Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 11/06/2013 17:06:24)
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 September 28, 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 October 31, 2013 , 106,673,032 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)
 
September 28,
2013
 
December 29,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
209,800

 
252,618

Accounts receivable, net of allowance for doubtful accounts of $2,503 and $2,483 as of September 28, 2013 and December 29, 2012, respectively
46,124

 
32,407

Notes and other receivables, net of allowance for doubtful accounts of $854 and $1,204 as of September 28, 2013 and December 29, 2012, respectively
9,837

 
20,649

Assets held for sale
1,606

 
2,400

Deferred income taxes, net
47,412

 
47,263

Restricted assets of advertising funds
35,021

 
31,849

Prepaid income taxes
3,283

 
10,825

Prepaid expenses and other current assets
22,158

 
21,769

Total current assets
375,241

 
419,780

Property and equipment, net of accumulated depreciation of $102,364 and $109,747 as of September 28, 2013 and December 29, 2012, respectively
178,639

 
181,172

Equity method investments
171,025

 
174,823

Goodwill
891,880

 
891,900

Other intangible assets, net
1,459,235

 
1,479,784

Restricted cash
319

 
367

Other assets
73,619

 
69,687

Total assets
$
3,149,958

 
3,217,513

Liabilities, Redeemable Noncontrolling Interests, and Stockholders’ Equity
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
5,000

 
26,680

Capital lease obligations
403

 
371

Accounts payable
11,955

 
16,256

Liabilities of advertising funds
52,897

 
45,594

Deferred income
22,745

 
24,683

Other current liabilities
177,071

 
239,931

Total current liabilities
270,071

 
353,515

Long-term debt, net
1,823,226

 
1,823,278

Capital lease obligations
7,116

 
7,251

Unfavorable operating leases acquired
17,354

 
19,061

Deferred income
16,840

 
15,720

Deferred income taxes, net
563,571

 
569,126

Other long-term liabilities
65,464

 
79,587

Total long-term liabilities
2,493,571

 
2,514,023

Commitments and contingencies (note 12)

 

Redeemable noncontrolling interests
5,113

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at September 28, 2013 and December 29, 2012, respectively

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 107,065,302 issued and 106,648,002 outstanding at September 28, 2013; and 106,146,984 shares issued and outstanding at December 29, 2012
107

 
106

Additional paid-in capital
1,202,808

 
1,251,498

Treasury stock, at cost
(17,190
)
 

Accumulated deficit
(809,286
)
 
(914,094
)
Accumulated other comprehensive income
4,764

 
9,141

Total stockholders’ equity of Dunkin’ Brands
381,203

 
346,651

Noncontrolling interests

 
3,324

Total stockholders' equity
381,203

 
349,975

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity
$
3,149,958

 
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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Revenues:
 
 
 
 
 
Franchise fees and royalty income
$
117,486

 
107,847

 
334,045

 
309,819

Rental income
25,437

 
24,918

 
72,924

 
73,859

Sales of ice cream products
30,429

 
27,118

 
86,818

 
78,283

Sales at company-owned restaurants
6,250

 
5,913

 
18,261

 
16,706

Other revenues
6,715

 
5,923

 
18,615

 
17,811

Total revenues
186,317

 
171,719

 
530,663

 
496,478

Operating costs and expenses:
 
 
 
 
 
Occupancy expenses—franchised restaurants
13,445

 
12,965

 
39,041

 
38,797

Cost of ice cream products
20,899

 
19,211

 
61,187

 
56,000

Company-owned restaurant expenses
6,222

 
6,021

 
17,817

 
16,967

General and administrative expenses, net
57,703

 
55,630

 
174,287

 
186,550

Depreciation
5,591

 
9,011

 
16,961

 
22,533

Amortization of other intangible assets
6,938

 
6,669

 
20,085

 
20,317

Long-lived asset impairment charges
92

 
564

 
447

 
950

Total operating costs and expenses
110,890

 
110,071

 
329,825

 
342,114

Net income of equity method investments:
 
 
 
 
 
 
 
Net income, excluding impairment
8,201

 
8,697

 
16,070

 
17,314

Impairment charge
(873
)
 

 
(873
)
 

Total net income of equity method investments
7,328

 
8,697

 
15,197

 
17,314

Other operating income (expense), net
(518
)
 

 
6,466

 

Operating income
82,237

 
70,345

 
222,501

 
171,678

Other income (expense):
 
 
 
 
 
Interest income
105

 
126

 
310

 
383

Interest expense
(19,805
)
 
(18,920
)
 
(60,523
)
 
(52,306
)
Loss on debt extinguishment and refinancing transactions

 
(3,963
)
 
(5,018
)
 
(3,963
)
Other gains (losses), net
12

 
(265
)
 
(1,191
)
 
(472
)
Total other expense
(19,688
)
 
(23,022
)
 
(66,422
)
 
(56,358
)
Income before income taxes
62,549

 
47,323

 
156,079

 
115,320

Provision for income taxes
22,505

 
18,022

 
51,664

 
41,886

Net income including noncontrolling interests
40,044

 
29,301

 
104,415

 
73,434

Net loss attributable to noncontrolling interests
(177
)
 
(225
)
 
(416
)
 
(539
)
Net income attributable to Dunkin’ Brands
$
40,221

 
29,526

 
104,831

 
73,973

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.38

 
0.26

 
0.99

 
0.63

Common—diluted
0.37

 
0.26

 
0.97

 
0.62

Cash dividends declared per common share
0.19

 
0.15

 
0.57

 
0.45

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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net income including noncontrolling interests
$
40,044

 
29,301

 
104,415

 
73,434

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense (benefit) of $(75) and $299 for the three and nine months ended September 28, 2013, respectively
5,358

 
4,364

 
(11,345
)
 
1,143

Unrealized gains (losses) on interest rate swaps, net of deferred tax expense (benefit) of $(1,412) and $4,887 for the three and nine months ended September 28, 2013, respectively
(2,071
)
 
(2,454
)
 
7,145

 
(2,454
)
Unrealized loss on pension plan, net of deferred tax benefit of $93 and $80 for the three and nine months ended September 28, 2013, respectively
(266
)
 
(1,451
)
 
(231
)
 
(1,451
)
Other, net
(30
)
 
(125
)
 
54

 
(1,739
)
Total other comprehensive income (loss)
2,991

 
334

 
(4,377
)
 
(4,501
)
Comprehensive income including noncontrolling interests
43,035

 
29,635

 
100,038

 
68,933

Comprehensive loss attributable to noncontrolling interests
(177
)
 
(225
)
 
(416
)
 
(539
)
Comprehensive income attributable to Dunkin’ Brands
$
43,212

 
29,860

 
100,454

 
69,472

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)

 
Nine months ended
 
September 28,
2013
 
September 29,
2012
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
104,415

 
73,434

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37,046

 
42,850

Amortization of deferred financing costs and original issue discount
3,586

 
4,110

Loss on debt extinguishment and refinancing transactions
5,018

 
3,963

Impact of unfavorable operating leases acquired
(1,685
)
 
(1,804
)
Deferred income taxes
(10,893
)
 
(12,901
)
Long-lived asset impairment charges
447

 
950

Provision for (recovery of) bad debt
3,008

 
(586
)
Share-based compensation expense
5,750

 
5,907

Net income of equity method investments
(15,197
)
 
(17,314
)
Dividends received from equity method investments
7,226

 
6,497

Gain on sale of joint venture
(6,466
)
 

Other, net
(1,201
)
 
(519
)
Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
(3,162
)
 
9,401

Other current assets
1

 
(247
)
Accounts payable
(517
)
 
(1,442
)
Other current liabilities
(62,137
)
 
(37,796
)
Liabilities of advertising funds, net
4,847

 
(2,222
)
Income taxes payable, net
(5,010
)
 
(13,971
)
Deferred income
(814
)
 
(1,137
)
Other, net
1,053

 
257

Net cash provided by operating activities
65,315

 
57,430

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(20,930
)
 
(13,379
)
Proceeds from sale of joint venture
7,200

 

Other, net
755

 
(925
)
Net cash used in investing activities
(12,975
)
 
(14,304
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(19,157
)
 
(15,441
)
Payment of deferred financing and other debt-related costs
(6,157
)
 
(5,773
)
Dividends paid on common stock
(60,707
)
 
(54,189
)
Repurchases of common stock
(17,190
)

(450,343
)
Proceeds from issuance of long-term debt

 
396,000

Exercise of stock options
6,287

 
1,791

Other, net
1,906

 
3,397

Net cash used in financing activities
(95,018
)
 
(124,558
)
Effect of exchange rates on cash and cash equivalents
(140
)
 
359

Decrease in cash and cash equivalents
(42,818
)
 
(81,073
)
Cash and cash equivalents, beginning of period
252,618

 
246,715

Cash and cash equivalents, end of period
$
209,800

 
165,642

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
68,504

 
70,106

Cash paid for interest
58,997

 
47,493

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,095

 
1,424

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 consolidated 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 Consolidated Financial Statements
The consolidated balance sheet as of September 28, 2013 , the consolidated statements of operations and comprehensive income for the three and nine months ended September 28, 2013 and September 29, 2012 , and the consolidated statements of cash flows for the nine months ended September 28, 2013 and September 29, 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 nine -month periods ended September 28, 2013 and September 29, 2012 reflect the results of operations for the 13-week and 39-week periods ended on those dates. Operating results for the three- and nine -month periods ended September 28, 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 consolidated 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 counterparties on a quarterly basis, and adjust the carrying values as necessary. We believe the carrying value of long-term receivables of $4.7 million and $5.8 million as of September 28, 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 September 28, 2013 and December 29, 2012 are summarized as follows (in thousands):
 
September 28, 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
$
2,163

 

 
2,163

 
2,505

 

 
2,505

Interest rate swaps

 
9,223

 
9,223

 

 

 

Total assets
$
2,163

 
9,223

 
11,386

 
2,505

 

 
2,505

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
$

 
6,752

 
6,752

 

 
7,379

 
7,379

Interest rate swaps

 

 

 

 
2,809

 
2,809

Total liabilities
$

 
6,752

 
6,752

 

 
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 September 28, 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 September 28, 2013 and December 29, 2012 were as follows (in thousands):
 
September 28, 2013
 
December 29, 2012
 
Carrying Value
 
Estimated fair value
 
Carrying Value
 
Estimated fair value
Financial liabilities:
 
 
 
 
 
 
 
Term loans
$
1,828,226

 
1,836,621

 
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

8


the hedged transaction affects earnings.  Any ineffective portion of the gain or loss on the derivative instrument for a cash flow 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 September 28, 2013 , one master licensee and majority owned subsidiaries of the master licensee, accounted for approximately 27% 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 nine months ended September 28, 2013 or the three or nine months ended September 29, 2012 .
(g) Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance which requires presentation of an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. This guidance is effective for the Company in fiscal year 2014 with early adoption permitted. The Company has not adopted this guidance as of September 28, 2013 , and does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.
In February 2013, the 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) 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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Royalty income
$
106,327

 
98,858

 
305,803

 
286,487

Initial franchise fees, including renewal income
11,159

 
8,989

 
28,242

 
23,332

Total franchise fees and royalty income
$
117,486

 
107,847

 
334,045

 
309,819


9


The changes in franchised and company-owned points of distribution were as follows:
 
Three months ended
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution—beginning of period
17,688

 
16,980

 
17,424

 
16,763

Franchised points of distribution—opened
360

 
310

 
904

 
879

Franchised points of distribution—closed
(140
)
 
(124
)
 
(420
)
 
(472
)
Net transfers to company-owned points of distribution

 

 

 
(4
)
Franchised points of distribution in operation—end of period
17,908

 
17,166

 
17,908

 
17,166

Company-owned points of distribution—end of period
32

 
37

 
32

 
37

Total systemwide points of distribution—end of period
17,940

 
17,203

 
17,940

 
17,203

(4) Goodwill and Other Intangible Assets
The change in the gross carrying amount of goodwill from December 29, 2012 to September 28, 2013 is due to the impact of foreign currency fluctuations.
Other intangible assets at September 28, 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
 
$
383,770

 
(154,829
)
 
228,941

Favorable operating leases acquired
16
 
74,549

 
(36,734
)
 
37,815

License rights
10
 
6,230

 
(4,721
)
 
1,509

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

 

 
1,190,970

 
 
 
$
1,655,519

 
(196,284
)
 
1,459,235

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 September 28, 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 $350 thousand for the three months ended September 28, 2013 and September 29, 2012 , respectively, and $358 thousand and $667 thousand for the nine months ended September 28, 2013 and September 29, 2012 , respectively, and is included within long-lived asset impairment charges in the consolidated statements of operations. Total estimated amortization expense for fiscal years 2013

10


through 2017 is presented below (in thousands). The amount reflected below for fiscal year 2013 includes year-to-date amortization.
Fiscal year:
 
2013
$
26,904

2014
25,447

2015
25,120

2016
22,188

2017
21,406

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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Increase in rental income
$
246

 
286

 
752

 
814

Decrease in rental expense
367

 
302

 
933

 
990

Total increase in operating income
$
613

 
588

 
1,685

 
1,804

(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 September 28, 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 nine months ended September 28, 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. The Company has reflected a  $5.0 million  voluntary payment, which was paid during the first week of the fourth quarter of 2013, within the current portion of long-term debt as of  September 28, 2013  on the consolidated balance sheets. 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 September 28, 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 September 28, 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):
 
September 28,
2013
 
December 29,
2012
 
Consolidated Balance Sheet Classification
Interest rate swaps - asset
$
9,223

 

 
Other assets
Total fair values of derivative instruments - asset
$
9,223

 

 
 
 
 
 
 
 
 
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 September 28, 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
 
$
(4,328
)
 
(845
)
 
Interest expense
 
$
(3,483
)
Income tax effect
 
1,755

 
343

 
Provision for income taxes
 
1,412

Net of income taxes
 
$
(2,573
)
 
(502
)
 
 
 
$
(2,071
)

The tables below summarizes the effects of derivative instruments on the consolidated statements of operations and comprehensive income for the nine months ended September 28, 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
 
$
9,495

 
(2,537
)
 
Interest expense
 
$
12,032

Income tax effect
 
(3,847
)
 
1,040

 
Provision for income taxes
 
(4,887
)
Net of income taxes
 
$
5,648

 
(1,497
)
 
 
 
$
7,145

The Company recorded $19 thousand of interest expense related to the swaps which is included in interest expense in the consolidated statements of operations for the three and nine months ended September 29, 2012.

12


There was no ineffectiveness of the interest rate swaps during the three and nine months ended September 28, 2013 , and therefore, ineffectiveness had no impact on the consolidated statements of operations. As of September 28, 2013 and December 29, 2012 , $864 thousand 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.

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  September 28, 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 September 28, 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 September 28, 2013 , the termination value of derivatives is a net asset position of $ 8.6 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):
 
September 28,
2013
 
December 29,
2012
Gift card/certificate liability
$
71,601

 
145,981

Gift card breakage liability
16,835

 

Accrued salary and benefits
22,427

 
31,136

Accrued legal liabilities (see note 12(d))
27,267

 
27,305

Accrued interest
10,748

 
13,564

Accrued professional costs
2,737

 
2,996

Other
25,456

 
18,949

Total other current liabilities
$
177,071

 
239,931

The decrease in the gift card/certificate liability is driven primarily by the seasonality of our gift card program. Additionally, during the second quarter of fiscal year 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.
(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, long-lived asset impairment charges, loss on debt extinguishment and refinancing transactions, other gains and losses, and unallocated corporate charges, referred to as segment

13


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.
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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Dunkin’ Donuts U.S.
$
134,254

 
123,622

 
382,560

 
357,282

Dunkin’ Donuts International
4,174

 
3,671

 
12,728

 
11,489

Baskin-Robbins U.S.
11,899

 
11,667

 
34,000

 
34,259

Baskin-Robbins International
32,759

 
29,657

 
93,104

 
84,004

Total reportable segment revenues
183,086

 
168,617

 
522,392

 
487,034

Other
3,231

 
3,102

 
8,271

 
9,444

Total revenues
$
186,317

 
171,719

 
530,663

 
496,478

Expenses included in “Corporate and other” in the segment profit (loss) table below include corporate overhead costs, such as payroll and related benefit costs and professional services. Segment profit (loss) by segment was as follows (in thousands):
 
Segment profit (loss)
 
Three months ended
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Dunkin’ Donuts U.S.
$
100,278

 
91,122

 
274,188

 
260,981

Dunkin’ Donuts International
(1,052
)
 
2,402

 
3,093

 
7,496

Baskin-Robbins U.S.
8,327

 
8,069

 
22,048

 
22,386

Baskin-Robbins International
16,795

 
16,047

 
45,548

 
35,171

Total reportable segment profit
124,348

 
117,640

 
344,877

 
326,034

Corporate and other
(29,490
)
 
(31,051
)
 
(84,883
)
 
(110,556
)
Interest expense, net
(19,700
)
 
(18,794
)
 
(60,213
)
 
(51,923
)
Depreciation and amortization
(12,529
)
 
(15,680
)
 
(37,046
)
 
(42,850
)
 Long-lived asset impairment charges
(92
)
 
(564
)
 
(447
)
 
(950
)
Loss on debt extinguishment and refinancing transactions

 
(3,963
)
 
(5,018
)
 
(3,963
)
Other gains (losses), net
12

 
(265
)
 
(1,191
)
 
(472
)
Income before income taxes
$
62,549

 
47,323

 
156,079

 
115,320

Net income of equity method investments is included in segment profit (loss) 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 (loss) of equity method investments
 
Three months ended
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Dunkin’ Donuts International
$
(431
)
 
414

 
(177
)
 
1,797

Baskin-Robbins International
7,467

 
7,504

 
14,131

 
12,848

Total reportable segments
7,036

 
7,918

 
13,954

 
14,645

Other
292

 
779

 
1,243

 
2,669

Total net income of equity method investments
$
7,328

 
8,697

 
15,197

 
17,314


14



(9) Stockholders’ Equity and Redeemable Noncontrolling Interests
The changes in total stockholders' equity and redeemable noncontrolling interests were as follows (in thousands):
 
 
Stockholders' equity
 
Redeemable noncontrolling interests
 
 
Total stockholders’ equity of Dunkin’ Brands
 
Noncontrolling interests
 
Total stockholders’ equity
 
Balance at December 29, 2012
 
$
346,651

 
3,324

 
349,975

 

Net income attributable to Dunkin' Brands
 
104,831

 

 
104,831

 

Net loss attributable to noncontrolling interests
 

 
(239
)
 
(239
)
 
(177
)
Other comprehensive loss
 
(4,377
)
 

 
(4,377
)
 

Dividends paid on common stock
 
(60,707
)
 

 
(60,707
)
 

Exercise of stock options
 
6,287

 

 
6,287

 

Repurchases of common stock
 
(17,190
)
 

 
(17,190
)
 

Share-based compensation expense
 
5,750

 

 
5,750

 

Reclassification to redeemable noncontrolling interests
 

 
(3,085
)
 
(3,085
)
 
3,085

Contributions from noncontrolling interests
 

 

 

 
2,205

Other, net
 
(42
)
 

 
(42
)
 

Balance at September 28, 2013
 
$
381,203

 

 
381,203

 
5,113

(a) Redeemable Noncontrolling Interests
During the nine months ended September 28, 2013 , the Company amended the partnership agreement with the noncontrolling owners to provide the noncontrolling owners the option in early 2017 to sell their entire interest to the Company. As a result of the amendment, the partnership agreement now contains a redemption feature that is not currently redeemable, but it is probable to become redeemable in the future. As such, the Company reclassified the noncontrolling interests during the nine months ended September 28, 2013 to temporary equity (between liabilities and stockholders’ equity). As of September 28, 2013 , the consolidated balance sheets included $4.0 million of cash and cash equivalents and $5.9 million of property and equipment, net for this partnership entity, which may be used only to settle obligations of the partnership.
(b) Treasury Stock
During the nine months ended September 28, 2013 , the Company repurchased a total of 417,300 shares of common stock at a weighted average price per share of $41.18 from existing stockholders. The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $17.2 million during the nine months ended September 28, 2013 , based on the fair market value of the shares on the date of repurchase and direct costs incurred.
(c) 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 nine months ended September 28, 2013 , the Company granted options to purchase 1,177,999 shares of common stock and 94,495 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 $2.1 million and $3.1 million for the three months ended September 28, 2013 and September 29, 2012 , respectively, and $5.8 million and $5.9 million for the nine months ended September 28, 2013 and September 29, 2012 , respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.

15


(d) 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)
(11,345
)
 
7,145

 
(231
)
 
54

 
(4,377
)
Balance at September 28, 2013
$
3,569

 
5,490

 
(2,717
)
 
(1,578
)
 
4,764


(1)  
The Company reclassified $1.5 million of losses, net of tax, from accumulated other comprehensive income into the consolidated statements of operations related to the interest rate swaps for the nine months ended September 28, 2013 (see note 6). Additionally, the Company reclassified $57 thousand of losses, net of tax, from accumulated other comprehensive income into the consolidated statements of operations related to The Baskin-Robbins Employees’ Pension Plan for the nine months ended September 28, 2013 , of which $76 thousand of losses are included in general and administrative expenses, net, and $19 thousand of a tax benefit is included in provision for income taxes.
(e) Dividends
The Company paid quarterly dividends of $0.19 per share of common stock on February 20, 2013 , June 6, 2013 , and September 4, 2013 totaling approximately $20.2 million , $20.3 million , and $20.3 million , respectively. On October 24, 2013 , we announced that our board of directors approved the next quarterly dividend of $0.19 per share of common stock payable November 26, 2013 to shareholders of record as of the close of business on November 18, 2013 .
(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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net income attributable to Dunkin’ Brands—basic and diluted
$
40,221

 
29,526

 
104,831

 
73,973

Allocation of net income to common stockholders:
 
 
 
 
 
 
 
Common—basic (1)
40,221

 
29,508

 
104,831

 
73,842

Common—diluted (1)
40,221

 
29,509

 
104,831

 
73,863

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
106,531,827

 
112,720,961

 
106,421,114

 
117,499,678

Common—diluted
108,164,925

 
115,075,000

 
108,178,632

 
119,459,154

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.38

 
0.26

 
0.99

 
0.63

Common—diluted
0.37

 
0.26

 
0.97

 
0.62

 
(1)  
Net income allocated to common shareholders for the three months ended September 29, 2012 excludes $18 thousand and $17 thousand for basic and diluted earnings per share, respectively, and $131 thousand and $110 thousand for basic and diluted earnings per share, respectively, for the nine months ended September 29, 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 nine months ended September 28, 2013 , as all restricted shares were fully vested as of September 28, 2013 .
The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,633,098 and 2,354,039 restricted shares and stock options for the three months ended September 28, 2013 and September 29, 2012 , respectively, and includes the dilutive effect of 1,757,518 and 1,959,476 restricted shares and stock options for the nine months ended September 28, 2013 and September 29, 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

16


the fiscal period end. As of September 28, 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 September 29, 2012 , there were approximately 4,000 common restricted stock awards that were performance-based and for which the performance criteria was not yet met. Additionally, the weighted average number of common shares in the common diluted earnings per share calculation excludes 1,181,338 and 1,046,753 stock options for the three months ended September 28, 2013 and September 29, 2012 , respectively, and 1,441,640 and 728,719 stock options for the nine months ended September 28, 2013 and September 29, 2012 , respectively, as they would be antidilutive.
(11) Income Taxes
Income tax expense and the effective tax rate were $22.5 million and 36.0% , respectively, for the three months ended September 28, 2013 , and $18.0 million and 38.1% , respectively, for the three months ended September 29, 2012 . Income tax expense and the effective tax rate were $51.7 million and 33.1% , respectively, for the nine months ended September 28, 2013 , and $41.9 million and 36.3% , respectively, for the nine months ended September 29, 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 months ended September 28, 2013 , the Company recorded a net tax benefit of $1.1 million primarily related to closing costs of our Canadian ice cream manufacturing plant. During the nine months ended September 28, 2013 , the Company recorded a net tax benefit of $6.2 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, as well as the benefit related to closing costs of our Canadian ice cream manufacturing plant, 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 $2.4 million during the nine months ended September 29, 2012 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 nine months ended September 28, 2013 , the Company made cash payments of approximately $5.2 million 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 $4.0 million and $4.7 million at September 28, 2013 and December 29, 2012 , respectively. At September 28, 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 $355 thousand and $374 thousand , respectively, at September 28, 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 September 28, 2013 and December 29, 2012 , the Company had recorded reserves for such guarantees of $49 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 second quarter of fiscal year 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

17


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 September 28, 2013 and December 29, 2012 , the Company was contingently liable for $6.0 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 September 28, 2013 and December 29, 2012 , the Company was contingently liable under such supply chain agreements for approximately $54.4 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 September 28, 2013 , the Company was contingently liable for $ 486 thousand 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 varying terms, the latest of which expires in 2024 . As of September 28, 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 $6.4 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 September 28, 2013 and December 29, 2012 , the Company had standby letters of credit outstanding for a total of $11.9 million and $11.5 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, alleging that the Company breached its franchise agreements and provided inadequate management and support to Dunkin’ Donuts franchisees in Quebec (the “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 nine months ended September 28, 2013 , the Company accrued an additional $235 thousand and $718 thousand , respectively, of interest, resulting in an estimated liability of $25.8 million , including the impact of foreign exchange, as of September 28, 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 September 28, 2013 and December 29, 2012 , contingent liabilities, excluding the Bertico litigation, totaling $1.5 million , were included in other current

18


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
In May 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 entered into in connection with the line of credit agreement. Through September 28, 2013 , no amounts have been drawn on this line of credit.
(13) Related-Party Transactions
(a) Advertising Funds
At September 28, 2013 and December 29, 2012 , the Company had a net payable of $17.9 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 $1.5 million and $1.4 million for the three months ended September 28, 2013 and September 29, 2012 , respectively, and $4.3 million for the nine months ended September 28, 2013 and September 29, 2012 . Such management fees are reflected in the consolidated statements of operations as a reduction in general and administrative expenses, net.
The Company made discretionary contributions to certain advertising funds for the purpose of supplementing national and regional advertising in certain markets of $62 thousand and $105 thousand during the three months ended September 28, 2013 and September 29, 2012 , respectively, and $1.2 million and $844 thousand , during the nine months ended September 28, 2013 and September 29, 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 $256 thousand and $205 thousand during the three months ended September 28, 2013 and September 29, 2012 , respectively, and $749 thousand and $579 thousand during the nine months ended September 28, 2013 and September 29, 2012 , respectively, which are included in company-owned restaurant expenses in the consolidated statements of operations. During the three and nine months ended September 28, 2013 , the Company also made $357 thousand and $3.6 million , respectively, 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 September 28, 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 $492 thousand and $298 thousand during the three months ended September 28, 2013 and September 29, 2012 , respectively, and $1.7 million and $1.2 million during the nine months ended September 28, 2013 and September 29, 2012 , respectively, primarily for the purchase of consulting services, training services, and leasing of restaurant space. At December 29, 2012 , the Company had a net payable of $150 thousand to these entities. At September 28, 2013 , the Company had no net payable to these entities.

19


(c) Equity Method Investments
The Company recognized royalty income from its equity method investees as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
B-R 31 Ice Cream Co., Ltd.
$
838

 
1,107

 
1,842

 
2,257

BR Korea Co., Ltd.
1,036

 
939

 
3,065

 
2,706

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

 

 
130

 

 
$
1,874

 
2,046

 
5,037

 
4,963

At September 28, 2013 and December 29, 2012 , the Company had $1.2 million 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 $929 thousand and $376 thousand during the three months ended September 28, 2013 and September 29, 2012 , respectively, and $3.0 million and $1.1 million during the nine months ended September 28, 2013 and September 29, 2012 , respectively, primarily for the purchase of ice cream products and incentive payments.
During the three and nine months ended September 28, 2013 , the Company made additional loans of $496 thousand and $2.1 million , respectively, to our Spain joint venture, Coffee Alliance. As of September 28, 2013 and December 29, 2012 , the Company had $2.7 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 September 28, 2013 , the Company fully reserved all outstanding notes and accounts receivable totaling $2.8 million , and fully impaired its equity investment in Coffee Alliance of $873 thousand . The reserves on accounts and notes receivable are included in general and administrative expenses, net, and the impairment of the equity investment is included in net income of equity method investments in the consolidated statements of operations.
During the three and nine months ended September 28, 2013 , the Company recognized sales of ice cream products of $749 thousand and $3.3 million , respectively 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 September 28, 2013 , the Company had $2.1 million of receivables from the Australia JV, which were recorded in accounts 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 $216 thousand during the three months ended September 29, 2012 , and $343 thousand and $848 thousand during the nine months ended September 28, 2013 and September 29, 2012 , respectively. The Company recognized $6 thousand of income related to store development agreements with this entity during the nine months ended September 28, 2013 , and $40 thousand and $120 thousand during the three and nine months ended September 29, 2012 , respectively. No such income was recognized during the three months ended September 28, 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 $12.6 million , of which $66 thousand and $654 thousand were recorded during the three and nine months ended September 28, 2013 , respectively, and $5.3 million and $8.9 million were recorded during the three and nine months ended September 29, 2012 , 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 likely will not be obtained until early 2014.

20


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 nine months ended September 28, 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 $6.5 million , net of transaction costs, which is included in other operating income in the consolidated statements of operations for the nine months ended September 28, 2013. The gain consisted of net proceeds of $6.7 million , offset by the carrying value of the business included in the sale, which totaled $216 thousand . As of September 28, 2013, unpaid transaction-related costs totaling $518 thousand are included in other current liabilities on the consolidated balance sheets. The Company retained the remaining 20% ownership of the Australia JV, which is included in equity method investments on the consolidated balance sheets.

21


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 17,900 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 September 28, 2013 , Dunkin’ Donuts had 10,795 global points of distribution with restaurants in 40 U.S. states and the District of Columbia and in 30 foreign countries. Baskin-Robbins had 7,145 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 32 company-owned points of distribution as of September 28, 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 nine months ended September 28, 2013 , franchisee contributions to the U.S. advertising funds were $264.2 million.

22

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 nine -month periods ended September 28, 2013 and September 29, 2012 reflect the results of operations for the 13-week and 39-week periods ended on those dates. Operating results for the three- and nine -month periods ended September 28, 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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Franchisee-reported sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
1,719.5

 
1,583.3

 
4,950.0

 
4,604.4

Dunkin’ Donuts International
165.8

 
163.4

 
504.6

 
488.8

Baskin-Robbins U.S.
152.2

 
145.9

 
421.7

 
418.6

Baskin-Robbins International
399.2

 
409.8

 
1,044.4

 
1,047.3

Total franchisee-reported sales (a)
$
2,436.7

 
2,302.4

 
6,920.7

 
6,559.1

Systemwide sales growth
5.8
 %
 
4.7
%
 
5.5
 %
 
7.3
%
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
4.2
 %
 
2.8
%
 
3.3
 %
 
4.5
%
Dunkin’ Donuts International
(1.4
)%
 
2.1
%
 
(0.6
)%
 
2.8
%
Baskin-Robbins U.S.
3.2
 %
 
1.1
%
 
0.6
 %
 
4.4
%
Baskin-Robbins International
0.7
 %
 
3.0
%
 
2.3
 %
 
3.6
%
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
186,317

 
171,719

 
530,663

 
496,478

Operating income
82,237

 
70,345

 
222,501

 
171,678

Adjusted operating income
89,333

 
85,428

 
251,187

 
227,348

Net income attributable to Dunkin’ Brands
40,221

 
29,526

 
104,831

 
73,973

Adjusted net income
44,479

 
42,118

 
119,505

 
113,066

(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 5.8% and 5.5% for the three and nine months ended September 28, 2013 , respectively, over the same periods in the prior year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 8.6% and 7.5% for the three and nine months ended September 28, 2013 , respectively, as a result of 371 net new restaurants opened since September 29, 2012 and comparable store sales growth of 4.2% and 3.3% , 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 1.4% and 3.2% for the three and nine months ended September 28, 2013 , respectively, driven primarily by sales growth in Germany and the Middle East due to net new units and comparable store sales growth. The growth in Dunkin’ Donuts International systemwide sales for the nine months ended September 28, 2013 was also driven by sales growth in Southeast Asia. Dunkin’ Donuts International comparable store sales declined 1.4% and 0.6% for the three and nine months ended September 28, 2013 , respectively, driven primarily by a decline in South Korea, offset by growth in Southeast Asia and the Middle East.

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Table of Contents

Baskin-Robbins U.S. systemwide sales growth of 4.2% and 0.7% for the three and nine months ended September 28, 2013 , respectively, resulting primarily from comparable store sales growth of 3.2% and 0.6% , respectively, driven by sales of Flavors of the Month, increased cake sales, and limited-time offers on take-home ice cream quarts. Baskin-Robbins U.S. comparable store sales growth for the nine months ended September 28, 2013 reflects the negative impact of weather in the first quarter of the year.
Baskin-Robbins International systemwide sales decline of 2.6% and 0.3% for the three and nine months ended September 28, 2013 , respectively, driven by an unfavorable impact of exchange rates on sales in Japan, offset by sales growth in South Korea and the Middle East. Baskin-Robbins International comparable store sales growth was 0.7% and 2.3% for the three and nine months ended September 28, 2013 , respectively, driven primarily by growth in South Korea, offset by a comparable store sales decline in Japan.
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 nine months ended September 28, 2013 and September 29, 2012 were as follows:
 
 
 
 
 
September 28, 2013
 
September 29, 2012
Points of distribution, at period end:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
 
 
 
 
7,528

 
7,157

Dunkin’ Donuts International
 
 
 
 
3,267

 
3,126

Baskin-Robbins U.S.
 
 
 
 
2,471

 
2,492

Baskin-Robbins International
 
 
 
 
4,674

 
4,428

Consolidated global points of distribution
 
 
 
 
17,940

 
17,203

 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Net openings (closings), during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
81

 
78

 
222

 
142

Dunkin’ Donuts International
67

 
36

 
94

 
58

Baskin-Robbins U.S.
1

 
(1
)
 
8

 
(1
)
Baskin-Robbins International
73

 
74

 
157

 
210

Consolidated global net openings
222

 
187

 
481

 
409

The increases in total revenues of $14.6 million , or 8.5% , and $34.2 million , or 6.9% , for the three and nine months ended September 28, 2013 , respectively, primarily resulted from increased franchise fees and royalty income of $9.6 million and $24.2 million , respectively, and increases in sales of ice cream products of $3.3 million and $8.5 million , respectively.
Operating income for the three months ended September 28, 2013 increased $11.9 million , or 16.9% , from the comparable period of the prior year primarily as a result of the increase in franchise fees and royalty income, as well as $5.3 million of additional depreciation and costs incurred in the prior year related to the closure of our ice cream manufacturing plant in Canada. These increases were offset by $3.7 million in write-downs related to our investments in the Dunkin’ Donuts Spain joint venture. Operating income for the nine months ended September 28, 2013 increased $50.8 million , or 29.6% , from the comparable period of the prior year primarily as a result of the increase in franchise fees and royalty income, a $20.7 million increase in the Bertico litigation reserve recorded in the prior year, $8.9 million of costs incurred in the prior year related to the Canadian plant closure, and a $6.5 million net 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, as well as the write-downs related to the Spain joint venture.
Adjusted operating income increased $3.9 million , or 4.6% , and $23.8 million , or 10.5% , for the three and nine months ended September 28, 2013 , respectively, primarily as a result of the increases in franchise fees and royalty income, offset by the write-downs related to the Spain joint venture and incremental general and administrative costs. The increase in adjusted operating income for the nine months ended September 28, 2013 was also favorably impacted by the gain from the Baskin-Robbins Australia sale.
Net income increased $10.7 million for the three months ended September 28, 2013 primarily as a result of the $11.9 million increase in operating income and a $4.0 million loss on debt extinguishment and refinancing transactions incurred in the third quarter of 2012, offset by a $4.5 million increase in tax expense and a $0.9 million increase in interest expense. Net income

24

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increased $30.9 million for the nine months ended September 28, 2013 primarily as a result of the $50.8 million increase in operating income, offset by a $9.8 million increase in tax expense, an $8.2 million increase in interest expense, and an incremental $1.1 million of losses on debt extinguishment and refinancing transactions.
Adjusted net income increased $2.4 million and $6.4 million for the three and nine months ended September 28, 2013 , respectively, primarily as a result of the increases in adjusted operating income of $3.9 million and $23.8 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, long-lived asset 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
 
Nine months ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
(In thousands)
Operating income
$
82,237

 
70,345

 
222,501

 
171,678

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,938

 
6,669

 
20,085

 
20,317

Long-lived asset impairment charges
92

 
564

 
447

 
950

Third-party product volume guarantee

 

 
7,500

 

Secondary offering costs

 
2,579

 

 
4,774

Peterborough plant closure costs (a)
66

 
5,271

 
654

 
8,949

Bertico litigation (b)