Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 11/05/2014 17:01:16)
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 27, 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 October 31, 2014 , 104,583,479 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 27,
2014
 
December 28,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
155,665

 
256,933

Accounts receivable, net of allowance for doubtful accounts of $2,995 and $2,599 as of September 27, 2014 and December 28, 2013, respectively
49,845

 
47,162

Notes and other receivables, net of allowance for doubtful accounts of $1,542 and $659 as of September 27, 2014 and December 28, 2013, respectively
12,301

 
32,603

Deferred income taxes, net
46,052

 
46,461

Restricted assets of advertising funds
36,201

 
31,493

Prepaid income taxes
10,285

 
25,699

Prepaid expenses and other current assets
21,513

 
21,409

Total current assets
331,862

 
461,760

Property and equipment, net of accumulated depreciation of $102,001 and $105,834 as of September 27, 2014 and December 28, 2013, respectively
179,073

 
182,858

Equity method investments
174,129

 
170,644

Goodwill
890,337

 
891,598

Other intangible assets, net of accumulated amortization of $215,341 and $200,248 as of September 27, 2014 and December 28, 2013, respectively
1,432,699

 
1,452,205

Other assets
67,021

 
75,625

Total assets
$
3,075,121

 
3,234,690

Liabilities, Redeemable Noncontrolling Interests, and Stockholders’ Equity
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
625

 
5,000

Capital lease obligations
492

 
432

Accounts payable
12,112

 
12,445

Liabilities of advertising funds
46,696

 
49,077

Deferred income
30,563

 
28,426

Other current liabilities
178,346

 
248,918

Total current liabilities
268,834

 
344,298

Long-term debt, net
1,808,491

 
1,818,609

Capital lease obligations
7,052

 
6,996

Unfavorable operating leases acquired
15,258

 
16,834

Deferred income
13,344

 
11,135

Deferred income taxes, net
547,606

 
561,714

Other long-term liabilities
59,992

 
62,816

Total long-term liabilities
2,451,743

 
2,478,104

Commitments and contingencies (note 11)

 

Redeemable noncontrolling interests
7,164

 
4,930

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at September 27, 2014 and December 28, 2013, respectively

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 106,701,892 issued and 104,562,892 outstanding at September 27, 2014; 106,876,919 shares issued and 106,646,219 shares outstanding at December 28, 2013
107

 
107

Additional paid-in capital
1,134,459

 
1,196,426

Treasury stock, at cost
(93,712
)
 
(10,773
)
Accumulated deficit
(692,676
)
 
(779,741
)
Accumulated other comprehensive income (loss)
(798
)
 
1,339

Total stockholders’ equity
347,380

 
407,358

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity
$
3,075,121

 
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
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Revenues:
 
 
 
 
 
Franchise fees and royalty income
$
126,759

 
117,486

 
355,738

 
334,045

Rental income
25,570

 
25,437

 
73,650

 
72,924

Sales of ice cream products
27,357

 
30,429

 
88,072

 
86,818

Sales at company-owned restaurants
5,267

 
6,250

 
16,319

 
18,261

Other revenues
7,687

 
6,715

 
21,717

 
18,615

Total revenues
192,640

 
186,317

 
555,496

 
530,663

Operating costs and expenses:
 
 
 
 
 
Occupancy expenses—franchised restaurants
13,258

 
13,445

 
39,830

 
39,041

Cost of ice cream products
19,530

 
20,899

 
62,273

 
61,187

Company-owned restaurant expenses
5,505

 
6,222

 
16,772

 
17,817

General and administrative expenses, net
56,311

 
58,454

 
172,406

 
177,009

Depreciation
4,960

 
5,591

 
14,803

 
16,961

Amortization of other intangible assets
6,333

 
6,938

 
19,122

 
20,085

Long-lived asset impairment charges
633

 
92

 
1,279

 
447

Total operating costs and expenses
106,530

 
111,641

 
326,485

 
332,547

Net income of equity method investments:
 
 
 
 
 
 
 
Net income, excluding impairment
5,366

 
8,201

 
12,514

 
16,070

Impairment charge

 
(873
)
 

 
(873
)
Total net income of equity method investments
5,366

 
7,328

 
12,514

 
15,197

Other operating income, net
1,004

 
233

 
7,609

 
9,188

Operating income
92,480

 
82,237

 
249,134

 
222,501

Other income (expense), net:
 
 
 
 
 
Interest income
63

 
105

 
201

 
310

Interest expense
(16,680
)
 
(19,805
)
 
(51,444
)
 
(60,523
)
Loss on debt extinguishment and refinancing transactions

 

 
(13,735
)
 
(5,018
)
Other gains (losses), net
(584
)
 
12

 
(670
)
 
(1,191
)
Total other expense, net
(17,201
)
 
(19,688
)
 
(65,648
)
 
(66,422
)
Income before income taxes
75,279

 
62,549

 
183,486

 
156,079

Provision for income taxes
20,855

 
22,505

 
60,263

 
51,664

Net income including noncontrolling interests
54,424

 
40,044

 
123,223

 
104,415

Net loss attributable to noncontrolling interests
(273
)
 
(177
)
 
(621
)
 
(416
)
Net income attributable to Dunkin’ Brands
$
54,697

 
40,221

 
123,844

 
104,831

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.52

 
0.38

 
1.17

 
0.99

Common—diluted
0.52

 
0.37

 
1.16

 
0.97

Cash dividends declared per common share
0.23

 
0.19

 
0.69

 
0.57

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 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net income including noncontrolling interests
$
54,424

 
40,044

 
123,223

 
104,415

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense (benefit) of $74 and $(75) for the three months ended September 27, 2014 and September 28, 2013, respectively, and $251 and $299 for the nine months ended September 27, 2014 and September 28, 2013, respectively
(5,074
)
 
5,358

 
(1,552
)
 
(11,345
)
Unrealized gains (losses) on interest rate swaps, net of deferred tax expense (benefit) of $1,358 and $(1,412) for the three months ended September 27, 2014 and September 28, 2013, respectively, and $(709) and $4,887 for the nine months ended September 27, 2014 and September 28, 2013, respectively
2,026

 
(2,071
)
 
(1,032
)
 
7,145

Other, net
(74
)
 
(296
)
 
447

 
(177
)
Total other comprehensive income (loss), net
(3,122
)
 
2,991

 
(2,137
)
 
(4,377
)
Comprehensive income including noncontrolling interests
51,302

 
43,035

 
121,086

 
100,038

Comprehensive loss attributable to noncontrolling interests
(273
)
 
(177
)
 
(621
)
 
(416
)
Comprehensive income attributable to Dunkin’ Brands
$
51,575

 
43,212

 
121,707

 
100,454

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 27,
2014
 
September 28,
2013
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
123,223

 
104,415

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,925

 
37,046

Amortization of deferred financing costs and original issue discount
2,987

 
3,586

Loss on debt extinguishment and refinancing transactions
13,735

 
5,018

Deferred income taxes
(13,638
)
 
(10,893
)
Provision for bad debt
2,093

 
3,008

Share-based compensation expense
8,070

 
5,750

Net income of equity method investments
(12,514
)
 
(15,197
)
Dividends received from equity method investments
7,427

 
7,226

Gain on sale of joint venture

 
(6,466
)
Gain on sale of real estate and company-owned restaurants
(7,446
)
 
(1,519
)
Other, net
205

 
(920
)
Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
16,239

 
(3,162
)
Other current assets
519

 
1

Accounts payable
(497
)
 
(517
)
Other current liabilities
(69,113
)
 
(62,137
)
Liabilities of advertising funds, net
(6,320
)
 
4,847

Income taxes payable, net
8,218

 
(5,010
)
Deferred income
4,349

 
(814
)
Other, net
4,389

 
1,053

Net cash provided by operating activities
115,851

 
65,315

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(18,324
)
 
(20,930
)
Proceeds from sale of real estate and company-owned restaurants
14,354

 
2,776

Proceeds from sale of joint venture

 
7,200

Other, net
(1,734
)
 
(2,021
)
Net cash used in investing activities
(5,704
)
 
(12,975
)
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
(72,756
)
 
(60,707
)
Repurchases of common stock
(130,171
)

(17,190
)
Exercise of stock options
4,847

 
6,287

Excess tax benefits from share-based compensation
8,938

 

Other, net
1,923

 
1,906

Net cash used in financing activities
(211,196
)
 
(95,018
)
Effect of exchange rates on cash and cash equivalents
(219
)
 
(140
)
Decrease in cash and cash equivalents
(101,268
)
 
(42,818
)
Cash and cash equivalents, beginning of period
256,933

 
252,618

Cash and cash equivalents, end of period
$
155,665

 
209,800

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
57,507

 
68,504

Cash paid for interest
47,971

 
58,997

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,241

 
1,095

Purchase of leaseholds in exchange for capital lease obligations
434

 
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 September 27, 2014 , the consolidated statements of operations and comprehensive income for the three and nine months ended September 27, 2014 and September 28, 2013 , and the consolidated statements of cash flows for the nine months ended September 27, 2014 and September 28, 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 nine-month periods ended September 27, 2014 and September 28, 2013 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 27, 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 September 27, 2014 and December 28, 2013 are summarized as follows (in thousands):
 
September 27, 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

 
8,469

 
8,469

 

 
10,221

 
10,221

Total assets
$

 
8,469

 
8,469

 
1,012

 
10,221

 
11,233

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
$

 
8,138

 
8,138

 

 
7,181

 
7,181

Total liabilities
$

 
8,138

 
8,138

 

 
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 September 27, 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 September 27, 2014 and December 28, 2013 were as follows (in thousands):
 
September 27, 2014
 
December 28, 2013
 
Carrying Value
 
Estimated fair value
 
Carrying Value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Term loans
$
1,809,116

 
1,777,291

 
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 instruments 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

8


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.
(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 September 27, 2014 and December 28, 2013 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 25% 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 nine months ended September 27, 2014 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 10% of total revenues. No individual franchisee or master licensee accounted for more than 10% of total revenues for the three months ended September 27, 2014 or for the three or nine months ended September 28, 2013 .
(f) Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board ("FASB") issued new guidance which requires management to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern. This guidance is effective for the Company in fiscal year 2017 and early adoption is permitted. The Company has not adopted this guidance as of September 27, 2014, and based on the Company's financial condition as of September 27, 2014 , the Company does not expect the adoption of this guidance to have any impact on the Company's consolidated financial statements.
In May 2014, the 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 $751 thousand and $2.7 million have been reclassified into other operating income, net, for the three and nine months ended September 28, 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 expenses 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 nine months ended September 28, 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, 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.

9


(3) Franchise Fees and Royalty Income
Franchise fees and royalty income consisted of the following (in thousands):
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Royalty income
$
113,614

 
106,327

 
324,945

 
305,803

Initial franchise fees and renewal income
13,145

 
11,159

 
30,793

 
28,242

Total franchise fees and royalty income
$
126,759

 
117,486

 
355,738

 
334,045

The changes in franchised and company-owned points of distribution were as follows:
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution in operation—beginning of period
18,376

 
17,597

 
18,122

 
17,333

Franchised points of distribution—opened
363

 
360

 
944

 
904

Franchised points of distribution—closed
(169
)
 
(140
)
 
(506
)
 
(420
)
Net transfers from company-owned points of distribution
1

 

 
11

 

Franchised points of distribution in operation—end of period
18,571

 
17,817

 
18,571

 
17,817

Company-owned points of distribution—end of period
31

 
32

 
31

 
32

Total systemwide points of distribution—end of period
18,602

 
17,849

 
18,602

 
17,849

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 nine months ended September 28, 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 nine months ended September 28, 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 September 27, 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% .

10


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 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, principal payments of $625 thousand for the 2017 Term Loans are required in the next twelve months as of September 27, 2014 , though the Company may elect to make additional 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 September 27, 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 September 27, 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 nine months ended September 27, 2014 and September 28, 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

11


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):
 
September 27,
2014
 
December 28,
2013
 
Consolidated Balance Sheet Classification
Interest rate swaps
$
8,469

 
10,221

 
Other assets
Total fair values of derivative instruments
$
8,469

 
10,221

 
 
The tables below summarize the effects of derivative instruments on the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 27, 2014 , and September 28, 2013 (in thousands):
Three months ended September 27, 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
 
$
2,319

 
(1,065
)
 
Interest expense
 
$
3,384

Income tax effect
 
(916
)
 
442

 
Provision for income taxes
 
(1,358
)
Net of income taxes
 
$
1,403

 
(623
)
 
 
 
$
2,026

 
 
 
 
 
 
 
 
 
Three months ended September 28, 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
 
$
(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
)

Nine months ended September 27, 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
 
$
(4,854
)
 
(3,113
)
 
Interest expense
 
$
(1,741
)
Income tax effect
 
1,977

 
1,268

 
Provision for income taxes
 
709

Net of income taxes
 
$
(2,877
)
 
(1,845
)
 
 
 
$
(1,032
)
 
 
 
 
 
 
 
 
 
Nine months ended September 28, 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
 
$
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


(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 $381 thousand and $971 thousand during the three and nine months ended September 27, 2014, respectively, of the unrealized gain that remained in accumulated other comprehensive income as of the date of the amendment.
As of September 27, 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.


12


The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its hedging instruments. To mitigate counterparty credit risk, the Company only enters into contracts with major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of its counterparties. At  September 27, 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 September 27, 2014 , 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 27, 2014 , the termination value of derivatives is a net asset position of $ 7.5 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):
 
September 27,
2014
 
December 28,
2013
Gift card/certificate liability
$
74,496

 
139,721

Gift card breakage liability
28,420

 
14,093

Accrued salary and benefits
19,088

 
26,713

Accrued legal liabilities (see note 11(c))
25,483

 
26,633

Accrued interest
9,789

 
9,999

Accrued professional costs
3,486

 
2,938

Other
17,584

 
28,821

Total other current liabilities
$
178,346

 
248,918

The decrease in the gift card/certificate liability is driven primarily by the seasonality of our gift card program. Additionally, a portion of the decrease in the gift card/certificate liability and the corresponding increase in the gift card breakage liability is due to a current period change in estimated breakage rates based on historical redemption patterns related to unredeemed Dunkin’ Donuts gift cards.
(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 nine months ended September 28, 2013 have been adjusted to reflect this

13


change to the measurement of segment profit to enable comparability with the three and nine month periods ended September 27, 2014 .
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 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Dunkin’ Donuts U.S.
$
142,951

 
134,254

 
404,620

 
382,560

Dunkin’ Donuts International
4,372

 
4,174

 
13,178

 
12,728

Baskin-Robbins U.S.
12,616

 
11,899

 
34,689

 
34,000

Baskin-Robbins International
28,903

 
32,759

 
92,545

 
93,104

Total reportable segment revenues
188,842

 
183,086

 
545,032

 
522,392

Other
3,798

 
3,231

 
10,464

 
8,271

Total revenues
$
192,640

 
186,317

 
555,496

 
530,663

Expenses included in “Corporate” in the segment profit (loss) 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 nine months ended September 28, 2013 below include the $7.5 million charge related to the third-party product volume guarantee (see note 11(a)). Segment profit (loss) by segment was as follows (in thousands):
 
Segment profit (loss)
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Dunkin’ Donuts U.S.
$
106,242

 
97,109

 
297,055

 
271,966

Dunkin’ Donuts International
1,885

 
(1,059
)
 
7,757

 
3,074

Baskin-Robbins U.S.
8,828

 
8,215

 
23,011

 
21,664

Baskin-Robbins International
12,485

 
16,775

 
33,708

 
45,484

Total reportable segments
129,440

 
121,040

 
361,531

 
342,188

Corporate
(29,994
)
 
(31,707
)
 
(92,296
)
 
(91,001
)
Interest expense, net
(16,617
)
 
(19,700
)
 
(51,243
)
 
(60,213
)
Amortization of other intangible assets
(6,333
)
 
(6,938
)
 
(19,122
)
 
(20,085
)
Long-lived asset impairment charges
(633
)
 
(92
)
 
(1,279
)
 
(447
)
Loss on debt extinguishment and refinancing transactions

 

 
(13,735
)
 
(5,018
)
Other gains (losses), net
(584
)
 
12

 
(670
)
 
(1,191
)
Operating income adjustments excluded from reportable segments

 
(66
)
 
300

 
(8,154
)
Income before income taxes
$
75,279

 
62,549

 
183,486

 
156,079


14


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 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 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Dunkin’ Donuts International
$
331

 
(431
)
 
1,307

 
(177
)
Baskin-Robbins International
4,895

 
7,467

 
10,372

 
14,131

Total reportable segments
5,226

 
7,036

 
11,679

 
13,954

Other
140

 
292

 
835

 
1,243

Total net income of equity method investments
$
5,366

 
7,328

 
12,514

 
15,197

(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 (loss)
 
123,844

 
(621
)
Other comprehensive loss
 
(2,137
)
 

Dividends paid on common stock
 
(72,756
)
 

Exercise of stock options
 
4,847

 

Repurchases of common stock
 
(130,171
)
 

Share-based compensation expense
 
8,070

 

Excess tax benefits from share-based compensation
 
8,938

 

Contributions from noncontrolling interests
 

 
2,855

Other, net
 
(613
)
 

Balance at September 27, 2014
 
$
347,380

 
7,164

(a) Redeemable Noncontrolling Interests
As of September 27, 2014 , the consolidated balance sheets included $3.5 million of cash and cash equivalents and $10.7 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 nine months ended September 27, 2014 , the Company repurchased a total of 2,911,205 shares of common stock at a weighted average cost per share of $44.71 from existing stockholders. The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $130.2 million during the nine months ended September 27, 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 nine months ended September 27, 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

15


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 $2.1 million for the three months ended September 27, 2014 and September 28, 2013 , respectively, and $8.1 million and $5.8 million for the nine months ended September 27, 2014 and September 28, 2013 , respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.
(d) Accumulated Other Comprehensive Income (Loss)
The changes in the components of accumulated other comprehensive income (loss) 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 (loss)
Balance at December 28, 2013
$
5

 
6,085

 
(3,098
)
 
(1,653
)
 
1,339

Other comprehensive income (loss)
(1,552
)
 
(1,032
)
 
53

 
394

 
(2,137
)
Balance at September 27, 2014
$
(1,547
)
 
5,053

 
(3,045
)
 
(1,259
)
 
(798
)
(e) Dividends
The Company paid quarterly dividends of $0.23 per share of common stock on March 19, 2014 , June 4, 2014, and September 3, 2014 totaling approximately $24.5 million , $24.2 million , and $24.0 million , respectively. On October 23, 2014 , we announced that our board of directors approved the next quarterly dividend of $0.23 per share of common stock payable December 3, 2014 to shareholders of record at the close of business on November 24, 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
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net income attributable to Dunkin’ Brands—basic and diluted
$
54,697

 
40,221

 
123,844

 
104,831

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
104,742,212

 
106,531,827

 
105,719,491

 
106,421,114

Common—diluted
105,969,110

 
108,164,925

 
107,045,211

 
108,178,632

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.52

 
0.38

 
1.17

 
0.99

Common—diluted
0.52

 
0.37

 
1.16

 
0.97

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,226,898 and 1,633,098 equity awards for the three months ended September 27, 2014 and September 28, 2013 , respectively, and includes the dilutive effect of 1,325,720 and 1,757,518 equity awards for the nine months ended September 27, 2014 and September 28, 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 September 27, 2014 , there were 150,000 restricted shares that were performance-based and for which the performance criteria were not yet met. As of September 28, 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

16


calculation excludes 1,377,831 and 1,181,338 equity awards for the three months ended September 27, 2014 and September 28, 2013 , respectively, and 1,439,725 and 1,441,640 equity awards for the nine months ended September 27, 2014 and September 28, 2013 , respectively, as they would be antidilutive.
(10) Income Taxes
Income tax expense and the effective tax rate were $20.9 million and 27.7% , respectively, for the three months ended September 27, 2014, and $22.5 million and 36.0% , respectively, for the three months ended September 28, 2013. Income tax expense and the effective tax rate were $60.3 million and 32.8% , respectively, for the nine months ended September 27, 2014, and $51.7 million and 33.1% , respectively, for the nine months ended September 28, 2013.
The effective rate may fluctuate from quarter to quarter for various reasons, including discrete items, such as the settlement, effective settlement, or resolution of specific federal and state tax issues. During the three and nine months ended September 27, 2014, the Company recorded a net tax benefit of $6.7 million primarily related to the reversal of reserves for uncertain tax positions that were effectively settled during the period. 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 totaling $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.
(11) 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 $2.6 million and $3.0 million at September 27, 2014 and December 28, 2013 , respectively. At September 27, 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 September 27, 2014 and December 28, 2013 , the Company was contingently liable for $4.7 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 September 27, 2014 and December 28, 2013 , the Company was contingently liable under such supply chain agreements for approximately $44.5 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 September 27, 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 September 27, 2014 and December 28, 2013 , the potential amount of

17


undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $6.7 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 September 27, 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 September 27, 2014 and December 28, 2013 , the Company has recorded an estimated liability of $24.7 million and $25.1 million , respectively, which includes interest that continues to accrue on the judgment amount and the impact of foreign exchange. The Company strongly disagrees with the decision 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 27, 2014 and December 28, 2013 , contingent liabilities, excluding the Bertico litigation, totaling $765 thousand and $1.5 million , were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the probable 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.
(12) Related-Party Transactions
(a) Advertising Funds
At September 27, 2014 and December 28, 2013 , the Company had a net payable of $10.5 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 $5.7 million for the three and nine months ended September 27, 2014 , respectively, and $1.5 million and $4.3 million for the three and nine months ended September 28, 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 $1.6 million and $1.7 million during the three and nine months ended September 27, 2014 , respectively, and $62 thousand and $1.2 million during the three and nine months ended September 28, 2013 , respectively. Additionally, the Company made net contributions to the advertising funds based on retail sales as owner and operator of company-owned restaurants of $199 thousand and $650 thousand during the three and nine months ended September 27, 2014 , respectively, and $256 thousand and $749 thousand during the three and nine months ended September 28, 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 $644 thousand and $3.6 million during the three and nine months ended September 27, 2014 , respectively, and $357 thousand and $3.6 million during the three and nine months ended September 28, 2013 , respectively, which were recorded as reductions to the gift card breakage liability included within other current liabilities in the consolidated balance sheets.

18


(b) Equity Method Investments
The Company recognized royalty income from its equity method investees as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
B-R 31 Ice Cream Co., Ltd.
$
522

 
838

 
1,366

 
1,842

BR Korea Co., Ltd.
1,280

 
1,036

 
3,505

 
3,065

Coffee Alliance, S.L. (“Coffee Alliance”)
22

 

 
39

 
130

 
$
1,824

 
1,874

 
4,910

 
5,037

At September 27, 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 $674 thousand and $1.9 million during the three and nine months ended September 27, 2014 , respectively, and $929 thousand and $3.0 million during the three and nine months ended September 28, 2013 , 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. 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. As of September 27, 2014 and December 28, 2013 , the Company had $2.5 million and $2.7 million , respectively, of notes receivable from Coffee Alliance, which were fully reserved as of the respective dates.
The Company recognized sales of ice cream products of $1.0 million and $4.1 million during the three and nine months ended September 27, 2014 , respectively, and $749 thousand and $3.3 million during the three and nine months ended September 28, 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 September 27, 2014 and December 28, 2013 , the Company had $2.4 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 18,600 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 September 27, 2014 , Dunkin’ Donuts had 11,123 global points of distribution with restaurants in 41 U.S. states and the District of Columbia and in 33 foreign countries. Baskin-Robbins had 7,479 global points of distribution as of the same date, with restaurants in 43 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 31 company-owned points of distribution as of September 27, 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 nine months ended September 27, 2014 , franchisee contributions to the U.S. advertising funds were $281.3 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 nine -month periods ended September 27, 2014 and September 28, 2013 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 27, 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
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Franchisee-reported sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
1,840.5

 
1,719.5

 
5,268.6

 
4,950.0

Dunkin’ Donuts International
172.8

 
165.8

 
518.2

 
504.6

Baskin-Robbins U.S.
161.0

 
152.2

 
439.9

 
421.7

Baskin-Robbins International
401.9

 
399.2

 
1,061.4

 
1,044.4

Total franchisee-reported sales (a)
$
2,576.3

 
2,436.7

 
7,288.2

 
6,920.7

Systemwide sales growth
5.7
 %
 
5.8
 %
 
5.3
 %
 
5.5
 %
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
2.0
 %
 
4.2
 %
 
1.7
 %
 
3.3
 %
Dunkin’ Donuts International
(2.9
)%
 
(1.4
)%
 
(2.8
)%
 
(0.6
)%
Baskin-Robbins U.S.
5.8
 %
 
3.2
 %
 
3.7
 %
 
0.6
 %
Baskin-Robbins International
(1.5
)%
 
0.7
 %
 
(0.8
)%
 
2.3
 %
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
192,640

 
186,317

 
555,496

 
530,663

Operating income
92,480

 
82,237

 
249,134

 
222,501

Adjusted operating income
99,446

 
89,333

 
269,235

 
251,187

Net income attributable to Dunkin’ Brands
54,697

 
40,221

 
123,844

 
104,831

Adjusted net income
52,160

 
44,479

 
137,943

 
119,505

(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 5.3% for the three and nine months ended September 27, 2014 , respectively, over the same periods in the prior year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 7.0% and 6.4% for the three and nine months ended September 27, 2014 , respectively, as a result of 413 net new restaurants opened since September 28, 2013 and comparable store sales growth of 2.0% and 1.7% , respectively. The increase in comparable store sales for the three-month period was driven by higher traffic and increased average ticket resulting primarily from increases in product pricing. The increase for the nine-month period was due primarily to higher traffic and increased average ticket resulting from an increase in units per transaction and increases in product pricing.
Dunkin’ Donuts International systemwide sales growth of 4.3% and 2.7% for the three and nine months ended September 27, 2014 , respectively, driven primarily by sales growth in Germany, Spain, Philippines, and the Middle East due to net new units and comparable store sales growth, offset by a decline in South Korea. The decline in South Korea was partially offset by favorable foreign exchange. Dunkin’ Donuts International comparable store sales declined 2.9% and 2.8% for the three and nine months ended September 27, 2014 , respectively, driven primarily by a decline in South Korea, offset by growth in southeast Asia and the Middle East.

21

Table of Contents

Baskin-Robbins U.S. systemwide sales growth of 5.9% and 4.4% for the three and nine months ended September 27, 2014 , respectively, resulting primarily from comparable store sales growth of 5.8% and 3.7% , respectively, driven by increased sales of cups and cones, cakes, and beverages.
Baskin-Robbins International systemwide sales growth of 0.7% and 1.6% for the three and nine months ended September 27, 2014 , respectively, driven by favorable foreign exchange and an increase in sales in South Korea, offset by unfavorable foreign exchange and a decrease in sales in Japan. Baskin-Robbins International comparable store sales declined 1.5% and 0.8% for the three and nine months ended September 27, 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 nine months ended September 27, 2014 and September 28, 2013 were as follows:
 
 
 
 
 
September 27, 2014
 
September 28, 2013
Points of distribution, at period end (a) :
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
 
 
 
 
7,941

 
7,528

Dunkin’ Donuts International
 
 
 
 
3,182

 
3,137

Baskin-Robbins U.S.
 
 
 
 
2,486

 
2,471

Baskin-Robbins International
 
 
 
 
4,993

 
4,713

Consolidated global points of distribution
 
 
 
 
18,602

 
17,849

(a)  Prior year points of distribution have been adjusted to reflect the results of an internal point of distribution count audit.
 
Three months ended
 
Nine months ended
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Net openings during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
120

 
81

 
264

 
222

Dunkin’ Donuts International
10

 
67

 
1

 
94

Baskin-Robbins U.S.
6

 
1

 
19

 
8

Baskin-Robbins International
61

 
73

 
160

 
157

Consolidated global net openings
197

 
222

 
444

 
481

Total revenues increased $6.3 million , or 3.4% , for the three months ended September 27, 2014 driven primarily by an increase in franchise fees and royalty income of $9.3 million , offset by a decline in sales of ice cream products of $3.1 million . Total revenues increased $24.8 million , or 4.7% , for the nine months ended September 27, 2014 resulting primarily from increased franchise fees and royalty income of $21.7 million and other revenues of $3.1 million .
Operating income for the three and nine months ended September 27, 2014 increased $10.2 million , or 12.5% , and $26.6 million , or 12.0% , respectively, from the prior year periods primarily as a result of increases in franchise fees and royalty income, as well as $3.7 million in write-downs related to our investments in the Spain joint venture recorded in the prior year periods, offset by decreases in net income of equity method investments. Also contributing to the growth in operating income for the nine-month period were gains recognized in connection with the sale of real estate and a gain recognized in connection with the sale of all company-owned restaurants in the Atlanta market, offset by a reduction in breakage income on gift cards. Additionally, the nine month prior year period included a $7.5 million charge related to a third-party product volume guarantee and a $6.5 million gain related to the sale of 80% of our Baskin-Robbins Australia business.
Adjusted operating income increased $10.1 million , or 11.3% , and $18.0 million , or 7.2% , for the three and nine months ended September 27, 2014 , respectively, primarily as a result of increases in franchise fees and royalty income, as well as write-downs related to the Spain joint venture recorded in the prior year periods, offset by decreases in net income of equity method investments. Also contributing to the growth in adjusted operating income for the nine-month period were gains recognized in connection with the sale of real estate and a gain recognized in connection with the sale of all company-owned restaurants in the Atlanta market, offset by the gain from sale of the Baskin-Robbins Australia business recognized in the prior year period and a reduction in breakage income on gift cards.
Net income attributable to Dunkin' Brands increased $14.5 million for the three months ended September 27, 2014 primarily as a result of a $10.2 million increase in operating income and decreases in interest expense and tax expense of $3.1 million and

22

Table of Contents

$1.7 million , respectively. Net income attributable to Dunkin' Brands increased $19.0 million for the nine months ended September 27, 2014 primarily as a result of a $26.6 million increase in operating income and a $9.1 million decrease in interest expense, offset by an $8.6 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 $7.7 million and $18.4 million for the three and nine months ended September 27, 2014 , respectively, primarily as a result of the increases in adjusted operating income of $10.1 million and $18.0 million , respectively, and decreases in interest expense, offset by increases in 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 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 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands)
Operating income
$
92,480

 
82,237

 
249,134

 
222,501

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,333

 
6,938

 
19,122

 
20,085

Long-lived asset impairment charges
633

 
92

 
1,279

 
447

Third-party product volume guarantee

 

 
(300
)
 
7,500

Peterborough plant closure costs (a)

 
66

 

 
654

Adjusted operating income
$
99,446

 
89,333

 
269,235

 
251,187

Net income attributable to Dunkin’ Brands
$
54,697

 
40,221

 
123,844

 
104,831

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,333

 
6,938

 
19,122

 
20,085

Long-lived asset impairment charges
633

 
92

 
1,279

 
447

Third-party product volume guarantee

 

 
(300
)
 
7,500

Peterborough plant closure costs (a)

 
66

 

 
654

Loss on debt extinguishment and refinancing transactions

 

 
13,735

 
5,018

Tax impact of adjustments (b)
(2,786
)
 
(2,838
)
 
(13,534
)
 
(13,481
)
Income tax audit settlements (c)
(6,717
)
 

 
(6,717
)
 
(8,417
)
State tax apportionment (d)

 

 
514

 
2,868

Adjusted net income
$
52,160

 
44,479

 
137,943

 
119,505

(a)
For the three and nine months ended September 28, 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 or effectively 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.


23

Table of Contents

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.52

 
0.38

 
1.17

 
0.99

Common—diluted
0.52

 
0.37

 
1.16

 
0.97

Diluted adjusted earnings per share
0.49

 
0.41

 
1.29

 
1.10

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 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
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands, except share and per share data)
Adjusted net income
$
52,160

 
44,479

 
137,943

 
119,505

Weighted average number of common shares—diluted
105,969,110

 
108,164,925

 
107,045,211

 
108,178,632

Diluted adjusted earnings per share
$
0.49

 
0.41

 
1.29

 
1.10


Results of operations
Consolidated results of operations
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013
 
Increase (Decrease)
 
September 27,
2014
 
September 28,
2013
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Franchise fees and royalty income
$
126,759

 
117,486

 
9,273

 
7.9
 %
 
$
355,738

 
334,045

 
21,693

 
6.5
 %
Rental income
25,570

 
25,437

 
133

 
0.5
 %
 
73,650

 
72,924

 
726

 
1.0
 %
Sales of ice cream products
27,357

 
30,429

 
(3,072
)
 
(10.1
)%
 
88,072

 
86,818

 
1,254

 
1.4
 %
Sales at company-owned restaurants
5,267

 
6,250

 
(983
)
 
(15.7
)%
 
16,319

 
18,261

 
(1,942
)
 
(10.6
)%
Other revenues
7,687

 
6,715

 
972

 
14.5
 %
 
21,717

 
18,615

 
3,102

 
16.7
 %
Total revenues
$
192,640

 
186,317

 
6,323

 
3.4
 %
 
$
555,496

 
530,663

 
24,833

 
4.7
 %
Total revenues for the three months ended September 27, 2014 increased $6.3 million , or 3.4% , driven by an increase in franchise fees and royalty income of $9.3 million , 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, as well as an increase in other revenues of $1.0 million driven primarily by gains from refranchising transactions. These increases for the three-month period were offset by a decline in sales of ice cream products of $3.1 million , or 10.1% , due primarily to a decline in sales to the Middle East, which was partially driven by a reduction in the inventory level held by the licensee, as well as Asia. Additionally, sales at company-owned restaurants declined $1.0 million as a result of a net decrease in the number of company-owned restaurants, primarily in the Atlanta market.

24

Table of Contents

Total revenues for the nine months ended September 27, 2014 increased $24.8 million , or 4.7% , driven by an increase in franchise fees and royalty income of $21.7 million , 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, as well as an increase in other revenues of $3.1 million driven primarily by gains from refranchising transactions. Also contributing to the increase in revenues for the nine-month period was an increase in sales of ice cream products of $1.3 million , or 1.4% , driven by an increase in sales to the Middle East and the United Kingdom, offset by a decline in sales to our Australian joint venture, due primarily to significant sales of ice cream products in the prior year period in conjunction with the sale of 80% of our Baskin-Robbins Australia business. These increases for the nine-month period were offset by a decline in sales at company-owned restaurants of $1.9 million as a result of a net decrease in the number of company-owned restaurants, primarily in the Atlanta market.
 
Three months ended
 
Nine months ended
 
September 27,
2014
 
September 28,
2013