Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 08/05/2015 17:03:20)
Table of Contents

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

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 27, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from              to             
Commission file number 001-35258  
 
 
 
DUNKIN’ BRANDS GROUP, INC.
(Exact name of registrant as specified in its charter)  
 
 
 
Delaware
 
20-4145825
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
130 Royall Street
Canton, Massachusetts 02021
(Address of principal executive offices) (zip code)
(781) 737-3000
(Registrants’ telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
 
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   x     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).     YES   ¨     NO   x
As of August 3, 2015 , 95,240,864 shares of common stock of the registrant were outstanding.


Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

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


2

Table of Contents

Part I.        Financial Information
Item 1.       Financial Statements
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
June 27,
2015
 
December 27,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
328,596

 
208,080

Restricted cash
71,191

 

Accounts receivable, net of allowance for doubtful accounts of $4,796 and $3,882 as of June 27, 2015 and December 27, 2014, respectively
57,427

 
55,908

Notes and other receivables, net of allowance for doubtful accounts of $748 and $1,278 as of June 27, 2015 and December 27, 2014, respectively
35,265

 
49,152

Deferred income taxes, net
48,788

 
49,216

Restricted assets of advertising funds
40,668

 
34,300

Prepaid income taxes
7,248

 
24,861

Prepaid expenses and other current assets
26,753

 
21,101

Total current assets
615,936

 
442,618

Property and equipment, net of accumulated depreciation of $108,141 and $104,415 as of June 27, 2015 and December 27, 2014, respectively
183,422

 
182,061

Equity method investments
162,396

 
164,493

Goodwill
892,137

 
891,370

Other intangible assets, net of accumulated amortization of $228,976 and $221,042 as of June 27, 2015 and December 27, 2014, respectively
1,413,636

 
1,425,797

Other assets
91,197

 
71,044

Total assets
$
3,358,724

 
3,177,383

Liabilities, Redeemable Noncontrolling Interests, and Stockholders’ Equity (Deficit)
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
25,253

 
3,852

Capital lease obligations
530

 
506

Accounts payable
13,324

 
13,814

Liabilities of advertising funds
53,121

 
48,081

Deferred income
32,679

 
30,374

Other current liabilities
221,539

 
258,892

Total current liabilities
346,446

 
355,519

Long-term debt, net
2,469,778

 
1,807,081

Capital lease obligations
7,306

 
7,575

Unfavorable operating leases acquired
13,817

 
14,795

Deferred income
16,315

 
14,935

Deferred income taxes, net
527,708

 
540,339

Other long-term liabilities
65,241

 
62,189

Total long-term liabilities
3,100,165

 
2,446,914

Commitments and contingencies (note 10)

 

Redeemable noncontrolling interests

 
6,991

Stockholders’ equity (deficit):
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at June 27, 2015 and December 27, 2014

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 95,021,111 issued and outstanding at June 27, 2015; 104,630,978 shares issued and outstanding at December 27, 2014
95

 
104

Additional paid-in capital
960,818

 
1,093,363

Accumulated deficit
(1,034,102
)
 
(711,531
)
Accumulated other comprehensive loss
(14,829
)
 
(13,977
)
Total stockholders’ equity (deficit) of Dunkin' Brands
(88,018
)
 
367,959

Noncontrolling interests
131

 

Total stockholders’ equity (deficit)
(87,887
)
 
367,959

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity (deficit)
$
3,358,724

 
3,177,383


See accompanying notes to unaudited consolidated financial statements.

3

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

 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Revenues:
 
 
 
 
 
Franchise fees and royalty income
$
131,143

 
122,267

 
246,468

 
228,979

Rental income
26,535

 
25,633

 
50,162

 
48,080

Sales of ice cream and other products
35,410

 
32,220

 
58,478

 
61,061

Sales at company-operated restaurants
7,727

 
4,736

 
14,285

 
11,052

Other revenues
10,609

 
6,052

 
27,936

 
13,684

Total revenues
211,424

 
190,908

 
397,329

 
362,856

Operating costs and expenses:
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
13,717

 
13,560

 
27,235

 
26,572

Cost of ice cream and other products
22,876

 
23,181

 
38,222

 
43,112

Company-operated restaurant expenses
7,757

 
4,904

 
14,615

 
11,267

General and administrative expenses, net
68,349

 
56,195

 
126,189

 
115,726

Depreciation
4,991

 
4,930

 
10,101

 
9,843

Amortization of other intangible assets
6,181

 
6,384

 
12,381

 
12,789

Long-lived asset impairment charges

 
523

 
264

 
646

Total operating costs and expenses
123,871

 
109,677

 
229,007

 
219,955

Net income of equity method investments
3,951

 
4,048

 
6,898

 
7,148

Other operating income, net
1,084

 
2,278

 
1,108

 
6,605

Operating income
92,588

 
87,557

 
176,328

 
156,654

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
116

 
69

 
238

 
138

Interest expense
(25,095
)
 
(16,823
)
 
(47,259
)
 
(34,764
)
Loss on debt extinguishment and refinancing transactions

 

 
(20,554
)
 
(13,735
)
Other losses, net
(12
)
 
(113
)
 
(557
)
 
(86
)
Total other expense, net
(24,991
)
 
(16,867
)
 
(68,132
)
 
(48,447
)
Income before income taxes
67,597

 
70,690

 
108,196

 
108,207

Provision for income taxes
25,148

 
24,719

 
40,322

 
39,408

Net income including noncontrolling interests
42,449

 
45,971

 
67,874

 
68,799

Net income (loss) attributable to noncontrolling interests
131

 
(220
)
 
(75
)
 
(348
)
Net income attributable to Dunkin’ Brands
$
42,318

 
46,191

 
67,949

 
69,147

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.44

 
0.44

 
0.69

 
0.65

Common—diluted
0.44

 
0.43

 
0.69

 
0.64

Cash dividends declared per common share
0.27

 
0.23

 
0.53

 
0.46

See accompanying notes to unaudited consolidated financial statements.

4

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

 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Net income including noncontrolling interests
$
42,449

 
45,971

 
67,874

 
68,799

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense (benefit) of $35 and $(136) for the three months ended June 27, 2015 and June 28, 2014, respectively, and $293 and $177 for the six months ended June 27, 2015 and June 28, 2014, respectively
(3,819
)
 
2,231

 
(2,440
)
 
3,522

Effect of interest rate swaps, net of deferred tax benefit of $217 and $1,610 for the three months ended June 27, 2015 and June 28, 2014, respectively, and $434 and $2,067 for the six months ended June 27, 2015 and June 28, 2014, respectively
(318
)
 
(2,357
)
 
(636
)
 
(3,058
)
Effect of pension plan, net of deferred tax expense of $877 and $4 for the three months ended June 27, 2015 and June 28, 2014, respectively, and $866 and $10 for the six months ended June 27, 2015 and June 28, 2014, respectively
2,844

 
19

 
2,874

 
35

Other, net
(113
)
 
(156
)
 
(650
)
 
486

Total other comprehensive income (loss), net
(1,406
)
 
(263
)
 
(852
)
 
985

Comprehensive income including noncontrolling interests
41,043

 
45,708

 
67,022

 
69,784

Comprehensive income (loss) attributable to noncontrolling interests
131

 
(220
)
 
(75
)
 
(348
)
Comprehensive income attributable to Dunkin’ Brands
$
40,912


45,928

 
67,097

 
70,132

See accompanying notes to unaudited consolidated financial statements.

5

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

 
Six months ended
 
June 27,
2015
 
June 28,
2014
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
67,874

 
68,799

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,482

 
22,632

Amortization of debt issuance costs and original issue discount
2,905

 
2,010

Loss on debt extinguishment and refinancing transactions
20,554

 
13,735

Deferred income taxes
(13,296
)
 
(9,303
)
Provision for bad debt
681

 
839

Share-based compensation expense
7,713

 
4,926

Net income of equity method investments
(6,898
)
 
(7,148
)
Dividends received from equity method investments
5,283

 
5,825

Gain on sale of real estate and company-operated restaurants
(998
)
 
(6,442
)
Other, net
2,429

 
(914
)
Change in operating assets and liabilities:
 
 
 
Restricted cash
(64,918
)
 

Accounts, notes, and other receivables, net
11,664

 
10,650

Prepaid income taxes, net
17,744

 
17,522

Other current assets
(5,771
)
 
454

Accounts payable
653

 
(716
)
Other current liabilities
(35,502
)
 
(61,083
)
Liabilities of advertising funds, net
(829
)
 
(10,938
)
Deferred income
3,697

 
4,820

Other, net
12,210

 
4,003

Net cash provided by operating activities
47,677

 
59,671

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(14,362
)
 
(10,556
)
Proceeds from sale of real estate and company-operated restaurants
1,586

 
12,761

Other, net
(2,887
)
 
(1,520
)
Net cash (used in) provided by investing activities
(15,663
)
 
685

Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
2,500,000

 

Repayment of long-term debt
(1,825,273
)
 
(15,000
)
Payment of debt issuance and other debt-related costs
(41,301
)
 
(8,977
)
Dividends paid on common stock
(50,815
)
 
(48,759
)
Repurchases of common stock, including accelerated share repurchase
(493,869
)

(81,046
)
Change in restricted cash
(6,866
)
 

Exercise of stock options
6,364

 
4,293

Excess tax benefits from share-based compensation
7,523

 
7,821

Other, net
(6,910
)
 
718

Net cash provided by (used in) financing activities
88,853

 
(140,950
)
Effect of exchange rates on cash and cash equivalents
(351
)
 
42

Increase (decrease) in cash and cash equivalents
120,516

 
(80,552
)
Cash and cash equivalents, beginning of period
208,080

 
256,933

Cash and cash equivalents, end of period
$
328,596

 
176,381

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
28,599

 
24,068

Cash paid for interest
43,075

 
32,859

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,139

 
1,622

Purchase of leaseholds in exchange for capital lease obligations

 
294

See accompanying notes to unaudited consolidated financial statements.

6


DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Description of Business and Organization
Dunkin’ Brands Group, Inc. (“DBGI”), together with its consolidated subsidiaries, is one of the world’s leading franchisors of restaurants serving coffee and baked goods, as well as ice cream, within the quick service restaurant segment of the restaurant industry. We develop, franchise, and license a system of both traditional and nontraditional quick service restaurants and, in limited circumstances, own and operate individual locations. Through our Dunkin’ Donuts brand, we develop and franchise restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. Through our Baskin-Robbins brand, we develop and franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, we distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in certain international markets.
Throughout these unaudited consolidated financial statements, “Dunkin’ Brands,” “the Company,” “we,” “us,” “our,” and “management” refer to DBGI and its consolidated subsidiaries taken as a whole.
(2) Summary of Significant Accounting Policies
(a) Unaudited Consolidated Financial Statements
The consolidated balance sheet as of June 27, 2015 , the consolidated statements of operations and comprehensive income for the three and six months ended June 27, 2015 and June 28, 2014 , and the consolidated statements of cash flows for the six months ended June 27, 2015 and June 28, 2014 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 27, 2014 , included in the Company’s Annual Report on Form 10-K.
(b) Fiscal Year
The Company operates and reports financial information on a 52 - or 53 -week year on a 13 -week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within our three- and six-month periods ended June 27, 2015 and June 28, 2014 reflect the results of operations for the 13-week and 26-week periods ended on those dates, respectively. Operating results for the three- and six-month periods ended June 27, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2015 .
(c) Restricted Cash
In accordance with the Company's securitized financing facility, certain cash accounts have been established in the name of Citibank, N.A. (the “Trustee”) for the benefit of the Trustee and the noteholders, and are restricted in their use. The Company held restricted cash which primarily represented (i) cash collections held by the Trustee, (ii) interest, principal, and commitment fee reserves held by the Trustee related to the Company's Notes (see note 4), and (iii) real estate reserves used to pay real estate obligations. Changes in restricted cash accounts are presented as either a component of cash flows from operating or financing activities in the consolidated statements of cash flows based on the nature of the restricted balance.
(d) Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

7


Financial assets and liabilities measured at fair value on a recurring basis as of June 27, 2015 and December 27, 2014 are summarized as follows (in thousands):
 
June 27, 2015
 
December 27, 2014
 
Significant other observable inputs (Level 2)
 
Total
 
Significant other observable inputs (Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
Company-owned life insurance
$
3,065

 
3,065

 
2,975

 
2,975

Total assets
$
3,065

 
3,065

 
2,975

 
2,975

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
9,147

 
9,147

 
8,488

 
8,488

Total liabilities
$
9,147

 
9,147

 
8,488

 
8,488

The deferred compensation liabilities relate primarily to the Dunkin’ Brands, Inc. non-qualified deferred compensation plans (“NQDC Plans”), which allows for pre-tax deferral of compensation for certain qualifying employees and directors. 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 include company-owned life insurance policies, to partially offset the Company’s liabilities under the NQDC Plans. The changes in the fair value of any company-owned life insurance policies are derived using determinable cash surrender values. As such, the company-owned life insurance policies are classified within Level 2, as defined under U.S. GAAP.
The carrying value and estimated fair value of long-term debt as of June 27, 2015 and December 27, 2014 were as follows (in thousands):
 
June 27, 2015
 
December 27, 2014
 
Carrying value
 
Estimated fair value
 
Carrying value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
2,495,031

 
2,481,032

 
1,810,933

 
1,778,066

The estimated fair value of our long-term debt is estimated primarily based on current market rates for debt with similar terms and remaining maturities or current bid prices for our long-term debt. Judgment is required to develop these estimates. As such, our long-term debt is classified within Level 2, as defined under U.S. GAAP.
(e) Concentration of Credit Risk
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees, royalty income, and sales of ice cream products. In addition, we have note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. At June 27, 2015 and December 27, 2014 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 22% and 19% , respectively, of total accounts and notes receivable. For the three months ended June 27, 2015 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 11% of total revenues. No individual franchisee or master licensee accounted for more than 10% of total revenues for the six months ended June 27, 2015 . For the three and six months ended June 28, 2014 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 10% and 11% of total revenues, respectively.
Additionally, the Company engages various third parties to manufacture and/or distribute certain Dunkin' Donuts and Baskin-Robbins products under licensing arrangements. As of June 27, 2015 , one of these third parties accounted for approximately 16% of total accounts and notes receivable. No individual third party accounted for more than 10% of total accounts and notes receivable as of December 27, 2014 .

8


(f) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (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. In July 2015, the FASB approved to defer the mandatory effective date by one year and permit early adoption, but not before the original effective date. As a result, this guidance is now effective for the Company in fiscal year 2018 with early adoption permitted in fiscal year 2017. The Company expects to adopt this new standard in fiscal year 2018, and 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, and has not yet selected a transition method.
In April 2015, the FASB issued new guidance to simplify the presentation of debt issuance costs, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums, instead of as an asset. This guidance is effective for the Company in fiscal year 2016, and early adoption is permitted. The adoption of this guidance by the Company will result in the reclassification of debt issuance costs, which were approximately $38.7 million and $11.5 million as of June 27, 2015 and December 27, 2014 , respectively, from other assets to long-term debt, net in the consolidated balance sheets, resulting in a corresponding reduction in total assets and total long-term liabilities. The adoption of this guidance will not have any impact on the Company’s consolidated statements of operations or cash flows.
(g) Reclassifications
The Company has revised the presentation of revenues and related costs from the sale of Dunkin’ Donuts products in certain international markets within the consolidated statements of operations due to the growth in and the nature of such transactions. To conform to the current period presentation, revenues totaling $176 thousand and $346 thousand have been reclassified from other revenues to sales of ice cream and other products for the three and six months ended June 28, 2014, respectively, and expenses totaling $186 thousand and $369 thousand have been reclassified from general and administrative expenses, net to cost of ice cream and other products for the three and six months ended June 28, 2014, respectively. There was no impact to total revenues, total operating costs and expenses, operating income, income before income taxes, or net income as a result of these reclassifications.
Additionally, the Company has revised the presentation in the consolidated statements of comprehensive income to conform to the current period presentation which separately discloses the effect of the pension plan on other comprehensive income (loss), net. In prior periods, such amounts were included within other, net. There was no impact to total other comprehensive income (loss), net or comprehensive income attributable to Dunkin’ Brands as a result of this reclassification.
(h) Subsequent Events
Subsequent events have been evaluated through the date these consolidated financial statements were filed.
(3) Franchise Fees and Royalty Income
Franchise fees and royalty income consisted of the following (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Royalty income
$
120,757

 
112,732

 
226,878

 
211,331

Initial franchise fees and renewal income
10,386

 
9,535

 
19,590

 
17,648

Total franchise fees and royalty income
$
131,143

 
122,267

 
246,468

 
228,979


9


The changes in franchised and company-operated points of distribution were as follows:
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution in operation—beginning of period
18,898

 
18,218

 
18,821

 
18,122

Franchised points of distribution—opened
381

 
315

 
679

 
581

Franchised points of distribution—closed
(231
)
 
(167
)
 
(450
)
 
(337
)
Net transfers from (to) company-operated points of distribution

 
10

 
(2
)
 
10

Franchised points of distribution in operation—end of period
19,048

 
18,376

 
19,048

 
18,376

Company-operated points of distribution—end of period
47

 
29

 
47

 
29

Total systemwide points of distribution—end of period
19,095

 
18,405

 
19,095

 
18,405

(4) Debt
Securitized Financing Facility
On January 26, 2015, DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of DBGI, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2015-1 3.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $750.0 million and Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of $1.75 billion . I n addition, the Master Issuer issued Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”), which allow for the issuance of up to $100.0 million of Variable Funding Notes and certain other credit instruments, including letters of credit. The Notes were issued in a securitization transaction pursuant to which most of the Company’s domestic and certain of its foreign revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets to secure the Notes.
The legal final maturity date of the Class A-2 Notes is in February 2045 , but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in February 2019 and the Class A-2-II Notes will be repaid in February 2022 (the “Anticipated Repayment Dates”). If the Class A-2 Notes have not been repaid in full by their respective Anticipated Repayment Dates, a rapid amortization event will occur in which residual net cash flows, after making certain required payments, will be applied to the outstanding principal of the Class A-2 Notes. Various other events, including failure to maintain a minimum ratio of net cash flows to debt service (“DSCR”), may also cause a rapid amortization event. Borrowings under the Class A-2-I and Class A-2-II Notes bear interest at a fixed rate equal to 3.262% and 3.980% , respectively. If the Class A-2 Notes are not repaid or refinanced prior to their respective Anticipated Repayment Dates, incremental interest will accrue. Principal payments are required to be made on the Class A-2-I and Class A-2-II Notes equal to $7.5 million and $17.5 million , respectively, per calendar year, payable in quarterly installments. No principal payments will be required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the Indenture), is less than or equal to 5.0 to 1.0. Other events and transactions, such as certain asset sales and receipt of various insurance or indemnification proceeds, may trigger additional mandatory prepayments.
It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior to February 2020 , subject to two additional one-year extensions. Borrowings under the Variable Funding Notes bear interest at a rate equal to a base rate, a LIBOR rate plus 2.25% , or the lenders’ commercial paper funding rate plus 2.25% . If the Variable Funding Notes are not repaid prior to February 2020 , incremental interest will accrue. In addition, the Company is required to pay a 2.25% fee for letters of credit amounts outstanding and a commitment fee on the unused portion of the Variable Funding Notes which ranges from 0.50% to 1.00% based on utilization.
As of June 27, 2015 , approximately $748.1 million and $1.75 billion of principal were outstanding on the Class A-2-I Notes and Class A-2-II Notes, respectively. Total debt issuance costs incurred and capitalized in connection with the issuance of the Notes were $41.3 million . The effective interest rate, including the amortization of debt issuance costs, was 3.5% and 4.3% for the Class A-2-I Notes and Class A-2-II Notes, respectively, at June 27, 2015 . As of June 27, 2015 , $26.4 million of letters of

10


credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the Indenture. There were no amounts drawn down on these letters of credit.
The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments, including mandatory prepayments in the event of a change of control as defined in the Indenture and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information and similar matters. As noted above, the Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated DSCR, failure to maintain an aggregate level of Dunkin' Donuts U.S. retail sales on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.
Senior Credit Facility
In February 2014, the senior credit facility was amended, which resulted in a reduction of interest rates. As a result, during the first quarter of fiscal year 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 debt issuance 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 . As of December 27, 2014 , $1.82 billion of principal was outstanding on the term loans.
The proceeds from the issuance of the Class A-2 Notes were used to repay the remaining principal outstanding on the term loans. During the first quarter of fiscal year 2015, the Company recorded a loss on debt extinguishment of $20.6 million , consisting primarily of the write-off of the remaining original issuance discount and debt issuance costs related to the term loans.
(5) Derivative Instruments and Hedging Transactions
Effective December 23, 2014, the Company terminated all interest rate swap agreements with its counterparties in anticipation of the securitization transaction and related repayment of the outstanding term loans (see note 4). The total fair value of the interest rate swaps at the termination date was $6.3 million , excluding accrued interest owed to the counterparties of $1.0 million . The Company received cash proceeds, net of accrued interest, of $3.6 million in fiscal year 2014 and the remaining $1.7 million in the first quarter of fiscal year 2015. Upon termination, cash flow hedge accounting was discontinued and the cumulative pre-tax gain was recorded in accumulated other comprehensive loss, which is being amortized on a straight-line basis to interest expense in the consolidated statements of operations through November 23, 2017, the original maturity date of the swaps.
As of June 27, 2015 and December 27, 2014 , a pre-tax gain of $5.2 million and $6.2 million , respectively, was recorded in accumulated other comprehensive loss. During the next twelve months, the Company estimates that $2.1 million will be reclassified from accumulated other comprehensive loss as a reduction of interest expense.

11


The tables below summarize the effects of derivative instruments on the consolidated statements of operations and comprehensive income for the three and six months ended June 27, 2015 and June 28, 2014 (in thousands):
Three months ended June 27, 2015
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
 
$

 
535

 
Interest expense
 
$
(535
)
Income tax effect
 

 
(217
)
 
Provision for income taxes
 
217

Net of income taxes
 
$

 
318

 
 
 
$
(318
)
 
 
 
 
 
 
 
 
 
Three months ended June 28, 2014
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
(5,138
)
 
(1,171
)
 
Interest expense
 
$
(3,967
)
Income tax effect
 
2,090

 
480

 
Provision for income taxes
 
1,610

Net of income taxes
 
$
(3,048
)
 
(691
)
 
 
 
$
(2,357
)

Six months ended June 27, 2015
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
 
$

 
1,070

 
Interest expense
 
$
(1,070
)
Income tax effect
 

 
(434
)
 
Provision for income taxes
 
434

Net of income taxes
 
$

 
636

 
 
 
$
(636
)
 
 
 
 
 
 
 
 
 
Six months ended June 28, 2014
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
(7,173
)
 
(2,048
)
 
Interest expense
 
$
(5,125
)
Income tax effect
 
2,893

 
826

 
Provision for income taxes
 
2,067

Net of income taxes
 
$
(4,280
)
 
(1,222
)
 
 
 
$
(3,058
)
(6) Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
June 27,
2015
 
December 27,
2014
Gift card/certificate liability
$
104,146

 
151,127

Gift card breakage liability
26,640

 
25,893

Accrued salary and benefits
25,482

 
21,632

Accrued legal liabilities (see note 10(c))
20,212

 
24,648

Accrued interest
10,092

 
8,351

Accrued professional costs
3,529

 
9,381

Franchisee profit-sharing liability
12,686

 
1,074

Other
18,752

 
16,786

Total other current liabilities
$
221,539

 
258,892

The decrease in the gift card/certificate liability is driven by the seasonality of our gift card program.


12


(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-operated 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, which 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.
Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenue earned through certain licensing arrangements with third parties in which our brand names are used, revenue generated from online training programs for franchisees, and revenues from the sale of Dunkin’ Donuts products in certain international markets, all of which are not allocated to a specific segment. Revenues by segment were as follows (in thousands):
 
Revenues
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Dunkin’ Donuts U.S.
$
149,768

 
136,450

 
283,635

 
261,669

Dunkin’ Donuts International
5,421

 
4,521

 
11,999

 
8,806

Baskin-Robbins U.S.
13,519

 
12,952

 
23,391

 
22,073

Baskin-Robbins International
36,204

 
33,631

 
59,772

 
63,642

Total reportable segment revenues
204,912

 
187,554

 
378,797

 
356,190

Other
6,512

 
3,354

 
18,532

 
6,666

Total revenues
$
211,424

 
190,908

 
397,329

 
362,856

Expenses included in “Corporate” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services. Segment profit by segment was as follows (in thousands):
 
Segment profit
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Dunkin’ Donuts U.S.
$
108,127

 
100,981

 
201,533

 
190,813

Dunkin’ Donuts International
3,218

 
3,015

 
7,518

 
5,872

Baskin-Robbins U.S.
9,381

 
9,315

 
15,350

 
14,183

Baskin-Robbins International
12,797

 
11,724

 
20,768

 
21,223

Total reportable segments
133,523

 
125,035

 
245,169

 
232,091

Corporate
(34,754
)
 
(30,871
)
 
(56,196
)
 
(62,302
)
Interest expense, net
(24,979
)
 
(16,754
)
 
(47,021
)
 
(34,626
)
Amortization of other intangible assets
(6,181
)
 
(6,384
)
 
(12,381
)
 
(12,789
)
Long-lived asset impairment charges

 
(523
)
 
(264
)
 
(646
)
Loss on debt extinguishment and refinancing transactions

 

 
(20,554
)
 
(13,735
)
Other losses, net
(12
)
 
(113
)
 
(557
)
 
(86
)
Operating income adjustments excluded from reportable segments

 
300

 

 
300

Income before income taxes
$
67,597

 
70,690

 
108,196

 
108,207


13


Net income of equity method investments, including amortization of intangibles resulting from recording a step-up in the basis of our investment in B-R 31 Ice Cream Co., Ltd. (“BR Japan”), is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Income included in “Other” in the table below represents the reduction of depreciation and amortization, net of tax, related to BR Korea Co., Ltd. (“BR Korea”) as the result of an impairment charge recorded in fiscal year 2011 related to the underlying long-lived assets of BR Korea. Net income of equity method investments by reportable segment was as follows (in thousands):
 
Net income of equity method investments
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Dunkin’ Donuts International
$
560

 
672

 
849

 
976

Baskin-Robbins International
3,327

 
3,019

 
5,892

 
5,477

Total reportable segments
3,887

 
3,691

 
6,741

 
6,453

Other
64

 
357

 
157

 
695

Total net income of equity method investments
$
3,951

 
4,048

 
6,898

 
7,148

(8) Stockholders’ Equity (Deficit) and Redeemable Noncontrolling Interests
The changes in total stockholders’ equity (deficit) and redeemable noncontrolling interests were as follows (in thousands):
 
 
Total stockholders’ equity (deficit)
 
Redeemable noncontrolling interests
Balance at December 27, 2014
 
$
367,959

 
6,991

Net income (loss)
 
68,080

 
(206
)
Other comprehensive loss
 
(852
)
 

Dividends paid on common stock
 
(50,815
)
 

Exercise of stock options
 
6,364

 

Repurchases of common stock
 
(493,869
)
 

Share-based compensation expense
 
7,713

 

Excess tax benefits from share-based compensation
 
7,523

 

Purchase of redeemable noncontrolling interests
 
885

 
(6,785
)
Other, net
 
(875
)
 

Balance at June 27, 2015
 
$
(87,887
)
 

(a) Noncontrolling Interests
During the three months ended June 27, 2015, the Company purchased the remaining interests in a limited partnership that owns and operates Dunkin’ Donuts restaurants in the Dallas, Texas area for approximately $5.9 million from the noncontrolling owners, which is presented as a component of cash flows from financing activities in the consolidated statements of cash flows. The carrying value of the redeemable noncontrolling interests in excess of the consideration paid to noncontrolling owners was recorded as an increase to additional paid-in capital of $885 thousand .
Noncontrolling interests included within total stockholders' equity (deficit) in the consolidated balance sheets as of June 27, 2015 represent interests in a franchise entity that has been deemed a variable interest entity and for which the Company is the primary beneficiary.
(b) Treasury Stock
On February 5, 2015, the Company entered into a $400.0 million accelerated share repurchase agreement (the “ASR Agreement”) with a third-party financial institution. Pursuant to the terms of the ASR Agreement, the Company paid the financial institution $400.0 million in cash and received an initial delivery of 6,951,988 of the Company’s common stock in February 2015, representing an estimate of 80% of the total shares expected to be delivered under the ASR Agreement. Upon the final settlement of this ASR Agreement in fiscal June 2015, the Company received an additional delivery of 1,274,309 shares of its common stock based on a weighted average cost per share of $48.62 over the term of the ASR Agreement. Additionally, during the six months ended June 27, 2015 , the Company repurchased a total of 1,980,447 shares of common stock in the open market at a weighted average cost per share of $47.38 from existing stockholders.

14


Upon settlement of the ASR Agreement, the Company reclassified the previously unsettled amount of $80.0 million to common treasury stock with a corresponding increase in additional paid-in capital. The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $493.9 million during the six months ended June 27, 2015 for the shares repurchased under the ASR Agreement and in the open market, based on the fair market value of the shares on the dates of repurchase and direct costs incurred. During the six months ended June 27, 2015 , the Company retired 10,206,744 shares of treasury stock, resulting in decreases in treasury stock and additional paid-in capital of $493.9 million and $103.9 million , respectively, and an increase in accumulated deficit of $389.9 million .
(c) Equity Incentive Plans
During the six months ended June 27, 2015 , the Company granted stock options to purchase 1,621,899 shares of common stock and 21,101 restricted stock awards (“RSAs”) to certain employees, and 85,197 restricted stock units (“RSUs”) to certain employees and members of our board of directors. The stock options generally vest in equal annual amounts over a 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 $47.39 per share and have a weighted average grant-date fair value of $8.66 per share. The RSAs will vest in equal installments in February 2018 and February 2019, and have a grant-date fair value of $47.39 per share. The RSUs granted to employees and members of our board of directors vest over a three -year period and a one-year period, respectively, subsequent to the grant date and have a weighted average grant-date fair value of $46.18 per share.
Total compensation expense related to all share-based awards was $4.0 million and $3.1 million for the three months ended June 27, 2015 and June 28, 2014 , respectively, and $7.7 million and $4.9 million for the six months ended June 27, 2015 and June 28, 2014 , respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.
(d) Accumulated Other Comprehensive Loss
The changes in the components of accumulated other comprehensive loss were as follows (in thousands):
 
Effect of foreign currency translation
 
Unrealized gains (losses) on interest rate swaps
 
Unrealized loss on pension plan (1)
 
Other        
 
Accumulated other comprehensive loss
Balance at December 27, 2014
$
(13,738
)
 
3,716

 
(2,874
)
 
(1,081
)
 
(13,977
)
Other comprehensive income (loss), net
(2,440
)
 
(636
)
 
2,874

 
(650
)
 
(852
)
Balance at June 27, 2015
$
(16,178
)
 
3,080

 

 
(1,731
)
 
(14,829
)
(1) Upon settlement of the pension plan, unrealized losses were reclassified to general and administrative expenses, net, during the three months ended June 27, 2015 (see note 12).
(e) Dividends
The Company paid a quarterly dividend of $0.265 per share of common stock on March 18, 2015 and June 17, 2015 , totaling approximately $25.7 million and $25.1 million , respectively. On July 23, 2015 , we announced that our board of directors approved the next quarterly dividend of $0.265 per share of common stock payable September 2, 2015 to shareholders of record at the close of business on August 24, 2015 .

15



(9) Earnings per Share
The computation of basic and diluted earnings per common share is as follows:
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Net income attributable to Dunkin’ Brands—basic and diluted (in thousands)
$
42,318

 
46,191

 
67,949

 
69,147

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
95,729,949

 
105,914,402

 
98,000,825

 
106,208,129

Common—diluted
96,876,510

 
107,186,360

 
99,189,474

 
107,583,260

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.44

 
0.44

 
0.69

 
0.65

Common—diluted
0.44

 
0.43

 
0.69

 
0.64

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,146,561 and 1,271,958 equity awards for the three months ended June 27, 2015 and June 28, 2014 , respectively, and includes the dilutive effect of 1,188,649 and 1,375,131 equity awards for the six months ended June 27, 2015 and June 28, 2014 , 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 contingently issuable equity awards for which the contingent vesting criteria were not yet met as of the fiscal period end. As of June 27, 2015 and June 28, 2014 , there were 150,000 restricted shares that were contingently issuable and for which the contingent vesting criteria were not yet met as of the fiscal period end. Additionally, the weighted average number of common shares in the common diluted earnings per share calculation excludes 2,992,006 and 1,445,128 equity awards for the three months ended June 27, 2015 and June 28, 2014 , respectively, and 3,038,101 and 1,470,672 equity awards for the six months ended June 27, 2015 and June 28, 2014 , respectively, as they would be antidilutive.
(10) Commitments and Contingencies
(a) Guarantees
Financial Guarantees
The Company has established agreements with certain financial institutions whereby the Company’s franchisees can obtain financing with terms of approximately 3 to 10 years for various business purposes. Substantially all loan proceeds are used by the franchisees to finance store improvements, new store development, new central production locations, equipment purchases, related business acquisition costs, working capital, and other costs. In limited instances, the Company guarantees a portion of the payments and commitments of the franchisees, which is collateralized by the store equipment owned by the franchisee. Under the terms of the agreements, in the event that all outstanding borrowings come due simultaneously, the Company would be contingently liable for $1.9 million and $2.2 million at June 27, 2015 and December 27, 2014 , respectively. At June 27, 2015 and December 27, 2014 , there were no amounts under such guarantees that were due. The Company assesses the risk of performing under these guarantees for each franchisee relationship on a quarterly basis. As of June 27, 2015 and December 27, 2014 , the Company recorded an immaterial amount of reserves for such guarantees.
Supply Chain Guarantees
The Company entered into a third-party guarantee with a distribution facility that guarantees franchisees will purchase a certain volume of product over a 10 -year period. As product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. As of June 27, 2015 and December 27, 2014 , the Company was contingently liable for $3.6 million and $4.3 million , respectively, under this guarantee. Additionally, the Company has various supply chain contracts that generally provide for purchase commitments or exclusivity, the majority of which result in the Company being contingently liable upon early termination of the agreement or engaging with another supplier. As of June 27, 2015 and December 27, 2014 , the Company was contingently liable under such supply chain agreements for approximately $48.1 million and $51.5 million , respectively. The Company assesses the risk of performing under each of these guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and ability to extend contract terms, we accrued $507 thousand related to these commitments as of December 27, 2014 which is included in other current liabilities in the consolidated balance sheets. There was no accrual required as of June 27, 2015 related to these commitments.

16


Lease Guarantees
The Company is contingently liable on certain lease agreements typically resulting from assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants and the guarantee of certain other leases. These leases have varying terms, the latest of which expires in 2024 . As of June 27, 2015 and December 27, 2014 , the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $5.5 million and $6.3 million , respectively. Our franchisees are the primary lessees under the majority of these leases. The Company generally has cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of nonpayment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, we do not believe it is probable that the Company will be required to make payments under such leases, and we have not recorded a liability for such contingent liabilities.
(b) Letters of Credit
At June 27, 2015 and December 27, 2014 , the Company had standby letters of credit outstanding for a total of $26.4 million and $2.9 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, 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”). In June 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 , plus costs and interest, representing loss in value of the franchises and lost profits. The Company appealed the decision, and in April 2015, the Quebec Court of Appeals (Montreal) ruled to reduce the damages to approximately C $10.9 million , plus costs and interest. Similar claims have also been made against the Company by other former Dunkin’ Donuts franchisees in Canada. As a result of the Bertico litigation appellate ruling and assessment of similar claims, the Company reduced its aggregate legal reserves for the Bertico litigation and similar claims by approximately $2.8 million during the first quarter of fiscal year 2015, which is recorded within general and administrative expenses, net in the consolidated statements of operations, resulting in an estimated liability of $20.0 million as of June 27, 2015 . The Company has sought leave to appeal with the Supreme Court of Canada in the Bertico litigation.
Additionally, the Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. At June 27, 2015 and December 27, 2014 , contingent liabilities, excluding the Bertico litigation and related matters, totaling $215 thousand and $765 thousand , respectively, were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the probable losses which may be incurred in connection with these matters.
(11) Related-Party Transactions
(a) Advertising Funds
At June 27, 2015 and December 27, 2014 , the Company had a net payable of $12.5 million and $13.8 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 $2.5 million and $1.9 million for the three months ended June 27, 2015 and June 28, 2014 , respectively, and $4.9 million and $3.7 million for the six months ended June 27, 2015 and June 28, 2014 , respectively. Such management fees are included in the consolidated statements of operations as a reduction in general and administrative expenses, net.
The Company made net contributions to the advertising funds based on retail sales at company-operated restaurants of $353 thousand and $186 thousand during the three months ended June 27, 2015 and June 28, 2014 , respectively, and $618 thousand and $450 thousand during the six months ended June 27, 2015 and June 28, 2014 , respectively, which are included in company-operated restaurant expenses in the consolidated statements of operations. The Company also funded advertising fund initiatives that will benefit the gift card program of $937 thousand and $1.2 million during the three months ended June 27, 2015 and June 28, 2014 , respectively, and $1.4 million and $2.9 million during the six months ended June 27, 2015 and June 28, 2014 , respectively, which were contributed from the gift card breakage liability included within other current liabilities in the consolidated balance sheets (see note 6).

17


(b) Equity Method Investments
The Company recognized royalty income from its equity method investees as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
BR Japan
$
323

 
533

 
565

 
844

BR Korea
1,126

 
1,178

 
2,139

 
2,225

Coffee Alliance S.L. (“Spain JV”)
68

 
17

 
68

 
17

 
$
1,517

 
1,728

 
2,772

 
3,086

At June 27, 2015 and December 27, 2014 , the Company had $1.3 million and $1.4 million , respectively, of royalties receivable from its equity method investees, which were recorded in accounts receivable, net of allowance for doubtful accounts, in the consolidated balance sheets.
The Company made net payments to its equity method investees totaling approximately $831 thousand and $778 thousand during the three months ended June 27, 2015 and June 28, 2014 , respectively, and $1.8 million and $1.3 million during the six months ended June 27, 2015 and June 28, 2014 , respectively, primarily for the purchase of ice cream products and incentive payments.
As of June 27, 2015 and December 27, 2014 , the Company had $2.1 million and $2.5 million , respectively, of notes receivable from its Spain JV, of which $2.1 million and $2.3 million , were reserved, respectively. The notes receivable, net of the reserve, are included in other assets in the consolidated balance sheets.
The Company recognized sales of ice cream products of $999 thousand and $1.9 million during the three months ended June 27, 2015 and June 28, 2014 , respectively, and $1.4 million and $3.0 million during the six months ended June 27, 2015 and June 28, 2014 , respectively, in the consolidated statements of operations from the sale of ice cream products to Palm Oasis Ventures Pty. Ltd. (“Australia JV”), of which the Company owns a 20 percent equity interest. As of June 27, 2015 and December 27, 2014 , the Company had $2.3 million and $3.1 million , respectively, of net receivables from the Australia JV, consisting of accounts receivable and notes and other receivables, net of other current liabilities.
(12) Canadian Pension Plan
The Company sponsored a contributory defined benefit pension plan in Canada, The Baskin-Robbins Employees’ Pension Plan (“Canadian Pension Plan”), which provided retirement benefits for the majority of its Canadian employees. During the second quarter of fiscal year 2012, the Company’s board of directors approved a plan to close our Peterborough, Ontario, Canada manufacturing plant, where the majority of the Canadian Pension Plan participants were employed. As a result of the closure, the Company terminated the Canadian Pension Plan in fiscal year 2012, and the Financial Services Commission of Ontario approved the termination of the plan in the third quarter of 2014. During the three months ended June 27, 2015, the Company completed the final settlement of the plan by funding the plan deficit and distributing substantially all plan assets through lump-sum distributions to participants and the purchase of annuities. The settlement of the Canadian Pension Plan resulted in the recognition of a loss of $4.1 million , which was reclassified from accumulated other comprehensive loss to general and administrative expenses, net during the three months ended June 27, 2015.

18


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 risks 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 19,000 points of distribution in nearly 60 countries worldwide, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of June 27, 2015 , Dunkin’ Donuts had 11,460 global points of distribution with restaurants in 41 U.S. states and the District of Columbia and in 38 foreign countries. Baskin-Robbins had 7,635 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 and other products to franchisees in certain international markets, (iv) retail store revenue at our company-operated 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 47 company-operated points of distribution as of June 27, 2015 , we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators.
Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing, research and development, and innovation personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For the six months ended June 27, 2015 , franchisee contributions to the U.S. advertising funds were $196.9 million.
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

19

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applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and six -month periods ended June 27, 2015 and June 28, 2014 reflect the results of operations for the 13-week and 26-week periods ended on those dates. Operating results for the three- and six -month periods ended June 27, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2015 .
Selected Operating and Financial Highlights
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Franchisee-reported sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
1,954.4

 
1,813.2

 
3,698.8

 
3,428.1

Dunkin’ Donuts International
173.6

 
176.7

 
341.7

 
345.4

Baskin-Robbins U.S.
177.3

 
169.1

 
296.9

 
278.9

Baskin-Robbins International
359.5

 
377.3

 
638.4

 
659.4

Total franchisee-reported sales (a)
$
2,664.7

 
2,536.4

 
4,975.8

 
4,711.8

Systemwide sales growth
5.2
 %
 
5.7
 %
 
5.7
 %
 
5.0
 %
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
2.9
 %
 
1.8
 %
 
2.8
 %
 
1.5
 %
Dunkin’ Donuts International
(0.1
)%
 
(3.1
)%
 
0.8
 %
 
(2.7
)%
Baskin-Robbins U.S.
3.4
 %
 
4.2
 %
 
5.4
 %
 
2.6
 %
Baskin-Robbins International
(2.5
)%
 
(1.6
)%
 
(1.2
)%
 
(0.3
)%
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
211,424

 
190,908

 
397,329

 
362,856

Operating income
92,588

 
87,557

 
176,328

 
156,654

Adjusted operating income
102,971

 
94,164

 
190,576

 
169,789

Net income attributable to Dunkin’ Brands
42,318

 
46,191

 
67,949

 
69,147

Adjusted net income
48,548

 
50,155

 
88,830

 
85,783

(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. Franchisee-reported sales include sales at franchisee-operated restaurants, including joint ventures. While we do not record sales by franchisees or licensees as revenue and such sales are not included in our consolidated financial statements, we believe that these operating measures are 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 and in evaluating our performance relative to competitors. 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 fiscal year week.

Overall growth in systemwide sales of 5.2% and 5.7% for the three and six months ended June 27, 2015 , respectively, over the same periods in the prior fiscal year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 7.9% and 8.0% for the three and six months ended June 27, 2015 , respectively, as a result of 419 net new restaurants opened since June 28, 2014 and comparable store sales growth of 2.9% and 2.8% , respectively. The increase in comparable store sales was driven by increased average ticket and higher traffic resulting from our focus on operational excellence and product and marketing innovation, which resulted in sales growth of beverages, breakfast sandwiches, and donuts. Average ticket growth was positively impacted by pricing, offset by declining in-restaurant K-Cup® and packaged coffee categories.
Dunkin’ Donuts International systemwide sales declines of 1.8% and 1.1% for the three and six months ended June 27, 2015 , respectively, driven primarily by sales declines in South Korea and South America, offset by sales growth in Asia and the Middle East. Sales in Europe, South America, South Korea, and Southeast Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for the three and six months ended June 27, 2015 increased by approximately 6% and 5%, respectively. Dunkin’ Donuts International comparable store sales declined 0.1% and grew 0.8% for the three and six months ended June 27, 2015 , respectively. The decline for the three-month period was due to declines in Europe and South Korea, offset by gains in Southeast Asia. The comparable store sales growth for the six-month period was driven by growth in Southeast Asia,

20

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South America, and the Middle East, offset by a decline in Europe. Comparable store sales for the three- and six-month periods were negatively impacted as a result of the MERS outbreak in South Korea and a shift in the timing of Ramadan, which impacted the Middle East and some Southeast Asia markets.
Baskin-Robbins U.S. systemwide sales growth of 5.0% and 6.5% for the three and six months ended June 27, 2015 , respectively, resulting primarily from comparable store sales growth of 3.4% and 5.4% , respectively, driven by increased sales of cups and cones, beverages, desserts, and sundaes, as well as increased sales of cakes stimulated by strong year-over-year growth of online cake ordering.
Baskin-Robbins International systemwide sales declines of 4.7% and 3.2% for the three and six months ended June 27, 2015 , respectively, driven by unfavorable foreign exchange rates in Japan and South Korea, offset by increases in sales in Asia, the Middle East, and South Korea. On a constant currency basis, systemwide sales increased by approximately 4% for the three- and six-month periods. Baskin-Robbins International comparable store sales declines of 2.5% and 1.2% for the three and six months ended June 27, 2015 , respectively, were driven primarily by declines in Japan and South Korea. Comparable store sales in the Middle East had a negative impact on the three-month period, but were positive for the six-month period. Comparable store sales were negatively impacted as a result of the MERS outbreak in South Korea and a shift in the timing of Ramadan, which impacted the Middle East and some Southeast Asia markets.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and six months ended June 27, 2015 and June 28, 2014 were as follows:
 
June 27, 2015
 
June 28, 2014
Points of distribution, at period end:
 
 
 
Dunkin’ Donuts U.S.
8,240

 
7,821

Dunkin’ Donuts International
3,220

 
3,172

Baskin-Robbins U.S.
2,490

 
2,480

Baskin-Robbins International
5,145

 
4,932

Consolidated global points of distribution
19,095

 
18,405


 
Three months ended
 
Six months ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Net openings (closings) during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
80

 
75

 
158

 
144

Dunkin’ Donuts International
13

 
17

 
(8
)
 
(9
)
Baskin-Robbins U.S.
6

 
12

 
6

 
13

Baskin-Robbins International
55

 
47

 
77

 
99

Consolidated global net openings
154

 
151

 
233

 
247

Total revenues increased $20.5 million , or 10.7% , and $34.5 million , or 9.5% , for the three and six months ended June 27, 2015 , respectively, driven primarily by increases in franchise fees and royalty income of $8.9 million and $17.5 million , respectively, and other revenues of $4.6 million and $14.3 million , respectively, due primarily to licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement. Also contributing to the increase in revenues for the three- and six-month periods were increases in sales at company-operated restaurants of $3.0 million and $3.2 million , respectively, driven by a net increase in the number of company-operated restaurants. Additionally, sales of ice cream and other products increased $3.2 million for the three-month period.
Operating income and adjusted operating income for the three months ended June 27, 2015 increased $5.0 million , or 5.7% , and $8.8 million , or 9.4% , respectively, from the prior year period primarily as a result of the increases in franchise fees and royalty income, ice cream margin due primarily to the increase in sales, and licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement. The increases in revenues were offset by an increase in general and administrative expenses, net, primarily driven by incremental incentive compensation accruals, and a decrease in other operating income as the prior year period included a gain recognized in connection with the sale of the company-operated restaurants in the Atlanta market. Additionally, operating income for the three months ended June 27, 2015 was unfavorably impacted by costs incurred in connection with the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012.

21

Table of Contents

Operating income and adjusted operating income for the six months ended June 27, 2015 increased $19.7 million , or 12.6% , and $20.8 million , or 12.2% , respectively, from the prior year period primarily as a result of the increases in franchise fees and royalty income, licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement, and ice cream margin. The increases in revenues and ice cream margin were offset by an increase in general and administrative expenses, net, primarily driven by incremental incentive compensation accruals, and a decrease in other operating income due to the timing of the sale of real estate and a gain recognized in the prior year period in connection with the sale of the company-operated restaurants in the Atlanta market. Additionally, operating income for the six months ended June 27, 2015 included costs incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012, offset by a reduction in legal reserves for the Bertico litigation and related matters.
Net income attributable to Dunkin’ Brands decreased $3.9 million for the three months ended June 27, 2015 primarily as a result of an $8.3 million increase in interest expense driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed during January 2015, offset by the $5.0 million increase in operating income. Net income attributable to Dunkin’ Brands decreased $1.2 million for the six months ended June 27, 2015 primarily as a result of a $12.5 million increase in interest expense driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed during January 2015, an increase in loss on debt extinguishment and refinancing transactions of $6.8 million , and an increase in tax expense of $0.9 million , offset by the $19.7 million increase in operating income.
Adjusted net income decreased $1.6 million for the three months ended June 27, 2015 , primarily as a result of increases in interest expense and income tax expense, offset by the increase in adjusted operating income of $8.8 million . Adjusted net income increased $3.0 million for the six months ended June 27, 2015 , primarily as a result of the increase in adjusted operating income of $20.8 million , offset by increases in interest expense and income tax expense.
Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairments, and other non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. We use 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.

22

Table of Contents

Adjusted operating income and adjusted net income are reconciled from operating income and net income, respectively, determined under GAAP as follows:
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands)
Operating income
$
92,588

 
87,557

 
176,328

 
156,654

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,181

 
6,384

 
12,381

 
12,789

Long-lived asset impairment charges

 
523

 
264

 
646

Third-party product volume guarantee

 
(300
)
 

 
(300
)
Transaction-related costs (a)
127

 

 
281

 

Bertico and related litigation (b)

 

 
(2,753
)
 

Settlement of Canadian pension plan (c)
4,075

 

 
4,075

 

Adjusted operating income
$
102,971

 
94,164

 
190,576

 
169,789

Net income attributable to Dunkin’ Brands
$
42,318

 
46,191

 
67,949

 
69,147

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,181

 
6,384

 
12,381

 
12,789

Long-lived asset impairment charges

 
523

 
264

 
646

Third-party product volume guarantee

 
(300
)
 

 
(300
)
Transaction-related costs (a)
127

 

 
281

 

Bertico and related litigation (b)

 

 
(2,753
)
 

Settlement of Canadian pension plan (c)
4,075

 

 
4,075

 

Loss on debt extinguishment and refinancing transactions

 

 
20,554

 
13,735

Tax impact of adjustments (d)
(4,153
)
 
(2,643
)
 
(13,921
)
 
(10,748
)
State tax apportionment (e)

 

 

 
514

Adjusted net income
$
48,548

 
50,155

 
88,830

 
85,783

(a)
Represents non-capitalizable costs incurred as a result of the new securitized financing facility, which was completed in January 2015.
(b)
Represents a net reduction to legal reserves for the Bertico litigation and related matters, as a result of the Quebec Court of Appeals (Montreal) ruling to reduce the damages assessed against the Company in the Bertico litigation from approximately C$16.4 million to approximately C$10.9 million, plus costs and interest.
(c)
Represents costs incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012.
(d)
Tax impact of adjustments calculated at a 40% effective tax rate.
(e)
Represents tax expense recognized due to an increase in our overall state tax rate for a shift in the apportionment of income to certain state jurisdictions.

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.44

 
0.44

 
0.69

 
0.65

Common—diluted
0.44

 
0.43

 
0.69

 
0.64

Diluted adjusted earnings per share
0.50

 
0.47

 
0.90

 
0.80

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

23

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analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.
The following table sets forth the computation of diluted adjusted earnings per share:
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In thousands, except share and per share data)
Adjusted net income
$
48,548

 
50,155

 
88,830

 
85,783

Weighted average number of common shares—diluted
96,876,510

 
107,186,360

 
99,189,474

 
107,583,260

Diluted adjusted earnings per share
$
0.50

 
0.47

 
0.90

 
0.80


Results of operations
Consolidated results of operations
 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
Increase (Decrease)
 
June 27,
2015
 
June 28,
2014
 
Increase (Decrease)
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Franchise fees and royalty income
$
131,143

 
122,267

 
8,876

 
7.3
%
 
$
246,468

 
228,979

 
17,489

 
7.6
 %
Rental income
26,535

 
25,633

 
902

 
3.5
%
 
50,162

 
48,080

 
2,082

 
4.3
 %
Sales of ice cream and other products
35,410

 
32,220

 
3,190

 
9.9
%
 
58,478

 
61,061

 
(2,583
)
 
(4.2
)%
Sales at company-operated restaurants
7,727

 
4,736

 
2,991

 
63.2
%
 
14,285

 
11,052

 
3,233

 
29.3
 %
Other revenues
10,609

 
6,052

 
4,557

 
75.3
%
 
27,936

 
13,684

 
14,252

 
104.2
 %
Total revenues
$
211,424

 
190,908

 
20,516

 
10.7
%
 
$
397,329

 
362,856

 
34,473

 
9.5
 %
Total revenues for the three months ended June 27, 2015 increased $20.5 million , or 10.7% , due primarily to an increase in franchise fees and royalty income of $8.9 million as a result of Dunkin’ Donuts U.S. systemwide sales growth and an increase in other revenues of $4.6 million driven by licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement. Also contributing to the increase in revenues were increases in sales of ice cream and other products of $3.2 million , due primarily to sales of ice cream in the Middle East, and an increase in sales at company-operated restaurants of $3.0 million driven by a net increase in the number of company-operated restaurants.
Total revenues for the six months ended June 27, 2015 increased $34.5 million , or 9.5% , due primarily to an increase in franchise fees and royalty income of $17.5 million as a result of Dunkin’ Donuts U.S. systemwide sales growth, as well as an increase in other revenues of $14.3 million driven by licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement and a settlement reached with a master licensee which resulted in the recovery of prior period royalty income and franchise fees. Also contributing to the increase in revenues was an increase in sales at company-operated restaurants of $3.2 million driven by a net increase in the number of company-operated restaurants.

24

Table of Contents

 
Three months ended
 
Six months ended
 
June 27,
2015
 
June 28,
2014
 
Increase (Decrease)
 
June 27,
2015
 
June 28,
2014
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Occupancy expenses—franchised restaurants
$
13,717

 
13,560

 
157

 
1.2
 %
 
$
27,235

 
26,572

 
663

 
2.5
 %
Cost of ice cream and other products
22,876

 
23,181

 
(305
)
 
(1.3
)%
 
38,222

 
43,112

 
(4,890
)
 
(11.3
)%
Company-operated restaurant expenses
7,757

 
4,904

 
2,853

 
58.2
 %
 
14,615

 
11,267

 
3,348

 
29.7
 %
General and administrative expenses, net
68,349

 
56,195

 
12,154

 
21.6
 %
 
126,189

 
115,726

 
10,463

 
9.0
 %
Depreciation and amortization
11,172

 
11,314

 
(142
)
 
(1.3
)%
 
22,482

 
22,632