Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 08/06/2014 16:41:29)
Table of Contents

 
 
 
 
 
FORM 10-Q  
 
 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 28, 2014
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 August 1, 2014 , 104,844,641 shares of common stock of the registrant were outstanding.


Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 
 
 
 
 
 
Page    
 
Part I. – Financial Information
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
Part II. – Other Information
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2

Table of Contents

Part I.        Financial Information
Item 1.       Financial Statements
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
June 28,
2014
 
December 28,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
176,381

 
256,933

Accounts receivable, net of allowance for doubtful accounts of $3,068 and $2,599 as of June 28, 2014 and December 28, 2013, respectively
54,979

 
47,162

Notes and other receivables, net of allowance for doubtful accounts of $1,448 and $659 as of June 28, 2014 and December 28, 2013, respectively
13,579

 
32,603

Deferred income taxes, net
46,284

 
46,461

Restricted assets of advertising funds
35,142

 
31,493

Prepaid income taxes
8,351

 
25,699

Prepaid expenses and other current assets
21,479

 
21,409

Total current assets
356,195

 
461,760

Property and equipment, net of accumulated depreciation of $100,475 and $105,834 as of June 28, 2014 and December 28, 2013, respectively
178,361

 
182,858

Equity method investments
175,677

 
170,644

Goodwill
890,362

 
891,598

Other intangible assets, net of accumulated amortization of $210,745 and $200,248 as of June 28, 2014 and December 28, 2013, respectively
1,439,101

 
1,452,205

Other assets
64,795

 
75,625

Total assets
$
3,104,491

 
3,234,690

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

 
5,000

Capital lease obligations
480

 
432

Accounts payable
12,535

 
12,445

Liabilities of advertising funds
41,312

 
49,077

Deferred income
30,623

 
28,426

Other current liabilities
186,930

 
248,918

Total current liabilities
271,880

 
344,298

Long-term debt, net
1,808,679

 
1,818,609

Capital lease obligations
7,042

 
6,996

Unfavorable operating leases acquired
15,752

 
16,834

Deferred income
13,758

 
11,135

Deferred income taxes, net
550,541

 
561,714

Other long-term liabilities
66,614

 
62,816

Total long-term liabilities
2,462,386

 
2,478,104

Commitments and contingencies (note 10)

 

Redeemable noncontrolling interests
6,044

 
4,930

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at June 28, 2014 and December 28, 2013, respectively

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 106,601,169 issued and 105,601,169 outstanding at June 28, 2014; 106,876,919 shares issued and 106,646,219 shares outstanding at December 28, 2013
106

 
107

Additional paid-in capital
1,153,690

 
1,196,426

Treasury stock, at cost
(44,587
)
 
(10,773
)
Accumulated deficit
(747,352
)
 
(779,741
)
Accumulated other comprehensive income
2,324

 
1,339

Total stockholders’ equity
364,181

 
407,358

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity
$
3,104,491

 
3,234,690


See accompanying notes to unaudited consolidated financial statements.

3

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

 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Revenues:
 
 
 
 
 
Franchise fees and royalty income
$
122,267

 
112,794

 
228,979

 
216,559

Rental income
25,633

 
25,055

 
48,080

 
47,487

Sales of ice cream products
32,044

 
32,809

 
60,715

 
56,389

Sales at company-owned restaurants
4,736

 
6,240

 
11,052

 
12,011

Other revenues
6,228

 
5,590

 
14,030

 
11,900

Total revenues
190,908

 
182,488

 
362,856

 
344,346

Operating costs and expenses:
 
 
 
 
 
Occupancy expenses—franchised restaurants
13,560

 
12,820

 
26,572

 
25,596

Cost of ice cream products
22,995

 
24,302

 
42,743

 
40,288

Company-owned restaurant expenses
4,904

 
5,940

 
11,267

 
11,595

General and administrative expenses, net
56,381

 
62,978

 
116,095

 
118,555

Depreciation
4,930

 
5,522

 
9,843

 
11,370

Amortization of other intangible assets
6,384

 
6,565

 
12,789

 
13,147

Long-lived asset impairment charges
523

 
107

 
646

 
355

Total operating costs and expenses
109,677

 
118,234

 
219,955

 
220,906

Net income of equity method investments
4,048

 
4,782

 
7,148

 
7,869

Other operating income, net
2,278

 
7,769

 
6,605

 
8,955

Operating income
87,557

 
76,805

 
156,654

 
140,264

Other income (expense), net:
 
 
 
 
 
Interest income
69

 
91

 
138

 
205

Interest expense
(16,823
)
 
(19,886
)
 
(34,764
)
 
(40,718
)
Loss on debt extinguishment and refinancing transactions

 

 
(13,735
)
 
(5,018
)
Other losses, net
(113
)
 
(813
)
 
(86
)
 
(1,203
)
Total other expense, net
(16,867
)
 
(20,608
)
 
(48,447
)
 
(46,734
)
Income before income taxes
70,690

 
56,197

 
108,207

 
93,530

Provision for income taxes
24,719

 
15,487

 
39,408

 
29,159

Net income including noncontrolling interests
45,971

 
40,710

 
68,799

 
64,371

Net loss attributable to noncontrolling interests
(220
)
 
(102
)
 
(348
)
 
(239
)
Net income attributable to Dunkin’ Brands
$
46,191

 
40,812

 
69,147

 
64,610

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.44

 
0.38

 
0.65

 
0.61

Common—diluted
0.43

 
0.38

 
0.64

 
0.60

Cash dividends declared per common share
0.23

 
0.19

 
0.46

 
0.38

See accompanying notes to unaudited consolidated financial statements.

4

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

 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net income including noncontrolling interests
$
45,971

 
40,710

 
68,799

 
64,371

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense (benefit) of $(136) and $240 for the three months ended June 28, 2014 and June 29, 2013, respectively, and $177 and $374 for the six months ended June 28, 2014 and June 29, 2013, respectively
2,231

 
(5,898
)
 
3,522

 
(16,703
)
Unrealized gains (losses) on interest rate swaps, net of deferred tax expense (benefit) of $(1,610) and $5,737 for the three months ended June 28, 2014 and June 29, 2013, respectively, and $(2,067) and $6,299 for the six months ended June 28, 2014 and June 29, 2013, respectively
(2,357
)
 
8,437

 
(3,058
)
 
9,216

Other, net
(137
)
 
99

 
521

 
119

Total other comprehensive income (loss), net
(263
)
 
2,638

 
985

 
(7,368
)
Comprehensive income including noncontrolling interests
45,708

 
43,348

 
69,784

 
57,003

Comprehensive loss attributable to noncontrolling interests
(220
)
 
(102
)
 
(348
)
 
(239
)
Comprehensive income attributable to Dunkin’ Brands
$
45,928

 
43,450

 
70,132

 
57,242

See accompanying notes to unaudited consolidated financial statements.

5

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

 
Six months ended
 
June 28, 2014
 
June 29, 2013
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
68,799

 
64,371

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,632

 
24,517

Amortization of deferred financing costs and original issue discount
2,010

 
2,473

Loss on debt extinguishment and refinancing transactions
13,735

 
5,018

Deferred income taxes
(9,303
)
 
(5,812
)
Provision for (recovery of) bad debt
839

 
(186
)
Share-based compensation expense
4,926

 
3,661

Net income of equity method investments
(7,148
)
 
(7,869
)
Dividends received from equity method investments
5,825

 
5,527

Gain on sale of joint venture

 
(6,984
)
Gain on sale of real estate and company-owned restaurants
(6,442
)
 
(772
)
Other, net
(914
)
 
(651
)
Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
10,650

 
(4,969
)
Other current assets
454

 
1,012

Accounts payable
(716
)
 
(158
)
Other current liabilities
(61,083
)
 
(63,358
)
Liabilities of advertising funds, net
(10,938
)
 
(1,043
)
Income taxes payable, net
17,522

 
(5,935
)
Deferred income
4,820

 
(958
)
Other, net
4,003

 
1,673

Net cash provided by operating activities
59,671

 
9,557

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(10,556
)
 
(12,507
)
Proceeds from sale of real estate and company-owned restaurants
12,761

 

Proceeds from sale of joint venture

 
7,200

Other, net
(1,520
)
 
(1,522
)
Net cash provided by (used in) investing activities
685

 
(6,829
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(15,000
)
 
(19,157
)
Payment of deferred financing and other debt-related costs
(8,977
)
 
(6,157
)
Dividends paid on common stock
(48,759
)
 
(40,450
)
Repurchases of common stock
(81,046
)

(16,756
)
Exercise of stock options
4,293

 
4,642

Excess tax benefits from share-based compensation
7,821

 

Other, net
718

 
(208
)
Net cash used in financing activities
(140,950
)
 
(78,086
)
Effect of exchange rates on cash and cash equivalents
42

 
(261
)
Decrease in cash and cash equivalents
(80,552
)
 
(75,619
)
Cash and cash equivalents, beginning of period
256,933

 
252,618

Cash and cash equivalents, end of period
$
176,381

 
176,999

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
24,068

 
41,732

Cash paid for interest
32,859

 
49,804

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,622

 
1,890

Purchase of leaseholds in exchange for capital lease obligations
294

 
173

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, breakfast sandwiches, 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 unaudited 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 June 28, 2014 , the consolidated statements of operations and comprehensive income for the three and six months ended June 28, 2014 and June 29, 2013 , and the consolidated statements of cash flows for the six months ended June 28, 2014 and June 29, 2013 , are unaudited.
The accompanying unaudited 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 28, 2013 , included in the Company’s Annual Report on Form 10-K.
(b) Fiscal Year
The Company operates and reports financial information on a 52 - or 53 -week year on a 13 -week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within our three- and six-month periods ended June 28, 2014 and June 29, 2013 reflect the results of operations for the 13-week and 26-week periods ended on those dates. Operating results for the three- and six-month periods ended June 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2014 .
(c) Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

7


Financial assets and liabilities measured at fair value on a recurring basis as of June 28, 2014 and December 28, 2013 are summarized as follows (in thousands):
 
June 28, 2014
 
December 28, 2013
 
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
$

 

 

 
1,012

 

 
1,012

Interest rate swaps

 
5,083

 
5,083

 

 
10,221

 
10,221

Total assets
$

 
5,083

 
5,083

 
1,012

 
10,221

 
11,233

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
$

 
7,996

 
7,996

 

 
7,181

 
7,181

Total liabilities
$

 
7,996

 
7,996

 

 
7,181

 
7,181

The 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 individuals. 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 assets, which may include mutual funds, to partially offset the Company’s liabilities under certain benefit plans. The changes in the fair value of any mutual funds held are derived using quoted prices in active markets for the specific funds. As such, the mutual funds are classified within Level 1, as defined under U.S. GAAP.
The Company uses readily available market data to value its interest rate swaps, such as interest rate curves and discount factors. Additionally, the fair value of derivatives includes consideration of credit risk in the valuation. The Company uses a potential future exposure model to estimate this credit valuation adjustment (“CVA”). The inputs to the CVA are largely based on observable market data, with the exception of certain assumptions regarding credit worthiness which make the CVA a Level 3 input, as defined under U.S. GAAP. As the magnitude of the CVA is not a significant component of the fair value of the interest rate swaps as of June 28, 2014 , it is not considered a significant input and the derivatives are classified as Level 2.
The carrying value and estimated fair value of long-term debt as of June 28, 2014 and December 28, 2013 were as follows (in thousands):
 
June 28, 2014
 
December 28, 2013
 
Carrying Value
 
Estimated fair value
 
Carrying Value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Term loans
$
1,808,679

 
1,807,405

 
1,823,609

 
1,836,212

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.
(d) 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 other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the derivative instrument for a cash flow 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 5 for a discussion of the Company's use of derivative instruments, management of credit risk inherent in derivative instruments, and fair value information.

8


(e) Concentration of Credit Risk
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees, royalty income, and sales of ice cream products. In addition, we have note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. At June 28, 2014 and December 28, 2013 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 26% and 17% , respectively, of total accounts and notes receivable, which was primarily due to the timing of orders and shipments of ice cream to the master licensee. For the three and six months ended June 28, 2014 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 10% and 11% of total revenues, respectively. No individual franchisee or master licensee accounted for more than 10% of total revenues for the three or six months ended June 29, 2013 .
(f) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new guidance provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. This guidance is effective for the Company in fiscal year 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact the adoption of this new standard will have on the Company’s accounting policies, consolidated financial statements, and related disclosures.
In July 2013, the 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 was adopted by the Company in fiscal year 2014. The adoption of this guidance did not have any impact on the Company s consolidated financial statements.
(g) Reclassifications
The Company has revised the presentation of certain income generating transactions that historically were recorded within general and administrative expenses, net in the consolidated statements of operations. Income from these transactions totaling $785 thousand and $2.0 million have been reclassified into other operating income, net, for the three and six months ended June 29, 2013 , respectively, in the consolidated statements of operations to conform to the current year presentation. There was no impact to total revenues, operating income, income before income taxes, or net income as a result of these reclassifications.
The Company has also revised the presentation of certain asset captions within the consolidated balance sheets to conform to the current period presentation, including combining 'assets held for sale' with 'prepaid expense and other current assets' and combining 'restricted cash' with 'other assets'. The revisions had no impact on total current assets or total assets.
Additionally, the Company has revised the presentation of certain captions for the six months ended June 29, 2013 within the consolidated statements of cash flows to conform to the current period presentation. The revisions had no impact on net cash provided by operating, provided by or used in investing, or used in financing activities.
(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
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Royalty income
$
112,732

 
106,254

 
211,331

 
199,476

Initial franchise fees and renewal income
9,535

 
6,540

 
17,648

 
17,083

Total franchise fees and royalty income
$
122,267

 
112,794

 
228,979

 
216,559


9


The changes in franchised and company-owned points of distribution were as follows:
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution in operation—beginning of period
18,218

 
17,446

 
18,122

 
17,333

Franchised points of distribution—opened
315

 
300

 
581

 
544

Franchised points of distribution—closed
(167
)
 
(149
)
 
(337
)
 
(280
)
Net transfers from company-owned points of distribution
10

 

 
10

 

Franchised points of distribution in operation—end of period
18,376

 
17,597

 
18,376

 
17,597

Company-owned points of distribution—end of period
29

 
30

 
29

 
30

Total systemwide points of distribution—end of period
18,405

 
17,627

 
18,405

 
17,627

During fiscal year 2013, the Company performed an internal review of international franchised points of distribution, and determined that certain franchises opened and closed had not been accurately reported in prior years. As such, the points of distribution information for the three and six months ended June 29, 2013 has been adjusted to reflect the results of this internal review. The adjustments to the prior years were not material, and had no impact on the Company's financial position or results of operations. Franchised points of distribution in operation—beginning of period and franchised points of distribution in operation—end of period were reduced by 91 for the three and six months ended June 29, 2013 .
(4) Debt
In February 2014, Dunkin’ Brands, Inc. (“DBI”), a subsidiary of DBGI, amended its senior credit facility, resulting in a reduction of interest rates. The senior credit facility now consists of $1.38 billion in term loans due February 2021 (“2021 Term Loans”), $450.0 million in term loans due September 2017 (“2017 Term Loans”), and a $100.0 million revolving credit facility that matures in February 2019 .
The 2021 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) LIBOR plus 1.0% , and (d)  1.75% or (2) LIBOR provided that LIBOR shall not be lower than 0.75% . The applicable margin under the term loan facility is 1.50% for loans based upon the base rate and 2.50% for loans based upon LIBOR.
The 2017 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, and (c) LIBOR plus 1.0% , or (2) LIBOR. The applicable margin under the term loan facility is 1.50% for loans based upon the base rate and 2.50% for loans based upon LIBOR.
The effective interest rate for the term loans, including the amortization of original issue discount and deferred financing costs, was 3.5% and 2.8% for the 2021 Term Loans and 2017 Term Loans, respectively, at June 28, 2014 .
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) LIBOR plus 1.0% , or (2) LIBOR. The applicable margin under the revolving credit facility is 1.25% for loans based upon the base rate and 2.25% for loans based upon LIBOR. 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 2.25% .
In connection with the amendment, certain lenders, holding $684.7 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 2014, the Company recorded a loss on debt extinguishment and refinancing transactions of $13.7 million , including $10.5 million related to the write-off of original issuance discount and deferred financing costs and $3.2 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 this amendment were $1.2 million .
In February 2013, the Company amended its senior credit facility, resulting in a reduction of interest rates and an extension of the maturity dates for both the term loans and the revolving credit facility. As a result of the amendment, the Company recorded a loss on debt extinguishment and refinancing transactions of $5.0 million during the first quarter of 2013, 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

10


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.
Principal payments are required to be made on the 2017 Term Loans equal to $4.5 million per calendar year, payable in quarterly installments beginning June 2014 through June 2017. Principal payments are required to be made on the 2021 Term Loans equal to approximately $13.8 million per calendar year, payable in quarterly installments beginning June 2015 through December 2020. The final scheduled principal payments on the outstanding borrowings under the 2017 Term Loans and 2021 Term Loans are due in September 2017 and February 2021, respectively. 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. Considering the voluntary prepayments made, no additional principal payments are required in the next twelve months as of June 28, 2014 , though the Company may elect to make voluntary prepayments. Other events and transactions, such as certain asset sales and incurrence of debt, may trigger additional mandatory prepayments.
(5) Derivative Instruments and Hedging Transactions
The Company is exposed to global market risks, including the effect of changes in interest rates, and may use derivative instruments to mitigate the impact of these changes. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures to be hedged and does not hold or issue derivatives for trading purposes. The Company’s hedging instruments consist solely of interest rate swaps at June 28, 2014 . 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 the designated benchmark interest rate being hedged, through November 2017. 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 other comprehensive income (loss), or current earnings if there is ineffectiveness of the derivative instruments during the period.
As a result of the February 2014 amendment to the senior credit facility, the Company amended the interest rate swap agreements to align the embedded floors with the amended term loans. As a result of the amendments to the interest rate swap agreements, the Company will be required to make quarterly payments on the notional amount at a fixed average interest rate of approximately 1.22% . In exchange, the Company will receive interest on the notional amount at a variable rate based on three-month LIBOR spot rate, subject to a floor of 0.75% , resulting in a total interest rate of approximately 3.72% on the hedged amount when considering the applicable margin in effect at June 28, 2014 . There was no change to the term and the notional amount of the term loan borrowings being hedged of $900.0 million .
As a result of the amendment to the interest rate swaps, the Company does not expect the hedging relationship to have a material amount of ineffectiveness. During the three and six months ended June 28, 2014 and June 29, 2013 , there was no ineffectiveness of the interest rate swaps, and therefore, ineffectiveness had no impact on the consolidated statements of operations. As of the date of the amendment, a cumulative unrealized gain of $5.8 million was recorded in accumulated other comprehensive income, which will be amortized on a straight-line basis to interest expense in the consolidated statements of operations through the maturity date.
The fair values of derivatives instruments consisted of the following (in thousands):
 
June 28,
2014
 
December 28,
2013
 
Consolidated Balance Sheet Classification
Interest rate swaps
$
5,083

 
10,221

 
Other assets
Total fair values of derivative instruments
$
5,083

 
10,221

 
 

11


The tables below summarize the effects of derivative instruments on the consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 28, 2014, and June 29, 2013 (in thousands):
Three months ended June 28, 2014
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings (1)
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
(5,138
)
 
(1,171
)
 
Interest expense
 
$
(3,967
)
Income tax effect
 
2,090

 
480

 
Provision for income taxes
 
1,610

Net of income taxes
 
$
(3,048
)
 
(691
)
 
 
 
$
(2,357
)
 
 
 
 
 
 
 
 
 
Three months ended June 29, 2013
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
13,328

 
(846
)
 
Interest expense
 
$
14,174

Income tax effect
 
(5,395
)
 
342

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

 
(504
)
 
 
 
$
8,437


Six months ended June 28, 2014
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings (1)
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
(7,173
)
 
(2,048
)
 
Interest expense
 
$
(5,125
)
Income tax effect
 
2,893

 
826

 
Provision for income taxes
 
2,067

Net of income taxes
 
$
(4,280
)
 
(1,222
)
 
 
 
$
(3,058
)
 
 
 
 
 
 
 
 
 
Six months ended June 29, 2013
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
13,823

 
(1,692
)
 
Interest expense
 
$
15,515

Income tax effect
 
(5,602
)
 
697

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

 
(995
)
 
 
 
$
9,216


(1)
The total net gain (loss) reclassified from accumulated other comprehensive income into interest expense in the consolidated statements of operations includes the straight-line amortization of the unrealized gain that remained in accumulated other comprehensive income as of the date of the amendment.
As of June 28, 2014 and December 28, 2013 , $1.1 million and $836 thousand , respectively, of interest expense related to interest rate swaps is accrued in other current liabilities in the consolidated balance sheets. During the next twelve months, the Company estimates that $4.2 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  June 28, 2014 , all of the counterparties to the interest rate swaps had investment grade ratings. To date, all counterparties have performed in accordance with their contractual obligations.

The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of June 28, 2014 , the Company has not posted any collateral related to these agreements. The Company holds one derivative instrument with each of its derivative

12


counterparties, each of which is settled net with the respective counterparties in accordance with the swap agreements. There is no offsetting of these financial instruments on the consolidated balance sheets. As of June 28, 2014 , the termination value of derivatives is a net asset position of $ 4.0 million , which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements.
(6) Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
June 28,
2014
 
December 28,
2013
Gift card/certificate liability
$
99,386

 
139,721

Gift card breakage liability
11,551

 
14,093

Accrued salary and benefits
17,490

 
26,713

Accrued legal liabilities (see note 10(c))
26,085

 
26,633

Accrued interest
10,015

 
9,999

Accrued professional costs
2,942

 
2,938

Other
19,461

 
28,821

Total other current liabilities
$
186,930

 
248,918

The decrease in the gift card/certificate liability is driven primarily by the seasonality of our gift card program. The decrease in accrued salary and benefits is primarily due to bonus payments made during the first quarter of 2014 related to fiscal year 2013.
(7) Segment Information
The Company is strategically aligned into two global brands, Dunkin’ Donuts and Baskin-Robbins, which are further segregated between U.S. operations and international operations. As such, the Company has determined that it has four operating segments, which are its reportable segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. Dunkin’ Donuts U.S., Baskin-Robbins U.S., and Dunkin’ Donuts International primarily derive their revenues through royalty income, franchise fees, and rental income. 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 operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, and other infrequent or unusual charges, and does not reflect the allocation of any corporate charges. This profitability measure is referred to as segment profit. When senior management reviews a balance sheet, it is at a consolidated level. The accounting policies applicable to each segment are consistent with those used in the consolidated financial statements.
Prior to fiscal year 2014, the segment profit measure used by the Company to assess the performance of and allocate resources to each reportable segment was based on earnings before interest, taxes, depreciation, amortization, impairment charges, loss on debt extinguishment and refinancing transactions, and other gains and losses, and did not reflect the allocation of any corporate charges. Accordingly, the primary change from the historical segment profit measure is the inclusion of depreciation expense. Beginning in fiscal year 2014, the segment profit measure was revised to the adjusted operating income measure described above to better align the segments with our consolidated performance measures and incentive targets. The segment profit amounts presented below for the three and six months ended June 29, 2013 have been adjusted to reflect this change to the measurement of segment profit to ensure comparability.

13


Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenue earned through arrangements with third parties in which our brand names are used and revenue generated from online training programs for franchisees that are not allocated to a specific segment. Revenues by segment were as follows (in thousands):
 
Revenues
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Dunkin’ Donuts U.S.
$
136,450

 
128,672

 
261,669

 
$
248,306

Dunkin’ Donuts International
4,521

 
3,931

 
8,806

 
8,554

Baskin-Robbins U.S.
12,952

 
12,489

 
22,073

 
22,101

Baskin-Robbins International
33,631

 
34,917

 
63,642

 
60,345

Total reportable segment revenues
187,554

 
180,009

 
356,190

 
339,306

Other
3,354

 
2,479

 
6,666

 
5,040

Total revenues
$
190,908

 
182,488

 
362,856

 
344,346

Expenses included in “Corporate” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services. The “Operating income adjustments excluded from reportable segments” amounts for the three and six months ended June 29, 2013 below include the $7.5 million charge related to the third-party product volume guarantee (see note 10(a)). Segment profit by segment was as follows (in thousands):
 
Segment profit
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Dunkin’ Donuts U.S.
$
100,981

 
91,302

 
190,813

 
174,857

Dunkin’ Donuts International
3,015

 
1,581

 
5,872

 
4,133

Baskin-Robbins U.S.
9,315

 
7,856

 
14,183

 
13,449

Baskin-Robbins International
11,724

 
19,411

 
21,223

 
28,709

Total reportable segments
125,035

 
120,150

 
232,091

 
221,148

Corporate
(30,871
)
 
(28,982
)
 
(62,302
)
 
(59,294
)
Interest expense, net
(16,754
)
 
(19,795
)
 
(34,626
)
 
(40,513
)
Amortization of other intangible assets
(6,384
)
 
(6,565
)
 
(12,789
)
 
(13,147
)
Long-lived asset impairment charges
(523
)
 
(107
)
 
(646
)
 
(355
)
Loss on debt extinguishment and refinancing transactions

 

 
(13,735
)
 
(5,018
)
Other losses, net
(113
)
 
(813
)
 
(86
)
 
(1,203
)
Operating income adjustments excluded from reportable segments
300

 
(7,691
)
 
300

 
(8,088
)
Income before income taxes
$
70,690

 
56,197

 
108,207

 
93,530

Net income of equity method investments is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Income included in “Other” in the table below represents the reduction of depreciation and amortization expense reported by BR Korea Co., Ltd. (“BR Korea”) as the Company recorded an impairment charge in fiscal year 2011 related to the underlying long-lived assets of BR Korea. Net income of equity method investments by reportable segment was as follows (in thousands):
 
Net income of equity method investments
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Dunkin’ Donuts International
$
672

 
368

 
976

 
254

Baskin-Robbins International
3,019

 
4,126

 
5,477

 
6,664

Total reportable segments
3,691

 
4,494

 
6,453

 
6,918

Other
357

 
288

 
695

 
951

Total net income of equity method investments
$
4,048

 
4,782

 
$
7,148

 
7,869


14


(8) Stockholders’ Equity and Redeemable Noncontrolling Interests
The changes in total stockholders' equity and redeemable noncontrolling interests were as follows (in thousands):
 
 
Total stockholders’ equity
 
Redeemable noncontrolling interests
Balance at December 28, 2013
 
$
407,358

 
4,930

Net income
 
69,147

 
(348
)
Other comprehensive income
 
985

 

Dividends paid on common stock
 
(48,759
)
 

Exercise of stock options
 
4,293

 

Repurchases of common stock
 
(81,046
)
 

Share-based compensation expense
 
4,926

 

Excess tax benefits from share-based compensation
 
7,821

 

Contributions from noncontrolling interests
 

 
1,462

Other, net
 
(544
)
 

Balance at June 28, 2014
 
$
364,181

 
6,044

(a) Redeemable Noncontrolling Interests
As of June 28, 2014 , the consolidated balance sheets included $2.7 million of cash and cash equivalents and $9.1 million of property and equipment, net, for the partnership entity with the noncontrolling owners, which may be used only to settle obligations of the partnership.
(b) Treasury Stock
During the six months ended June 28, 2014 , the Company repurchased a total of 1,772,205 shares of common stock at a weighted average price per share of $45.72 from existing stockholders. The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $81.0 million during the six months ended June 28, 2014 , based on the fair market value of the shares on the date of repurchase and direct costs incurred. In May 2014, the Company retired 1,002,905 shares of treasury stock, resulting in decreases in treasury stock and additional paid-in capital of $47.2 million and $10.8 million , respectively, and an increase in accumulated deficit of $36.4 million .
(c) Equity Incentive Plans
During the six months ended June 28, 2014 , the Company granted options to purchase 1,406,308 shares of common stock and 27,096 restricted stock awards (“RSAs”) to certain employees, and 74,299 restricted stock units (“RSUs”) to certain employees and members of our board of directors. The stock options generally vest in equal annual amounts over an approximately four -year period subsequent to the grant date, and have a maximum contractual term of seven years. The stock options were granted with an exercise price of $51.67 per share and have a weighted average grant-date fair value of $10.65 per share. The RSUs granted to employees and members of our board of directors vest over a three -year period and a one-year period, respectively, subsequent to the grant date. The RSUs have a weighted average grant-date fair value of $47.72 per share. The RSAs vest in full on July 31, 2016, and have a grant-date fair value of $51.67 per share.
In addition, the Company granted 150,000 performance-based RSAs during the first quarter of fiscal year 2014. These performance-based RSAs are eligible to vest on December 31, 2018, subject to a market vesting condition linked to the level of total shareholder return received by the Company's shareholders during the performance period measured against the median total shareholder return of the companies in the S&P 500 Composite Index. The performance-based RSAs were valued based on a Monte Carlo simulation model to reflect the impact of the total shareholder return market condition, resulting in a grant-date fair value of $37.94 per share.
Total compensation expense related to all share-based awards was $3.1 million and $2.0 million for the three months ended June 28, 2014 and June 29, 2013 , respectively, and $4.9 million and $3.7 million for the six months ended June 28, 2014 and June 29, 2013 , 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 gains (losses) on interest rate swaps
 
Unrealized gain (loss) on pension plan
 
Other        
 
Accumulated
other
comprehensive
income
Balance at December 28, 2013
$
5

 
6,085

 
(3,098
)
 
(1,653
)
 
1,339

Other comprehensive income (loss)
3,522

 
(3,058
)
 
35

 
486

 
985

Balance at June 28, 2014
$
3,527

 
3,027

 
(3,063
)
 
(1,167
)
 
2,324

(e) Dividends
The Company paid quarterly dividends of $0.23 per share of common stock on March 19, 2014 and June 4, 2014, totaling approximately $24.5 million and $24.2 million , respectively. On July 24, 2014 , we announced that our board of directors approved the next quarterly dividend of $0.23 per share of common stock payable September 3, 2014 to shareholders of record as of the close of business on August 25, 2014 .
(9) Earnings per Share
The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share amounts):
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net income attributable to Dunkin’ Brands—basic and diluted
$
46,191

 
40,812

 
69,147

 
64,610

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
105,914,402

 
106,485,078

 
106,208,129

 
106,365,758

Common—diluted
107,186,360

 
108,211,994

 
107,583,260

 
108,185,485

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.44

 
0.38

 
0.65

 
0.61

Common—diluted
0.43

 
0.38

 
0.64

 
0.60

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,271,958 and 1,726,916 equity awards for the three months ended June 28, 2014 and June 29, 2013 , respectively, and includes the dilutive effect of 1,375,131 and 1,819,727 equity awards for the six months ended June 28, 2014 and June 29, 2013 , 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 equity awards outstanding for which the performance criteria were not yet met as of the fiscal period end. As of June 28, 2014 , there were 150,000 restricted shares that were performance-based and for which the performance criteria were not yet met. As of June 29, 2013 , there were no equity 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 1,445,128 and 1,376,193 equity awards for the three months ended June 28, 2014 and June 29, 2013 , respectively, and 1,470,672 and 1,571,791 equity awards for the six months ended June 28, 2014 and June 29, 2013 , respectively, as they would be antidilutive.

16


(10) Commitments and Contingencies
(a) 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 $2.9 million and $3.0 million at June 28, 2014 and December 28, 2013 , respectively. At June 28, 2014 and December 28, 2013 , there were no amounts under such guarantees that were due.
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 the consolidated balance sheets as of December 28, 2013 . The Company made the full required guarantee payment during the first quarter of 2014. No additional guarantee payments will be required under the agreement.
The Company entered into a third-party guarantee with a distribution facility that guarantees franchisees will purchase a certain volume of product over a 10 -year period. As product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. As of June 28, 2014 and December 28, 2013 , the Company was contingently liable for $5.0 million and $5.7 million , respectively, under this guarantee. Additionally, the Company has various supply chain contracts that generally provide for purchase commitments or exclusivity, the majority of which result in the Company being contingently liable upon early termination of the agreement or engaging with another supplier. As of June 28, 2014 and December 28, 2013 , the Company was contingently liable under such supply chain agreements for approximately $46.7 million and $52.6 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 as of June 28, 2014 .
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 June 28, 2014 and December 28, 2013 , the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $6.5 million and $6.4 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.
(b) Letters of Credit
At June 28, 2014 and December 28, 2013 , the Company had standby letters of credit outstanding for a total of $2.5 million and $3.0 million , respectively. There were no amounts drawn down on these letters of credit.
(c) 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. As of June 28, 2014 and December 28, 2013 , the Company has recorded an estimated liability of $25.1 million which includes interest that continues to accrue on the judgment amount and

17


the impact of foreign exchange. The Company strongly disagrees with the decision reached by the Court and believes the damages awarded were unwarranted. As such, the Company is vigorously appealing the decision.
The Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. At June 28, 2014 and December 28, 2013 , contingent liabilities, excluding the Bertico litigation, totaling $1.0 million and $1.5 million , were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the potential loss which may be incurred in connection with these matters. While the Company intends to vigorously defend its positions against all claims in these lawsuits and disputes, it is reasonably possible that the losses in connection with all matters could increase by up to an additional $12.0 million based on the outcome of ongoing litigation or negotiations.
(11) Related-Party Transactions
(a) Advertising Funds
At June 28, 2014 and December 28, 2013 , the Company had a net payable of $6.2 million and $17.6 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, as well as share-based compensation expense for employees that provide services directly to the advertising funds. Management fees totaled $1.9 million and $1.4 million for the three months ended June 28, 2014 and June 29, 2013 , respectively, and $3.7 million and $2.9 million for the six months ended June 28, 2014 and June 29, 2013 , respectively, and 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 $192 thousand during the three and six months ended June 28, 2014 and $56 thousand and $1.1 million during the three and six months ended June 29, 2013 , 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 $186 thousand and $257 thousand during the three months ended June 28, 2014 and June 29, 2013 , respectively, and $450 thousand and $493 thousand during the six months ended June 28, 2014 and June 29, 2013 , respectively, which are included in company-owned restaurant expenses in the consolidated statements of operations. The Company also funded initiatives that benefit the gift card program of $1.2 million and $2.9 million during the three and six months ended June 28, 2014 , respectively, and $3.2 million during the three and six months ended June 29, 2013 , which were recorded as reductions to the gift card breakage liability included within other current liabilities in the consolidated balance sheets.
(b) Equity Method Investments
The Company recognized royalty income from its equity method investees as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
B-R 31 Ice Cream Co., Ltd.
$
533

 
602

 
844

 
1,004

BR Korea Co., Ltd.
1,178

 
1,019

 
2,225

 
2,029

Coffee Alliance, S.L. (“Coffee Alliance”)
17

 
32

 
17

 
130

 
$
1,728

 
1,653

 
3,086

 
3,163


18


At June 28, 2014 and December 28, 2013 , the Company had $1.4 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 $778 thousand and $1.1 million during the three months ended June 28, 2014 and June 29, 2013 , respectively, and $1.3 million and $2.1 million during the six months ended June 28, 2014 and June 29, 2013 , respectively, primarily for the purchase of ice cream products and incentive payments.
During the three and six months ended June 29, 2013 , the Company made additional loans of $899 thousand and $1.6 million , respectively, to our Spain joint venture, Coffee Alliance. As of June 28, 2014 and December 28, 2013 , the Company had $2.7 million of notes receivable from Coffee Alliance, of which $2.5 million and $2.7 million was reserved as of June 28, 2014 and December 28, 2013 , respectively.
The Company recognized sales of ice cream products of $1.9 million and $2.6 million during the three months ended June 28, 2014 and June 29, 2013 , respectively, and $3.0 million and $2.6 million during the six months ended June 28, 2014 and June 29, 2013 , 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. As of June 28, 2014 and December 28, 2013 , the Company had $2.3 million and $733 thousand , respectively, of net receivables from the Australia JV, consisting of accounts receivable and notes and other receivables, net of other current liabilities.

19


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; successful westward expansion; 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 18,400 points of distribution in 56 countries, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of June 28, 2014 , Dunkin’ Donuts had 10,993 global points of distribution with restaurants in 40 U.S. states and the District of Columbia and in 33 foreign countries. Baskin-Robbins had 7,412 global points of distribution as of the same date, with restaurants in 42 U.S. states and the District of Columbia and in 47 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 29 company-owned points of distribution as of June 28, 2014 , we are less affected by store-level costs, profitability, and fluctuations in commodity costs than many other QSR operators.
Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing, research, and innovation personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For the six months ended June 28, 2014 , franchisee contributions to the U.S. advertising funds were $182.8 million.

20

Table of Contents

We operate and report 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 the three- and six-month periods ended June 28, 2014 and June 29, 2013 reflect the results of operations for the 13-week and 26-week periods ended on those dates. Operating results for the three- and six -month periods ended June 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2014 .
Selected Operating and Financial Highlights
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Franchisee-reported sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
1,813.2

 
1,704.5

 
3,428.1

 
3,230.5

Dunkin’ Donuts International
176.7

 
170.8

 
345.4

 
338.8

Baskin-Robbins U.S.
169.1

 
161.9

 
278.9

 
269.5

Baskin-Robbins International
377.3

 
360.4

 
659.4

 
645.2

Total franchisee-reported sales (a)
$
2,536.4

 
2,397.6

 
4,711.8

 
4,484.0

Systemwide sales growth
5.7
 %
 
5.5
 %
 
5.0
 %
 
5.4
 %
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
1.8
 %
 
4.0
 %
 
1.5
 %
 
2.9
 %
Dunkin’ Donuts International
(3.1
)%
 
(1.7
)%
 
(2.7
)%
 
(0.1
)%
Baskin-Robbins U.S.
4.2
 %
 
1.6
 %
 
2.6
 %
 
(0.9
)%
Baskin-Robbins International
(1.6
)%
 
2.6
 %
 
(0.3
)%
 
3.3
 %
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
190,908

 
182,488

 
362,856

 
344,346

Operating income
87,557

 
76,805

 
156,654

 
140,264

Adjusted operating income
94,164

 
91,168

 
169,789

 
161,854

Net income attributable to Dunkin’ Brands
46,191

 
40,812

 
69,147

 
64,610

Adjusted net income
50,155

 
43,881

 
85,783

 
75,026

(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 5.7% and 5.0% for the three and six months ended June 28, 2014 , respectively, over the same periods in the prior year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 6.3% and 6.1% for the three and six months ended June 28, 2014 , respectively, as a result of 374 net new restaurants opened since June 29, 2013 and comparable store sales growth of 1.8% and 1.5% , respectively, driven by higher traffic and increased average ticket resulting from guests purchasing more items per transaction and positive mix as guests purchased more premium-priced items. Growth was driven by beverages, breakfast sandwiches, and donuts.
Dunkin’ Donuts International systemwide sales growth of 3.5% and 1.9% for the three and six months ended June 28, 2014 , respectively, driven primarily by sales growth in the Middle East, Germany, Spain, and India due to net new units and comparable store sales growth, offset by a decline in South Korea. Dunkin’ Donuts International comparable store sales declined 3.1% and 2.7% for the three and six months ended June 28, 2014 , respectively, driven primarily by a decline in South Korea, offset by growth in the Middle East.
Baskin-Robbins U.S. systemwide sales growth of 4.5% and 3.6% for the three and six months ended June 28, 2014 , respectively, resulting primarily from comparable store sales growth of 4.2% and 2.6% , respectively, driven by increased sales of cups and cones, cakes, beverages, as well as the launch of online cake ordering.

21

Table of Contents

Baskin-Robbins International systemwide sales growth of 4.7% and 2.2% for the three and six months ended June 28, 2014 , respectively, driven by sales growth in South Korea and the Middle East. Baskin-Robbins International comparable store sales declined 1.6% and 0.3% for the three and six months ended June 28, 2014 , respectively, driven by a decline in Japan, offset by growth in South Korea and the Middle East.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and six months ended June 28, 2014 and June 29, 2013 were as follows:
 
 
 
 
 
June 28, 2014
 
June 29, 2013
Points of distribution, at period end (a) :
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
 
 
 
 
7,821

 
7,447

Dunkin’ Donuts International
 
 
 
 
3,172

 
3,070

Baskin-Robbins U.S.
 
 
 
 
2,480

 
2,470

Baskin-Robbins International
 
 
 
 
4,932

 
4,640

Consolidated global points of distribution
 
 
 
 
18,405

 
17,627

(a)  Prior year points of distribution have been adjusted to reflect the results of an internal point of distribution count audit.
 
Three months ended
 
Six months ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net openings (closings), during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
75

 
63

 
144

 
141

Dunkin’ Donuts International
17

 
33

 
(9
)
 
27

Baskin-Robbins U.S.
12

 
5

 
13

 
7

Baskin-Robbins International
47

 
50

 
99

 
84

Consolidated global net openings
151

 
151

 
247

 
259

The increases in total revenues of $8.4 million , or 4.6% , and $18.5 million , or 5.4% , for the three and six months ended June 28, 2014 , respectively, resulted primarily from increased franchise fees and royalty income of $9.5 million and $12.4 million , respectively. Also contributing to revenue growth in the six month period was an increase in sale of ice cream products of $4.3 million .
Operating income for the three and six months ended June 28, 2014 increased $10.8 million , or 14.0% , and $16.4 million , or 11.7% , respectively, from the comparable periods of the prior year primarily as a result of increases in franchise fees and royalty income and a gain recognized in connection with the sale of all company-owned restaurants in the Atlanta market. Additionally, the prior year period included a $7.5 million charge related to a third-party product volume guarantee and a $7.0 million gain related to the sale of 80 percent of our Baskin-Robbins Australia business. Also contributing to the growth in operating income for the six month period were gains recognized in connection with the sale of real estate, offset by a reduction in breakage income on gift cards.
Adjusted operating income increased $3.0 million , or 3.3% , and $7.9 million , or 4.9% , for the three and six months ended June 28, 2014 , respectively, primarily as a result of the increases in franchise fees and royalty income and the gain on sale of company-owned restaurants in Atlanta, offset by the gain from sale of the Baskin-Robbins Australia business recognized in the prior year period. Also contributing to the growth in operating income for the six month period were gains recognized in connection with the sale of real estate, offset by a reduction in breakage income on gift cards.
Net income increased $5.4 million for the three months ended June 28, 2014 primarily as a result of a $10.8 million increase in operating income and a $3.1 million decrease in interest expense, offset by a $9.2 million increase in tax expense. Net income increased $4.5 million for the six months ended June 28, 2014 primarily as a result of a $16.4 million increase in operating income and a $6.0 million decrease in interest expense, offset by a $10.2 million increase in tax expense and a loss on debt extinguishment and refinancing transactions of $13.7 million compared to a $5.0 million loss in the prior year period.
Adjusted net income increased $6.3 million and $10.8 million for the three and six months ended June 28, 2014 , respectively, primarily as a result of the increases in adjusted operating income of $3.0 million and $7.9 million , respectively, and decreases in interest expense, offset by increases in income tax expense.

22

Table of Contents

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 infrequent or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies.
Adjusted operating income and adjusted net income are reconciled from operating income and net income determined under GAAP as follows:
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
(In thousands)
Operating income
$
87,557

 
76,805

 
156,654

 
140,264

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,384

 
6,565

 
12,789

 
13,147

Long-lived asset impairment charges
523

 
107

 
646

 
355

Third-party product volume guarantee
(300
)
 
7,500

 
(300
)
 
7,500

Peterborough plant closure costs (a)

 
191

 

 
588

Adjusted operating income
$
94,164

 
91,168

 
169,789

 
161,854

Net income attributable to Dunkin’ Brands
$
46,191

 
40,812

 
69,147

 
64,610

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,384

 
6,565

 
12,789

 
13,147

Long-lived asset impairment charges
523

 
107

 
646

 
355

Third-party product volume guarantee
(300
)
 
7,500

 
(300
)
 
7,500

Peterborough plant closure costs (a)

 
191

 

 
588

Loss on debt extinguishment and refinancing transactions

 

 
13,735

 
5,018

Tax impact of adjustments (b)
(2,643
)
 
(5,745
)
 
(10,748
)
 
(10,643
)
Income tax audit settlements (c)

 
(8,417
)
 

 
(8,417
)
State tax apportionment (d)

 
2,868

 
514

 
2,868

Adjusted net income
$
50,155

 
43,881

 
85,783

 
75,026

(a)
For the three and six months ended June 29, 2013, the adjustments represent transition-related general and administrative costs incurred related to the closure of the Baskin-Robbins ice cream manufacturing plant in Peterborough, Canada, such as information technology integration, project management, and transportation costs.
(b)
Tax impact of adjustments calculated at a 40% effective tax rate.
(c)
Represents income tax benefits resulting from the resolution of historical tax positions settled during the period.
(d)
Primarily represents deferred tax expense recognized due to an increase in our overall state tax rate resulting from a shift in estimated apportionment of income within state jurisdictions.

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.44

 
0.38

 
0.65

 
0.61

Common—diluted
0.43

 
0.38

 
0.64

 
0.60

Diluted adjusted earnings per share
0.47

 
0.41

 
0.80

 
0.69

Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding. Diluted adjusted earnings per share is not a presentation made in accordance with GAAP, and our use of the

23

Table of Contents

term diluted adjusted earnings per share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per share should not be considered as an alternative to earnings per share derived in accordance with GAAP. Diluted adjusted earnings per share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.
The following table sets forth the computation of diluted adjusted earnings per share:
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
(In thousands, except share and per share data)
Adjusted net income
$
50,155

 
43,881

 
85,783

 
$
75,026

Weighted average number of common shares—diluted
107,186,360

 
108,211,994

 
107,583,260

 
108,185,485

Diluted adjusted earnings per share
$
0.47

 
0.41

 
0.80

 
$
0.69


Results of operations
Consolidated results of operations
 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
Increase (Decrease)
 
June 28,
2014
 
June 29,
2013
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Franchise fees and royalty income
$
122,267

 
112,794

 
9,473

 
8.4
 %
 
$
228,979

 
216,559

 
12,420

 
5.7
 %
Rental income
25,633

 
25,055

 
578

 
2.3
 %
 
48,080

 
47,487

 
593

 
1.2
 %
Sales of ice cream products
32,044

 
32,809

 
(765
)
 
(2.3
)%
 
60,715

 
56,389

 
4,326

 
7.7
 %
Sales at company-owned restaurants
4,736

 
6,240

 
(1,504
)
 
(24.1
)%
 
11,052

 
12,011

 
(959
)
 
(8.0
)%
Other revenues
6,228

 
5,590

 
638

 
11.4
 %
 
14,030

 
11,900

 
2,130

 
17.9
 %
Total revenues
$
190,908

 
182,488

 
8,420

 
4.6
 %
 
$
362,856

 
344,346

 
18,510

 
5.4
 %
Total revenues for the three and six months ended June 28, 2014 increased $8.4 million , or 4.6% , and $18.5 million , or 5.4% , respectively. The increase in total revenues was driven by increases in franchise fees and royalty income of $9.5 million and $12.4 million for the three and six months ended June 28, 2014 , respectively, primarily as a result of Dunkin’ Donuts U.S. systemwide sales growth and additional franchise fees resulting from incremental gross development and the timing of franchise renewals. Offsetting the increases in franchise fees and royalty income were declines in sales at company-owned restaurants of $1.5 million and $1.0 million for the three and six months ended June 28, 2014 , respectively, as a result of a net decrease in the number of company-owned restaurants operating during the respective periods, primarily in the Atlanta market. Also contributing to the increase in revenues for the six month period was an increase in sales of ice cream products of $4.3 million , or 7.7% , primarily due to an increase in sales to the Middle East offset by a decrease in sales to our Australian joint venture, as well as an increase in other revenues of $2.1 million driven primarily by gains from refranchising transactions.

24

Table of Contents

 
Three months ended
 
Six months ended
 
June 28,
2014
 
June 29,
2013
 
Increase (Decrease)
 
June 28, 2014
 
June 29, 2013
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Occupancy expenses—franchised restaurants
$
13,560

 
12,820

 
740

 
5.8
 %
 
$
26,572

 
25,596

 
976

 
3.8
 %
Cost of ice cream products
22,995

 
24,302

 
(1,307
)
 
(5.4
)%
 
42,743

 
40,288

 
2,455

 
6.1
 %