012 , 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 $434 thousand and $438 thousand , respectively, at June 29, 2013 and $601 thousand and $572 thousand , respectively, at December 29, 2012 . The Company assesses the risk of performing under these guarantees for each franchisee relationship on a quarterly basis. As of June 29, 2013 and December 29, 2012 , the Company had recorded reserves for such guarantees of $399 thousand and $389 thousand , respectively.
Supply Chain Guarantees
In 2012, the Company entered into a third-party guarantee with a distribution facility of franchisee products that guarantees franchisees would sell a certain volume of cooler beverages each year over a 4 -year period. During the three months ended June 29, 2013 , the Company determined that the franchisees will not achieve the required sales volume, and therefore, the Company accrued the maximum guarantee under the agreement of $7.5 million , which is included in other current liabilities in the consolidated balance sheets and general and administrative expenses, net in the consolidated statements of operations. No additional guarantee payments will be required under the agreement.
The Company has also entered into a third-party guarantee with this distribution facility that guarantees franchisees will purchase a certain volume of product over a 10 -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 29, 2013 and December 29, 2012 , the Company was contingently liable for $6.3 million and $6.8 million , respectively, under this guarantee. Additionally, the Company has various supply chain contracts that generally 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. As of June 29, 2013 and December 29, 2012 , the Company was contingently liable under such supply chain agreements for approximately $52.9 million and $57.5 million , respectively. The Company assesses the risk of performing under each of these guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and ability to extend contract terms, we have not recorded any liabilities related to these commitments, except for the liability recorded in connection with the cooler beverage commitment discussed above.
Equipment Guarantee
In April 2013, the Company entered into a third-party guarantee with an equipment vendor that guarantees franchisees will purchase a total minimum quantity of certain equipment by March 31, 2014. Under the terms of the agreement, in the event that franchisees do not purchase the required minimum quantity, the Company would be contingently liable for purchasing the remaining quantity of equipment. As of June 29, 2013 , the Company was contingently liable for $ 4.2 million under this guarantee. The Company assesses the risk of performing under this guarantee on a quarterly basis, and, based on internal forecasts, we have not recorded any liabilities related to this commitment.
Lease Guarantees
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

17


varying terms, the latest of which expires in 2024 . As of June 29, 2013 and December 29, 2012 , the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $6.1 million and $5.6 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 29, 2013 and December 29, 2012 , the Company had standby letters of credit outstanding for a total of $11.5 million . 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, 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 C$16.4 million (approximately $15.9 million ), plus costs and interest, representing loss in value of the franchises and lost profits. During the second quarter of 2012, the Company increased its estimated liability related to the Bertico litigation by $20.7 million to reflect the judgment amount and estimated plaintiff legal costs and interest. During the third and fourth quarters of 2012, the Company accrued an additional $493 thousand for interest that continues to accrue on the judgment amount. During the three and six months ended June 29, 2013 , the Company accrued an additional $240 thousand and $483 thousand , respectively, of interest, resulting in an estimated liability of $25.0 million , including the impact of foreign exchange, as of June 29, 2013 . 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 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 29, 2013 and December 29, 2012 , contingent liabilities, excluding the Bertico litigation, totaling $1.5 million , 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 all matters could increase by up to an additional $12.0 million based on the outcome of ongoing litigation or negotiations.
(e) Line of Credit to Distribution Facility
On May 17, 2013, the Company provided a secured revolving line of credit to a distribution facility of franchisee products for an aggregate maximum principal amount of up to $8.0 million plus interest. The entire principal balance and accrued and unpaid interest is due June 1, 2014. The purpose of this line of credit is to provide funding for the purchase and storage of certain inventory, which was pledged as collateral under a security agreement dated May 17, 2013 between DBI and the distribution facility in connection with the line of credit agreement. Through June 29, 2013 , no amounts have been drawn on this line of credit.
(13) Related-Party Transactions
(a) Advertising Funds
At June 29, 2013 and December 29, 2012 , the Company had a net payable of $12.2 million and $13.7 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 for the three months ended June 29, 2013 and June 30, 2012 , and $2.9 million for the six months ended June 29, 2013 and June 30, 2012 . Such management fees are reflected in the consolidated statements of operations as a reduction in general and administrative expenses, net.

18


The Company made discretionary contributions to certain advertising funds for the purpose of supplementing national and regional advertising in certain markets of $56 thousand and $50 thousand during the three months ended June 29, 2013 and June 30, 2012 , respectively, and $1.1 million and $739 thousand , during the six months ended June 29, 2013 and June 30, 2012 , respectively, which are included in general and administrative expenses, net in the consolidated statements of operations. Additionally, the Company made net contributions to the advertising funds based on retail sales as owner and operator of company-owned restaurants of $257 thousand and $207 thousand during the three months ended June 29, 2013 and June 30, 2012 , respectively, and $493 thousand and $374 thousand during the six months ended June 29, 2013 and June 30, 2012 , respectively, which are included in company-owned restaurant expenses in the consolidated statements of operations. During the three and six months ended June 29, 2013 , the Company also made $3.2 million of contributions to fund future initiatives that will benefit the gift card program, which was contributed from the gift card breakage liability included within other current liabilities in the consolidated balance sheets.
(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”). Subsequently, the Sponsors sold all of their remaining shares in the Company. One representative of each Sponsor continues to serve on the board of directors.
At December 29, 2012 , certain affiliates of the Sponsors held $52.4 million , of term loans issued under the Company’s senior credit facility. The terms of these loans were identical to all other term loans issued to unrelated lenders in the senior credit facility. As of June 29, 2013 , there were no term loans held by affiliates of the Sponsors.
The Sponsors have historically held 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 in which the Sponsors have ownership interests totaling approximately $830 thousand and $726 thousand during the three months ended June 29, 2013 and June 30, 2012 , respectively, and $1.2 million and $928 thousand during the six months ended June 29, 2013 and June 30, 2012 , respectively, primarily for the purchase of consulting services, training services, and leasing of restaurant space. At June 29, 2013 and December 29, 2012 , the Company had a net payable of $12 thousand and $150 thousand , respectively, to these entities.
(c) Equity Method Investments
The Company received royalties from its equity method investees as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
B-R 31 Ice Cream Co., Ltd.
$
602

 
621

 
1,004

 
1,151

BR Korea Co., Ltd.
1,019

 
927

 
2,029

 
1,767

Coffee Alliance, S.L. (“Coffee Alliance”)
32

 

 
130

 

 
$
1,653

 
1,548

 
3,163

 
2,918

At June 29, 2013 and December 29, 2012 , the Company had $1.4 million and $1.2 million , respectively, of royalties receivable from its equity method investees, 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 $1.1 million and $355 thousand during the three months ended June 29, 2013 and June 30, 2012 , respectively, and $2.1 million and $699 thousand during the six months ended June 29, 2013 and June 30, 2012 , respectively, primarily for the purchase of ice cream products and incentive payments.
During the three and six months ended June 29, 2013 , the Company made additional loans of $899 thousand and $1.6 million , respectively, to Coffee Alliance. As of June 29, 2013 and December 29, 2012 , the Company had $2.2 million and $666 thousand , respectively, of notes receivable from Coffee Alliance, which are included in other assets in the consolidated balance sheets.
During the three months ended June 29, 2013 , the Company recognized sales of ice cream products of $2.6 million in the consolidated statements of operations from the sale of ice cream products to Palm Oasis Ventures Pty. Ltd. ("Australia JV"), of which the Company owns a 20 percent equity interest (see note 15). As of June 29, 2013 , the Company had $2.4 million of

19


receivables from the Australia JV, which were recorded in notes and other receivables, net of allowance for doubtful accounts, in the consolidated balance sheets.
(d) Board of Directors
Certain family members of one of our directors, who retired in May 2013, hold an ownership interest in an entity that owns and operates Dunkin’ Donuts restaurants, and hold the right to develop additional restaurants under store development agreements. The Company received royalty and rental payments from this entity of $119 thousand and $339 thousand during the three months ended June 29, 2013 and June 30, 2012 , respectively, and $343 thousand and $632 thousand during the six months ended June 29, 2013 and June 30, 2012 , respectively. The Company recognized $6 thousand of income related to store development agreements with this entity during the six months ended June 29, 2013 , and $80 thousand during the three and six months ended June 30, 2012 . No such income was recognized during the three months ended June 29, 2013 . All material terms of the franchise and store development agreements with this entity are consistent with other unrelated franchisees in the market.
(14) Closure of Manufacturing Plant
During the second quarter of 2012, the Company’s board of directors approved a plan to close our Peterborough, Ontario, Canada manufacturing plant, which supplied ice cream to certain of Baskin-Robbins international markets. Manufacturing of ice cream products that had been produced in Peterborough began transitioning to existing third-party partner suppliers during the third quarter of 2012, and production ceased at the plant at the end of September 2012. The majority of the costs and activities related to the closure of the plant and transition to third-party suppliers occurred in fiscal year 2012.
The Company recorded cumulative costs related to the plant closure of $12.5 million , of which $191 thousand and $588 thousand were recorded during the three and six months ended June 29, 2013 , respectively. The Company also expects to incur additional costs of approximately $3 million to $4 million primarily related to the settlement of our Canadian pension plan upon final government approval, which may not be obtained until the end of 2013 or early 2014.
As of December 29, 2012 , the Company had recorded reserves for ongoing termination benefits and one-time termination benefits of $636 thousand and $55 thousand , respectively, substantially all of which were paid during the six months ended June 29, 2013 .
(15) Sale of Baskin-Robbins Australia
In June 2013, the Company sold 80% of the Baskin-Robbins Australia franchising business, resulting in a gain of $7.0 million , which is included in other operating income in the consolidated statements of operations. The gain consisted of proceeds of $7.2 million , offset by the carrying value of the business included in the sale, which totaled $216 thousand . The Company retained the remaining 20% ownership of the Australia JV, which is included in equity method investments on the consolidated balance sheets.

20


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; our franchisees and licensees ability to sustain same store sales growth; changes in working relationships 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 impact of seasonal changes, including weather effects, on our business; the success of our growth strategy and international development; changes in commodity and food prices, particularly coffee, dairy products and sugar, and 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 media 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 17,700 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 29, 2013 , Dunkin’ Donuts had 10,647 global points of distribution with restaurants in 40 U.S. states and the District of Columbia and in 30 foreign countries. Baskin-Robbins had 7,071 global points of distribution as of the same date, with restaurants in 43 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 five 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, (iv) retail store revenue at our company-owned restaurants, and (v) 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, and online training fees.
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 30 company-owned points of distribution as of June 29, 2013 , we are less affected by store-level costs, profitability and fluctuations in commodity costs than many 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, research and innovation 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 29, 2013 , franchisee contributions to the U.S. advertising funds were $171.8 million.

21

Table of Contents

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 29, 2013 and June 30, 2012 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 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2013 .
Selected Operating and Financial Highlights
 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Franchisee-reported sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
1,704.5

 
1,574.9

 
3,230.5

 
3,021.1

Dunkin’ Donuts International
170.8

 
164.9

 
338.8

 
325.4

Baskin-Robbins U.S.
161.9

 
158.7

 
269.5

 
272.7

Baskin-Robbins International
360.4

 
374.5

 
645.2

 
637.5

Total franchisee-reported sales (a)
$
2,397.6

 
2,273.0

 
4,484.0

 
4,256.7

Systemwide sales growth
5.5
 %
 
6.9
%
 
5.4
 %
 
8.7
%
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
4.0
 %
 
4.0
%
 
2.9
 %
 
5.5
%
Dunkin’ Donuts International
(1.7
)%
 
3.5
%
 
(0.1
)%
 
3.1
%
Baskin-Robbins U.S.
1.6
 %
 
4.6
%
 
(0.9
)%
 
6.4
%
Baskin-Robbins International
2.6
 %
 
1.5
%
 
3.3
 %
 
4.0
%
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
182,488

 
172,387

 
344,346

 
324,759

Operating income
76,805

 
46,138

 
140,264

 
101,333

Adjusted operating income
91,168

 
78,937

 
161,854

 
141,920

Net income attributable to Dunkin’ Brands
40,812

 
18,497

 
64,610

 
44,447

Adjusted net income
43,881

 
40,325

 
75,026

 
70,948

(a)  Totals may not recalculate due to rounding.

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 our 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 aids 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.

Overall growth in systemwide sales of 5.5% and 5.4% for the three and six months ended June 29, 2013 , respectively, over the same periods in the prior year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 8.2% and 6.9% for the three and six months ended June 29, 2013 , respectively, as a result of 368 net new restaurants opened since June 30, 2012 and comparable store sales growth of 4.0% and 2.9% , respectively, driven by increased average ticket and higher traffic. The increase in average ticket resulted primarily from guests purchasing more units per transaction, including add-on items, and positive mix as guests purchased more premium-priced cold beverages and differentiated sandwiches. Increased traffic was driven by continued product and marketing innovation, resulting in strong growth in beverages, breakfast sandwiches, donuts, and our afternoon platform.
Dunkin’ Donuts International systemwide sales growth of 3.5% and 4.1% for the three and six months ended June 29, 2013 , respectively, driven primarily by sales growth in Southeast Asia, Germany, and the Middle East. Dunkin’ Donuts International comparable store sales declined 1.7% and 0.1% for the three and six months ended June 29, 2013 , respectively.
Baskin-Robbins U.S. systemwide sales growth of 2.0% for the three months ended June 29, 2013 resulting primarily from comparable store sales growth of 1.6% driven by sales of Flavors of the Month, increased cake sales, and

22

Table of Contents

limited-time offers on take-home ice cream quarts. Baskin-Robbins U.S. systemwide sales declined 1.2% for the six months ended June 29, 2013 resulting primarily from a comparable store sales decline of 0.9% driven primarily by the negative impact of weather in the first quarter.
Baskin-Robbins International systemwide sales decline of 3.8% for the three months ended June 29, 2013 driven by an unfavorable impact of exchange rates on sales in Japan, offset by sales growth in South Korea. Baskin-Robbins International systemwide sales grew 1.2% for the six months ended June 29, 2013 driven by increased sales in South Korea and the Middle East, offset by a sales decline in Japan. Baskin-Robbins International comparable store sales growth was 2.6% and 3.3% for the three and six months ended June 29, 2013 .
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and six months ended June 29, 2013 and June 30, 2012 were as follows:
 
 
 
 
 
June 29, 2013
 
June 30, 2012
Points of distribution, at period end:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
 
 
 
 
7,447

 
7,079

Dunkin’ Donuts International
 
 
 
 
3,200

 
3,090

Baskin-Robbins U.S.
 
 
 
 
2,470

 
2,493

Baskin-Robbins International
 
 
 
 
4,601

 
4,354

Consolidated global points of distribution
 
 
 
 
17,718

 
17,016

 
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Net openings, during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
63

 
19

 
141

 
64

Dunkin’ Donuts International
33

 
29

 
27

 
22

Baskin-Robbins U.S.
5

 
5

 
7

 

Baskin-Robbins International
50

 
87

 
84

 
136

Consolidated global net openings
151

 
140

 
259

 
222

The increases in total revenues of $10.1 million , or 5.9% , and $19.6 million , or 6.0% , for the three and six months ended June 29, 2013 , respectively, primarily resulted from increased franchise fees and royalty income of $6.9 million and $14.6 million , respectively, and increases in sales of ice cream products of $4.4 million and $5.2 million , respectively.
Operating income for the three months ended June 29, 2013 increased $30.7 million , or 66.5% , from the comparable period of the prior year primarily as a result of a $20.7 million increase in the Bertico litigation reserve in the prior year, the increase in royalty income and franchise fees, and a gain recognized on the sale of 80% of our Baskin-Robbins Australia business, offset by a $7.5 million charge related to a third-party product volume guarantee. Operating income for the six months ended June 29, 2013 increased $38.9 million , or 38.4% , from the comparable period of the prior year primarily as a result of the increase in the Bertico litigation reserve recorded in the prior year, the increase in royalty income and franchise fees, and the gain from the Baskin-Robbins Australia sale, offset by the third-party product volume guarantee charge.
Adjusted operating income increased $12.2 million , or 15.5% , and $19.9 million , or 14.0% , for the three and six months ended June 29, 2013 , respectively, primarily as a result of the increases in royalty income and the gain from the Baskin-Robbins Australia sale.
Net income increased $22.3 million for the three months ended June 29, 2013 primarily as a result of the $30.7 million increase in operating income, offset by a $4.4 million increase in tax expense and a $3.2 million increase in interest expense. Net income increased $20.2 million for the six months ended June 29, 2013 primarily as a result of the $38.9 million increase in operating income, offset by a $7.3 million increase in interest expense, a $5.3 million increase in tax expense, and $5.0 million of charges incurred in connection with the February 2013 debt repricing.
Adjusted net income increased $3.6 million and $4.1 million for the three and six months ended June 29, 2013 , respectively, primarily as a result of the increases in adjusted operating income of $12.2 million and $19.9 million , respectively, offset by increases in interest expense and income tax expense.
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

23

Table of Contents

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 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
 
(In thousands)
Operating income
$
76,805

 
46,138

 
140,264

 
101,333

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,565

 
6,783

 
13,147

 
13,648

Impairment charges
107

 
377

 
355

 
386

Third-party product volume guarantee
7,500

 

 
7,500

 

Secondary offering costs

 
1,281

 

 
2,195

Peterborough plant closure costs (a)
191

 
3,678

 
588

 
3,678

Bertico litigation (b)

 
20,680

 

 
20,680

Adjusted operating income
$
91,168

 
78,937

 
161,854

 
141,920

Net income attributable to Dunkin’ Brands
$
40,812

 
18,497

 
64,610

 
44,447

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,565

 
6,783

 
13,147

 
13,648

Impairment charges
107

 
377

 
355

 
386

Third-party product volume guarantee
7,500

 

 
7,500

 

Secondary offering costs

 
1,281

 

 
2,195

Peterborough plant closure costs (a)
191

 
3,678

 
588

 
3,678

Bertico litigation (b)

 
20,680

 

 
20,680

Loss on debt extinguishment and refinancing transactions

 

 
5,018

 

Tax impact of adjustments, excluding Bertico litigation (c)
(5,745
)
 
(4,848
)
 
(10,643
)
 
(7,963
)
Tax impact of Bertico adjustment (d)

 
(6,123
)
 

 
(6,123
)
Income tax audit settlements (e)
(8,417
)
 

 
(8,417
)
 

State tax apportionment (f)
2,868

 

 
2,868

 

Adjusted net income
$
43,881

 
40,325

 
75,026

 
70,948

(a)
Represents transition-related general and administrative costs incurred related to the closure of the Baskin-Robbins ice cream manufacturing plant in Peterborough, Canada, such as information technology integration, project management, and transportation costs.
(b)
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.
(c)
Tax impact of adjustments, excluding the Bertico litigation, calculated at a 40% effective tax rate.
(d)
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 fully reversed in the third and fourth quarters of 2012 based on interim tax provision requirements.
(e)
Represents income tax benefits resulting from the resolution of historical tax positions settled during the period.
(f)
Primarily represents deferred tax expense recognized due to an increase in our overall state tax rate resulting from a shift in estimated apportionment of income within state jurisdictions.


24

Table of Contents

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
 
Three months ended
 
Six months ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.38

 
0.15

 
0.61

 
0.37

Common—diluted
0.38

 
0.15

 
0.60

 
0.36

Diluted adjusted earnings per share
0.41

 
0.33