Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 08/02/2016 16:23:08)
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 25, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from              to             
Commission file number 001-35258  
 
 
 
DUNKIN’ BRANDS GROUP, INC.
(Exact name of registrant as specified in its charter)  
 
 
 
Delaware
 
20-4145825
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
130 Royall Street
Canton, Massachusetts 02021
(Address of principal executive offices) (zip code)
(781) 737-3000
(Registrants’ telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
 
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   x     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).     YES   ¨     NO   x
As of July 29, 2016 , 91,743,575 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 25,
2016
 
December 26,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
248,206

 
260,430

Restricted cash
72,150

 
71,917

Accounts receivable, net of allowance for doubtful accounts of $5,461 and $5,627 as of June 25, 2016 and December 26, 2015, respectively
56,729

 
53,142

Notes and other receivables, net of allowance for doubtful accounts of $313 and $1,007 as of June 25, 2016 and December 26, 2015, respectively
31,294

 
75,218

Restricted assets of advertising funds
42,718

 
38,554

Prepaid income taxes
16,345

 
23,899

Prepaid expenses and other current assets
33,222

 
34,664

Total current assets
500,664

 
557,824

Property and equipment, net of accumulated depreciation of $119,180 and $111,625 as of June 25, 2016 and December 26, 2015, respectively
179,349

 
182,614

Equity method investments
112,274

 
106,878

Goodwill
889,070

 
889,588

Other intangible assets, net of accumulated amortization of $248,930 and $239,715 as of June 25, 2016 and December 26, 2015, respectively
1,389,893

 
1,401,208

Other assets
59,145

 
59,007

Total assets
$
3,130,395

 
3,197,119

Liabilities and Stockholders’ Deficit
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
25,000

 
25,000

Capital lease obligations
551

 
546

Accounts payable
18,061

 
18,663

Liabilities of advertising funds
51,003

 
50,189

Deferred income
34,865

 
31,535

Other current liabilities
224,063

 
292,859

Total current liabilities
353,543

 
418,792

Long-term debt, net
2,411,234

 
2,420,600

Capital lease obligations
7,617

 
7,497

Unfavorable operating leases acquired
12,170

 
12,975

Deferred income
13,925

 
15,619

Deferred income taxes, net
468,139

 
476,510

Other long-term liabilities
67,461

 
65,869

Total long-term liabilities
2,980,546

 
2,999,070

Commitments and contingencies (note 10)

 

Stockholders’ equity (deficit):
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 91,746,263 issued and 91,719,371 outstanding as of June 25, 2016; 92,668,211 shares issued and 92,641,044 shares outstanding as of December 26, 2015
92

 
92

Additional paid-in capital
849,764

 
876,557

Treasury stock, at cost; 26,892 shares and 27,167 shares as of June 25, 2016 and December 26, 2015, respectively
(1,064
)
 
(1,075
)
Accumulated deficit
(1,034,170
)
 
(1,076,479
)
Accumulated other comprehensive loss
(18,316
)
 
(20,046
)
Total stockholders’ deficit of Dunkin’ Brands
(203,694
)
 
(220,951
)
Noncontrolling interests

 
208

Total stockholders’ deficit
(203,694
)
 
(220,743
)
Total liabilities and stockholders’ deficit
$
3,130,395

 
3,197,119


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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Revenues:
 
 
 
 
 
 
 
Franchise fees and royalty income
$
137,195

 
131,143

 
260,978

 
246,468

Rental income
25,769

 
26,535

 
48,994

 
50,162

Sales of ice cream and other products
33,966

 
35,410

 
59,857

 
58,478

Sales at company-operated restaurants
4,643

 
7,727

 
10,313

 
14,285

Other revenues
14,736

 
10,609

 
25,943

 
27,936

Total revenues
216,309

 
211,424

 
406,085

 
397,329

Operating costs and expenses:
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
13,614

 
13,717

 
26,810

 
27,235

Cost of ice cream and other products
22,827

 
22,876

 
40,061

 
38,222

Company-operated restaurant expenses
5,297

 
7,757

 
11,790

 
14,615

General and administrative expenses, net
63,459

 
68,349

 
124,654

 
126,189

Depreciation
5,178

 
4,991

 
10,311

 
10,101

Amortization of other intangible assets
5,568

 
6,181

 
11,329

 
12,381

Long-lived asset impairment charges
4

 

 
97

 
264

Total operating costs and expenses
115,947

 
123,871

 
225,052

 
229,007

Net income of equity method investments
3,717

 
3,951

 
6,681

 
6,898

Other operating income, net
2,062

 
1,084

 
3,760

 
1,108

Operating income
106,141

 
92,588

 
191,474

 
176,328

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
124

 
116

 
273

 
238

Interest expense
(24,972
)
 
(25,095
)
 
(49,853
)
 
(47,259
)
Loss on debt extinguishment and refinancing transactions

 

 

 
(20,554
)
Other losses, net
(102
)
 
(12
)
 
(472
)
 
(557
)
Total other expense, net
(24,950
)
 
(24,991
)
 
(50,052
)
 
(68,132
)
Income before income taxes
81,191

 
67,597

 
141,422

 
108,196

Provision for income taxes
31,601

 
25,148

 
54,678

 
40,322

Net income including noncontrolling interests
49,590

 
42,449

 
86,744

 
67,874

Net income (loss) attributable to noncontrolling interests

 
131

 

 
(75
)
Net income attributable to Dunkin’ Brands
$
49,590

 
42,318

 
86,744

 
67,949

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.54

 
0.44

 
0.95

 
0.69

Common—diluted
0.54

 
0.44

 
0.94

 
0.69

Cash dividends declared per common share
0.30

 
0.27

 
0.60

 
0.53

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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Net income including noncontrolling interests
$
49,590

 
42,449

 
86,744

 
67,874

Other comprehensive income (loss), net:
 
 
 
 
 
 


Effect of foreign currency translation, net of deferred tax expense (benefit) of $(231) and $35 for the three months ended June 25, 2016 and June 27, 2015, respectively, and $(429) and $293 for the six months ended June 25, 2016 and June 27, 2015, respectively.
312

 
(3,819
)
 
2,569

 
(2,440
)
Effect of interest rate swaps, net of deferred tax benefit of $217 for each of the three months ended June 25, 2016 and June 27, 2015 and $434 for each of the six months ended June 25, 2016 and June 27, 2015
(318
)
 
(318
)
 
(636
)
 
(636
)
Effect of pension plan, net of deferred tax expense of $877 and $866 for the three and six months ended June 27, 2015, respectively

 
2,844

 

 
2,874

Other, net
(178
)
 
(113
)
 
(203
)
 
(650
)
Total other comprehensive income (loss), net
(184
)
 
(1,406
)
 
1,730

 
(852
)
Comprehensive income including noncontrolling interests
49,406

 
41,043

 
88,474

 
67,022

Comprehensive income (loss) attributable to noncontrolling interests

 
131

 

 
(75
)
Comprehensive income attributable to Dunkin’ Brands
$
49,406


40,912

 
88,474

 
67,097

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 25,
2016
 
June 27,
2015
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
86,744

 
67,874

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,640

 
22,482

Amortization of debt issuance costs and original issue discount
3,134

 
2,905

Loss on debt extinguishment and refinancing transactions

 
20,554

Deferred income taxes
(7,590
)
 
(13,296
)
Provision for bad debt
170

 
681

Share-based compensation expense
8,307

 
7,713

Net income of equity method investments
(6,681
)
 
(6,898
)
Dividends received from equity method investments
4,441

 
5,283

Gain on sale of real estate and company-operated restaurants
(3,754
)
 
(998
)
Other, net
(829
)
 
2,429

Change in operating assets and liabilities:
 
 
 
Restricted cash
(289
)
 
(64,918
)
Accounts, notes, and other receivables, net
39,434

 
11,664

Prepaid income taxes, net
7,632

 
17,744

Other current assets
(3,470
)
 
(5,771
)
Accounts payable
(1,142
)
 
653

Other current liabilities
(68,590
)
 
(35,502
)
Liabilities of advertising funds, net
(2,902
)
 
(829
)
Deferred income
1,632

 
3,697

Other, net
2,156

 
12,210

Net cash provided by operating activities
80,043

 
47,677

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(6,775
)
 
(14,362
)
Proceeds from sale of real estate and company-operated restaurants
7,427

 
1,586

Other, net
(872
)
 
(2,887
)
Net cash used in investing activities
(220
)
 
(15,663
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt

 
2,500,000

Repayment of long-term debt
(12,500
)
 
(1,825,273
)
Payment of debt issuance and other debt-related costs

 
(41,301
)
Dividends paid on common stock
(54,851
)
 
(50,815
)
Repurchases of common stock, including accelerated share repurchases
(30,000
)

(493,869
)
Change in restricted cash
50

 
(6,866
)
Exercise of stock options
3,933

 
6,364

Excess tax benefits from share-based compensation
1,804

 
7,523

Other, net
(559
)
 
(6,910
)
Net cash provided by (used in) financing activities
(92,123
)
 
88,853

Effect of exchange rates on cash and cash equivalents
76

 
(351
)
Increase (decrease) in cash and cash equivalents
(12,224
)
 
120,516

Cash and cash equivalents, beginning of period
260,430

 
208,080

Cash and cash equivalents, end of period
$
248,206

 
328,596

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
53,174

 
28,599

Cash paid for interest
47,223

 
43,075

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,096

 
1,139

Purchase of leaseholds in exchange for capital lease obligations
389

 

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 25, 2016 , the consolidated statements of operations and comprehensive income for the three and six months ended June 25, 2016 and June 27, 2015 , and the consolidated statements of cash flows for the six months ended June 25, 2016 and June 27, 2015 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 26, 2015 , 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 the three- and six-month periods ended June 25, 2016 and June 27, 2015 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 25, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016 . The data periods contained within the three- and twelve-month periods ending December 31, 2016 will reflect the results of operations for the 14-week and 53-week periods ending on that date.
(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 holds restricted cash which primarily represents (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

7


which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis as of June 25, 2016 and December 26, 2015 are summarized as follows (in thousands):
 
June 25, 2016
 
December 26, 2015
 
Significant other observable inputs (Level 2)
 
Total
 
Significant other observable inputs (Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
Company-owned life insurance
$
5,752

 
5,752

 
5,802

 
5,802

Total assets
$
5,752

 
5,752

 
5,802

 
5,802

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
9,932

 
9,932

 
9,068

 
9,068

Total liabilities
$
9,932

 
9,932

 
9,068

 
9,068

The deferred compensation liabilities relate 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 value. As such, the company-owned life insurance policies are classified within Level 2, as defined under U.S. GAAP.
The carrying value, net of unamortized debt issuance costs, and estimated fair value of long-term debt as of June 25, 2016 and December 26, 2015 were as follows (in thousands):
 
June 25, 2016
 
December 26, 2015
 
Carrying value
 
Estimated fair value
 
Carrying value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
2,436,234

 
2,524,938

 
2,445,600

 
2,443,687

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 and other 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. As of June 25, 2016 and December 26, 2015 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 24% and 13% , respectively, of total accounts and notes receivable. For each of the three months ended June 25, 2016 and June 27, 2015 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 11% of total revenues. For the six months ended June 25, 2016 , 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 six months ended June 27, 2015 .
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 25, 2016 and December 26, 2015 , net receivables for one of these third parties accounted for approximately 11% and 13% , respectively, of total accounts and notes receivable.

8


(f) Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance for employee share-based compensation which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, forfeiture estimates, statutory tax withholding requirements, and classification in the statements of cash flows. This guidance is effective for the Company in fiscal year 2017 with early adoption permitted. The Company expects to adopt this new guidance in fiscal year 2017. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets. During fiscal year 2015 and the six months ended June 25, 2016, $11.5 million and $1.8 million , respectively, of excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes if this new guidance had been adopted as of the respective dates. The Company is further evaluating the impact the adoption of this new guidance will have on the Company’s accounting policies, consolidated financial statements, and related disclosures, as well as the transition methods.
In March 2016, the FASB issued new guidance related to the recognition of breakage for certain prepaid stored-value products which requires breakage for those liabilities to be recognized in a way that is consistent with how it will be recognized under the new revenue recognition guidance, eliminating any current or future diversity in practice. This guidance is effective for the Company in fiscal year 2018 with early adoption permitted. The Company does not expect the adoption of this guidance to have any impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued new guidance for lease accounting, which replaces existing lease guidance. The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This guidance is effective for the Company in fiscal year 2019 with early adoption permitted, and modified retrospective application is required. The Company expects to adopt this new guidance in fiscal year 2019 and is currently evaluating the impact the adoption of this new guidance will have on the Company’s consolidated financial statements and related disclosures. The Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption.
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. The new guidance is effective for the Company in fiscal year 2018 with early adoption permitted in fiscal year 2017. The Company expects to adopt this new guidance in fiscal year 2018 and is currently evaluating the impact the adoption of this new guidance will have on the Company’s accounting policies, consolidated financial statements, and related disclosures, and has not yet selected a transition method.
(g) 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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Royalty income
$
126,838

 
120,757

 
240,204

 
226,878

Initial franchise fees and renewal income
10,357

 
10,386

 
20,774

 
19,590

Total franchise fees and royalty income
$
137,195

 
131,143

 
260,978

 
246,468


9


The changes in franchised and company-operated points of distribution were as follows:
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution in operation—beginning of period
19,430

 
18,898

 
19,308

 
18,821

Franchised points of distribution—opened
377

 
381

 
678

 
679

Franchised points of distribution—closed
(179
)
 
(231
)
 
(368
)
 
(450
)
Net transfers from (to) company-operated points of distribution
12

 

 
22

 
(2
)
Franchised points of distribution in operation—end of period
19,640

 
19,048

 
19,640

 
19,048

Company-operated points of distribution—end of period
29

 
47

 
29

 
47

Total systemwide points of distribution—end of period
19,669

 
19,095

 
19,669

 
19,095

(4) Debt
Securitized Financing Facility
In January 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 . In 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 the Master Issuer to borrow up to $100.0 million on a revolving basis. The Variable Funding Notes may also be used to issue 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 of the Master Issuer, 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 fixed rates 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 or prior to the end of an extension period, if applicable, 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 25, 2016 , approximately $740.6 million and $1.73 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, as of June 25, 2016 .

10


As of June 25, 2016 , $25.9 million of letters of 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 as of June 25, 2016 .
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
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 senior credit facility, which was repaid in the first quarter of fiscal year 2015 with the proceeds of the issuance of the Class A-2 Notes.
(5) Derivative Instruments and Hedging Transactions
In December 2014, the Company terminated all interest rate swap agreements with its counterparties. 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 . 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 25, 2016 and December 26, 2015 , a pre-tax gain of $3.0 million and $4.1 million , respectively, was recorded in accumulated other comprehensive loss. During the next twelve months, the Company estimates that $2.2 million will be reclassified from accumulated other comprehensive loss as a reduction of interest expense.
The tables below summarize the effects of derivative instruments on the consolidated statements of operations and comprehensive income, which were equivalent for the three months ended June 25, 2016 and June 27, 2015 and were equivalent for the six months ended June 25, 2016 and June 27, 2015 (in thousands):
Three months ended June 25, 2016 and June 27, 2015
Derivatives designated as cash flow hedging instruments
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statements 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
)
 
 
 
 
 
 
 

Six months ended June 25, 2016 and June 27, 2015
Derivatives designated as cash flow hedging instruments
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statements 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
)
 
 
 
 
 
 
 


11


(6) Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
June 25,
2016
 
December 26,
2015
Gift card/certificate liability
$
123,269

 
176,080

Gift card breakage liability
19,700

 
23,955

Accrued payroll and benefits
22,822

 
29,540

Accrued legal liabilities (see note 10(c))
11,494

 
18,267

Accrued interest
9,474

 
9,522

Accrued professional costs
3,957

 
4,814

Franchisee profit-sharing liability
9,197

 
8,406

Other
24,150

 
22,275

Total other current liabilities
$
224,063

 
292,859

The decrease in the gift card/certificate liability was driven by the seasonality of our gift card program.
(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 and franchise fees. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement and rental income. Dunkin’ Donuts U.S. also derives revenue through retail sales at company-operated restaurants and rental income. Baskin-Robbins International primarily derives its revenues from the sales of ice cream and other 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.
Beginning in the first quarter of fiscal year 2016, certain segment profit amounts in the tables below have been reclassified as a result of the realignment of the Company’s organizational structure to better support its segment operations, including the allocation of previously unallocated costs. Additionally, revenues and segment profit amounts related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility. Prior period amounts in the tables below have been revised to reflect these changes for all periods presented.

12


Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenues earned through certain licensing arrangements with third parties in which our brand names are used, including the licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement, revenues 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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Dunkin’ Donuts U.S.
$
153,660

 
149,768

 
292,473

 
283,635

Dunkin’ Donuts International
5,218

 
5,421

 
12,468

 
11,999

Baskin-Robbins U.S.
13,738

 
14,152

 
24,299

 
24,461

Baskin-Robbins International
34,840

 
35,572

 
61,674

 
58,702

Total reportable segment revenues
207,456

 
204,913

 
390,914

 
378,797

Other
8,853

 
6,511

 
15,171

 
18,532

Total revenues
$
216,309

 
211,424

 
406,085

 
397,329

Amounts included in “Corporate” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services, net of “Other” revenues reported above. Segment profit by segment was as follows (in thousands):
 
Segment profit
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Dunkin’ Donuts U.S.
$
116,085

 
108,308

 
216,529

 
202,022

Dunkin’ Donuts International
1,975

 
2,543

 
5,733

 
6,217

Baskin-Robbins U.S.
10,738

 
9,590

 
18,038

 
15,678

Baskin-Robbins International
11,079

 
11,764

 
19,463

 
18,821

Total reportable segments
139,877

 
132,205

 
259,763

 
242,738

Corporate
(28,164
)
 
(33,436
)
 
(56,863
)
 
(53,765
)
Interest expense, net
(24,848
)
 
(24,979
)
 
(49,580
)
 
(47,021
)
Amortization of other intangible assets
(5,568
)
 
(6,181
)
 
(11,329
)
 
(12,381
)
Long-lived asset impairment charges
(4
)
 

 
(97
)
 
(264
)
Loss on debt extinguishment and refinancing transactions

 

 

 
(20,554
)
Other losses, net
(102
)
 
(12
)
 
(472
)
 
(557
)
Income before income taxes
$
81,191

 
67,597

 
141,422

 
108,196

Net income of equity method investments is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Amounts reported as “Other” in the segment profit table below include the reduction in depreciation and amortization, net of tax, reported by our equity method investees as a result of previously recorded impairment charges. 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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Dunkin’ Donuts International
$
304

 
560

 
478

 
849

Baskin-Robbins International
2,303

 
3,327

 
4,378

 
5,892

Total reportable segments
2,607

 
3,887

 
4,856

 
6,741

Other
1,110

 
64

 
1,825

 
157

Total net income of equity method investments
$
3,717

 
3,951

 
6,681

 
6,898


13


(8) Stockholders’ Deficit
The changes in total stockholders’ deficit were as follows (in thousands):
 
 
Total stockholders’ deficit
Balance as of December 26, 2015
 
$
(220,743
)
Net income
 
86,744

Other comprehensive income
 
1,730

Dividends paid on common stock
 
(54,851
)
Exercise of stock options
 
3,933

Repurchases of common stock
 
(30,000
)
Share-based compensation expense
 
8,307

Excess tax benefits from share-based compensation
 
1,804

Deconsolidation of noncontrolling interest
 
(208
)
Other, net
 
(410
)
Balance as of June 25, 2016
 
$
(203,694
)
(a) Treasury Stock
On October 22, 2015, the Company entered into an accelerated share repurchase agreement (the “October 2015 ASR Agreement”) with a third-party financial institution. Pursuant to the terms of the October 2015 ASR Agreement, the Company paid the financial institution $125.0 million in cash and received an initial delivery of 2,527,167 shares of the Company’s common stock in fiscal year 2015, representing an estimate of 80% of the total shares expected to be delivered under the October 2015 ASR Agreement. Upon final settlement of the October 2015 ASR Agreement during the first quarter of fiscal year 2016, the Company received an additional delivery of 483,913 shares of its common stock based on a weighted average cost per share of $41.51 over the term of the October 2015 ASR Agreement.
On February 4, 2016, the Company entered into an accelerated share repurchase agreement (the “February 2016 ASR Agreement”) with a third-party financial institution. Pursuant to the terms of the February 2016 ASR Agreement, the Company paid the financial institution $30.0 million in cash and received 702,239 shares of the Company’s common stock during the first quarter of fiscal year 2016 based on a weighted average cost per share of $42.72 over the term of the February 2016 ASR Agreement.
The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $55.0 million during the six months ended June 25, 2016 for the shares repurchased under the accelerated share repurchase agreements, based on the cost of the shares on the dates of repurchase and any direct costs incurred. During the six months ended June 25, 2016 , the Company retired 1,186,152 shares of treasury stock, resulting in decreases in treasury stock and additional paid-in capital of $55.0 million and $11.3 million , respectively, and an increase in accumulated deficit of $43.7 million .
(b) Equity Incentive Plans
During the six months ended June 25, 2016 , the Company granted stock options to purchase 1,384,294 shares of common stock and 93,666 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 $44.35 per share and have a weighted average grant-date fair value of $7.40 per share. The RSUs granted to employees and members of our board of directors vest in equal annual amounts 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 $42.30 per share.
In addition, the Company granted 92,487 performance stock units (“PSUs”) to certain employees during the first quarter of fiscal year 2016. These PSUs are eligible to vest on February 23, 2019, subject to two separate vesting conditions. Of the total PSUs granted, 39,684 PSUs are subject to a service condition and 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 companies in the S&P 500 Composite Index (“TSR PSUs”). The remaining 52,803 PSUs granted are subject to a service condition and a performance vesting condition linked to adjusted operating income growth over the performance period (“AOI PSUs”). The

14


maximum vesting percentage that could be realized for each of the TSR PSUs and the AOI PSUs is 200% based on the level of performance achieved for the respective awards. All of the PSUs are also subject to a one-year post-vesting holding period. The TSR PSUs 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 $55.36 per share. The AOI PSUs have a grant-date fair value of $41.61 per share.
Total compensation expense related to all share-based awards was $4.2 million and $4.0 million for the three months ended June 25, 2016 and June 27, 2015 , respectively, and $8.3 million and $7.7 million for the six months ended June 25, 2016 and June 27, 2015 , respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.
(c) 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 on interest rate swaps
 
Other        
 
Accumulated other comprehensive gain (loss)
Balance as of December 26, 2015
$
(20,459
)
 
2,443

 
(2,030
)
 
(20,046
)
Other comprehensive income (loss), net
2,569

 
(636
)
 
(203
)
 
1,730

Balance as of June 25, 2016
$
(17,890
)
 
1,807

 
(2,233
)
 
(18,316
)
(d) Dividends
The Company paid a quarterly dividend of $0.30 per share of common stock on March 16, 2016 and June 8, 2016 , totaling approximately $27.4 million and $27.5 million , respectively. On July 21, 2016 , the Company announced that its board of directors approved the next quarterly dividend of $0.30 per share of common stock payable August 31, 2016 to shareholders of record as of the close of business on August 22, 2016 .
(9) Earnings per Share
The computation of basic and diluted earnings per common share is as follows:
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Net income attributable to Dunkin’ Brands—basic and diluted (in thousands)
$
49,590

 
42,318

 
86,744

 
67,949

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
91,504,563

 
95,729,949

 
91,594,704

 
98,000,825

Common—diluted
92,451,913

 
96,876,510

 
92,535,091

 
99,189,474

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.54

 
0.44

 
0.95

 
0.69

Common—diluted
0.54

 
0.44

 
0.94

 
0.69

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 947,350 and 1,146,561 equity awards for the three months ended June 25, 2016 and June 27, 2015 , respectively, and includes the dilutive effect of 940,387 and 1,188,649 equity awards for the six months ended June 25, 2016 and June 27, 2015 , 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 25, 2016 and June 27, 2015 , 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 4,210,753 and 2,992,006 equity awards for the three months ended June 25, 2016 and June 27, 2015 , respectively, and 4,361,416 and 3,038,101 equity awards for the six months ended June 25, 2016 and June 27, 2015 , respectively, as they would be antidilutive.

15


(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 $2.0 million as of June 25, 2016 and December 26, 2015 , respectively. As of June 25, 2016 and December 26, 2015 , 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 25, 2016 , the Company recorded an immaterial amount of reserves for such guarantees. No reserves were recorded as of December 26, 2015 .
Supply Chain Guarantees
The Company has various supply chain agreements that provide for purchase commitments, the majority of which result in the Company being contingently liable upon early termination of the agreement. As of June 25, 2016 and December 26, 2015 , the Company was contingently liable under such supply chain agreements for approximately $126.9 million and $157.8 million , respectively. For certain supply chain commitments, as product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. 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, there was no accrual required as of June 25, 2016 or December 26, 2015 related to these commitments.
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 refranchising certain restaurants and the guarantee of certain other leases. These leases have varying terms, the latest of which expires in 2024 . As of June 25, 2016 and December 26, 2015 , the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $3.3 million and $3.7 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
As of June 25, 2016 and December 26, 2015 , the Company had standby letters of credit outstanding for a total of $25.9 million and $26.3 million , respectively. There were no amounts drawn down on these letters of credit as of June 25, 2016 and December 26, 2015 .
(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. The Company sought leave to appeal the decision with the Supreme Court of Canada, but was denied in March 2016. 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 was recorded within general and administrative expenses, net in the consolidated statements of operations. During the three months ended June 25, 2016 , the Company reached a final agreement on costs and interest with the plaintiffs in the Bertico litigation and paid approximately C$10.0 million with respect to this matter. An additional C$7.5 million is being held in escrow for the remaining amounts owed to plaintiffs associated with the Bertico litigation, and remains

16


within other current liabilities, with a corresponding offset within other current assets, in the consolidated balance sheets as of June 25, 2016 .
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. As of June 25, 2016 and December 26, 2015 , $11.5 million and $18.3 million , respectively, is recorded within other current liabilities in the consolidated balance sheets in connection with all outstanding litigation, including the Bertico litigation.
(11) Related-Party Transactions
(a) Advertising Funds
As of June 25, 2016 and December 26, 2015 , the Company had a net payable of $8.3 million and $11.6 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 $2.5 million for each of the three months ended June 25, 2016 and June 27, 2015 and $4.8 million and $4.9 million for the six months ended June 25, 2016 and June 27, 2015 , respectively. Such management fees are included in the consolidated statements of operations as a reduction in general and administrative expenses, net.
Additionally, the Company made contributions to the advertising funds based on retail sales at company-operated restaurants of $233 thousand and $353 thousand during the three months ended June 25, 2016 and June 27, 2015 , respectively, and $514 thousand and $618 thousand during the six months ended June 25, 2016 and June 27, 2015 , respectively, which are included in company-operated restaurant expenses in the consolidated statements of operations. The Company also funded advertising fund initiatives of $495 thousand and $937 thousand during the three months ended June 25, 2016 and June 27, 2015 , respectively, and $1.0 million and $1.4 million during the six months ended June 25, 2016 and June 27, 2015 , respectively, which were contributed from the gift card breakage liability included within other current liabilities in the consolidated balance sheets (see note 6).
(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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
B-R 31 Ice Cream Co., Ltd.
$
570

 
323

 
891

 
565

BR-Korea Co., Ltd.
968

 
1,126

 
1,861

 
2,139

Coffee Alliance S.L. ("Spain JV")

 
68

 

 
68

 
$
1,538

 
1,517

 
2,752

 
2,772

As of June 25, 2016 and December 26, 2015 , the Company had $1.2 million and $1.1 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 $805 thousand and $831 thousand during the three months ended June 25, 2016 and June 27, 2015 , respectively, and $1.6 million and $1.8 million during the six months ended June 25, 2016 and June 27, 2015 , respectively, primarily for the purchase of ice cream and other products.
As of June 25, 2016 and December 26, 2015 , the Company had $2.1 million of notes receivable from its Spain JV, which were fully reserved as of the respective dates. The notes receivable, net of the reserve, are included in other assets in the consolidated balance sheets.
The Company recognized $1.3 million and $999 thousand during the three months ended June 25, 2016 and June 27, 2015 , respectively, and $1.7 million and $1.4 million during the six months ended June 25, 2016 and June 27, 2015 , respectively, in the consolidated statements of operations from the sale of ice cream and other products to Palm Oasis Ventures Pty. Ltd. (“Australia JV”), of which the Company owns a 20% equity interest. As of June 25, 2016 and December 26, 2015 , the

17


Company had $2.2 million and $3.1 million , respectively, of net receivables from the Australia JV, consisting of accounts receivable and notes and other receivables, net of current liabilities.

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,” or “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 more than 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 25, 2016 , Dunkin’ Donuts had 11,941 global points of distribution with restaurants in 41 U.S. states and the District of Columbia and in 43 foreign countries. Baskin-Robbins had 7,728 global points of distribution as of the same date, with restaurants in 43 U.S. states, the District of Columbia, Puerto Rico, and 48 foreign countries.
We are organized into four 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 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 (such as retail packaged coffee and Dunkin’ Donuts K-Cup® pods), the licensing of the rights to manufacture Baskin-Robbins ice cream products to a third party for sale to U.S. franchisees, refranchising gains, transfer fees from franchisees, and online training fees.
Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With only 29 company-operated points of distribution as of June 25, 2016 , 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 25, 2016 , franchisee contributions to the U.S. advertising funds were $206.0 million.

19

Table of Contents

We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and six -month periods ended June 25, 2016 and June 27, 2015 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 25, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016 . The data periods contained within our three- and twelve-month periods ending December 31, 2016 will reflect the results of operations for the 14-week and 53-week periods ending on that date.
Selected Operating and Financial Highlights
  Amounts and percentages may not recalculate due to rounding
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Systemwide sales (in millions) (a) :
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
2,056.9

 
1,961.6

 
3,922.2

 
3,712.4

Dunkin’ Donuts International
175.0

 
173.6

 
342.5

 
341.7

Baskin-Robbins U.S.
183.0

 
181.2

 
312.9

 
304.2

Baskin-Robbins International
360.0

 
356.1

 
616.0

 
631.7

Total systemwide sales
$
2,774.9

 
2,672.4

 
5,193.5

 
4,990.1

Systemwide sales growth
3.8
 %
 
5.2
 %
 
4.1
 %
 
5.7
 %
Comparable store sales growth (decline) (b) :
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
0.5
 %
 
2.8
 %
 
1.2
 %
 
2.8
 %
Dunkin’ Donuts International
(3.1
)%
 
(0.1
)%
 
(2.6
)%
 
0.8
 %
Baskin-Robbins U.S.
0.6
 %
 
4.1
 %
 
2.3
 %
 
5.9
 %
Baskin-Robbins International
(6.6
)%
 
(2.5
)%
 
(7.3
)%
 
(1.2
)%
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
216,309

 
211,424

 
406,085

 
397,329

Operating income
106,141

 
92,588

 
191,474

 
176,328

Adjusted operating income
111,294

 
102,971

 
202,536

 
190,576

Net income attributable to Dunkin’ Brands
49,590

 
42,318

 
86,744

 
67,949

Adjusted net income
52,682

 
48,548

 
93,381

 
88,830

(a)
Beginning in the first quarter of fiscal year 2016, we began presenting systemwide sales rather than franchisee-reported sales, which excludes sales of company-operated restaurants, as we believe the systemwide sales information is a more complete metric in obtaining an understanding of our financial performance. Additionally, systemwide sales related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility.
(b)  
Comparable store sales growth for Dunkin’ Donuts U.S. and Baskin-Robbins U.S. for the three and six months ended June 27, 2015 has been revised to include only those restaurants that have been open at least 78 weeks (approximately 18 months) to conform to the current period calculation, whereas previously reported figures included only those restaurants that were open at least 54 weeks (approximately 12 months). The calculation of this operating measure was revised in the third quarter of fiscal 2015 to more accurately reflect sales growth at comparable stores by minimizing the impact of strong new store openings, particularly as we develop in newer markets. International comparable store sales growth has not been revised at this time to include only sales from restaurants that have been open at least 78 weeks, similar to the U.S., given that store-level sales information resides on multiple, non-uniform systems owned and controlled by our international partners.

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, including joint ventures. While we do not record sales by franchisees, licensees, or joint ventures as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue and in evaluating our performance relative to competitors.
Comparable store sales growth for Dunkin’ Donuts U.S. and Baskin-Robbins U.S. is calculated by including only sales from franchisee- and company-operated restaurants that have been open at least 78 weeks and that have reported sales in the current and comparable prior year week. Comparable store sales growth for Dunkin’ Donuts International and Baskin-Robbins International represents the growth in local currency average weekly sales for franchisee-operated restaurants, including joint ventures, that have been open at least 54 weeks and that have reported sales in the current and comparable prior year week.

20

Table of Contents

Overall growth in systemwide sales of 3.8% and 4.1% for the three and six months ended June 25, 2016 , over the same periods in the prior fiscal year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 4.9% and 5.6% for the three and six months ended June 25, 2016 , respectively, as a result of 333 net new restaurants opened since June 27, 2015 and comparable store sales growth of 0.5% and 1.2% , respectively. The increase in comparable store sales was driven by increased average ticket offset by a decline in traffic. Growth was driven by strong beverage sales led by iced coffee and hot and iced espresso-based beverages, and breakfast sandwiches, led by limited-time-offer products.
Dunkin’ Donuts International systemwide sales growth of 0.8% and 0.2% for the three and six months ended June 25, 2016 , respectively, driven primarily by sales growth in Europe and Asia, offset by a decline in South Korea. Sales in South Korea, Asia, and South America were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for the three and six months ended June 25, 2016 increased by approximately 5% and 6%, respectively. Dunkin’ Donuts International comparable store sales declined 3.1% and 2.6% for the three and six months ended June 25, 2016 , respectively, due to declines in the Middle East, Europe, and South Korea offset by gains in South America and Asia.
Baskin-Robbins U.S. systemwide sales growth of 1.0% and 2.9% for the three and six months ended June 25, 2016 , respectively, resulting primarily from comparable store sales growth of 0.6% and 2.3% , for the three and six months ended June 25, 2016 , respectively, driven by increased sales of cups and cones. The increase in sales of cups and cones for the three-month period was driven by the new Warm Cookie Ice Cream Sandwich. Comparable store sales growth for the three months ended June 25, 2016 was driven primarily by an increase in average ticket, offset by a decline in traffic. Comparable store sales growth for the six months ended June 25, 2016 was driven by an increase in average ticket and traffic.
Baskin-Robbins International systemwide sales growth of 1.1% for the three months ended June 25, 2016, driven by sales growth in Japan and the Middle East, offset by sales declines in South Korea and Europe. Systemwide sales declined 2.5% for the six months ended June 25, 2016 , driven by sales declines in South Korea and the Middle East, offset by sales growth in Japan. Sales in South Korea were negatively impacted by unfavorable foreign exchange rates, while sales in Japan were positively impacted by favorable foreign exchange rates. On a constant currency basis, systemwide sales for the three months ended June 25, 2016 increased by approximately 1%, while systemwide sales for the six months ended June 25, 2016 decreased approximately 1%. Baskin-Robbins International comparable store sales declined 6.6% and 7.3% for the three and six months ended June 25, 2016 , respectively, driven primarily by declines 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 information related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility. Prior period amounts in the tables below have been revised to reflect these changes for all periods presented. Points of distribution and net openings as of and for the three and six months ended June 25, 2016 and June 27, 2015 were as follows:
 
June 25, 2016
 
June 27, 2015
Points of distribution, at period end:
 
 
 
Dunkin’ Donuts U.S.
8,573

 
8,240

Dunkin’ Donuts International
3,368

 
3,220

Baskin-Robbins U.S.
2,530

 
2,528

Baskin-Robbins International
5,198

 
5,107

Consolidated global points of distribution
19,669

 
19,095

 
Three months ended
 
Six months ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
Net openings (closings) during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
73

 
80

 
142

 
158

Dunkin’ Donuts International
35

 
13

 
49

 
(8
)
Baskin-Robbins U.S.
12

 
2

 
1

 
(1
)
Baskin-Robbins International
78

 
59

 
120

 
84

Consolidated global net openings
198

 
154

 
312

 
233


21

Table of Contents

Total revenues increased $4.9 million , or 2.3% , and $8.8 million , or 2.2% for the three and six months ended June 25, 2016 , respectively, driven primarily by increases in franchise fees and royalty income of $6.1 million and $14.5 million for the respective periods, driven by Dunkin’ Donuts U.S. systemwide sales growth, offset by decreases in sales at company-operated restaurants of $3.1 million and $4.0 million , respectively, due to a net decrease in the number of company-operated restaurants. Additionally, other revenues increased $4.1 million during the three-month period due primarily to increased license fees recognized in connection with the Dunkin’ K-Cup® pod licensing agreement and an increase in transfer fee income, while other revenues decreased $2.0 million during the six-month period due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015.
Operating income and adjusted operating income for the three months ended June 25, 2016 increased $13.6 million , or 14.6% , and $8.3 million , or 8.1% , respectively, primarily as a result of the increase in franchise fees and royalty income, as well as the increase in other revenues, offset by a decrease in net margin on ice cream and other products from international markets. Additionally, operating income in the prior fiscal year period was unfavorably impacted by 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 2012.
Operating income and adjusted operating income for the six months ended June 25, 2016 increased $15.1 million , or 8.6% , and $12.0 million , or 6.3% respectively, primarily as a result of the increase in franchise fees and royalty income, as well as an increase in other operating income due primarily to a gain recognized in connection with the sale of company-operated restaurants, offset by the decrease in other revenues. Additionally, operating income in the prior fiscal year period was unfavorably impacted by 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 2012 and favorably impacted by a reduction in legal reserves.
Net income attributable to Dunkin’ Brands and adjusted net income increased $7.3 million and $4.1 million , respectively, for the three months ended June 25, 2016 primarily as a result of the increases in operating income and adjusted operating income of $13.6 million and $8.3 million , respectively, offset by increases in income tax expense.
Net income attributable to Dunkin’ Brands increased $18.8 million for the six months ended June 25, 2016 primarily as a result of the $20.6 million  loss on debt extinguishment and refinancing transactions recorded in the prior fiscal year period and the $15.1 million increase in operating income, offset by a $14.4 million increase in income tax expense and additional interest expense of $2.6 million driven primarily by additional borrowings incurred in conjunction with the securitization refinancing transaction completed in January 2015. Adjusted net income increased $4.6 million for the six months ended June 25, 2016 , primarily as a result of the $12.0 million increase in adjusted operating income, offset by increases in income tax expense and interest 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, impairments of investments in joint ventures, 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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
(In thousands)
Operating income
$
106,141

 
92,588

 
191,474

 
176,328

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
5,568

 
6,181

 
11,329

 
12,381

Long-lived asset impairment charges
4

 

 
97

 
264

Transaction-related costs (a)
9

 
127

 
64

 
281

Bertico and related litigation (b)
(428
)
 

 
(428
)
 
(2,753
)
Settlement of Canadian pension plan (c)

 
4,075

 

 
4,075

Adjusted operating income
$
111,294

 
102,971

 
202,536


190,576

Net income attributable to Dunkin’ Brands
$
49,590

 
42,318

 
86,744

 
67,949

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
5,568

 
6,181

 
11,329

 
12,381

Long-lived asset impairment charges
4

 

 
97

 
264

Transaction-related costs (a)
9

 
127

 
64

 
281

Bertico and related litigation (b)
(428
)
 

 
(428
)
 
(2,753
)
Settlement of Canadian pension plan (c)

 
4,075

 

 
4,075

Loss on debt extinguishment and refinancing transactions

 

 

 
20,554

Tax impact of adjustments (d)
(2,061
)
 
(4,153
)
 
(4,425
)
 
(13,921
)
Adjusted net income
$
52,682

 
48,548

 
93,381

 
88,830

(a)
Represents non-capitalizable costs incurred as a result of the securitized financing facility, which was completed in January 2015.
(b)
Adjustment for the three and six months ended June 25, 2016 represents a net reduction to legal reserves for the Bertico litigation based upon final agreement of interest and related costs associated with the judgment. Adjustment for the six months ended June 27, 2015 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.

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.54

 
0.44

 
0.95

 
0.69

Common—diluted
0.54

 
0.44

 
0.94

 
0.69

Diluted adjusted earnings per share
0.57

 
0.50

 
1.01

 
0.90

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.

23

Table of Contents

The following table sets forth the computation of diluted adjusted earnings per share:
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
(In thousands, except share and per share data)
Adjusted net income
$
52,682

 
48,548

 
93,381

 
88,830

Weighted average number of common shares—diluted
92,451,913

 
96,876,510

 
92,535,091

 
99,189,474

Diluted adjusted earnings per share
$
0.57

 
0.50

 
1.01

 
$
0.90


Results of operations
Consolidated results of operations
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
Increase (Decrease)
 
June 25,
2016
 
June 27,
2015
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
 
(In thousands, except percentages)
Franchise fees and royalty income
$
137,195

 
131,143

 
6,052

 
4.6
 %
 
$
260,978

 
246,468

 
14,510

 
5.9
 %
Rental income
25,769

 
26,535

 
(766
)
 
(2.9
)%
 
48,994

 
50,162

 
(1,168
)
 
(2.3
)%
Sales of ice cream and other products
33,966

 
35,410

 
(1,444
)
 
(4.1
)%
 
59,857

 
58,478

 
1,379

 
2.4
 %
Sales at company-operated restaurants
4,643

 
7,727

 
(3,084
)
 
(39.9
)%
 
10,313

 
14,285

 
(3,972
)
 
(27.8
)%
Other revenues
14,736

 
10,609

 
4,127

 
38.9
 %
 
25,943

 
27,936

 
(1,993
)
 
(7.1
)%
Total revenues
$
216,309

 
211,424

 
4,885

 
2.3
 %
 
$
406,085

 
397,329

 
8,756

 
2.2
 %
Total revenues for the three months ended June 25, 2016 increased $4.9 million , or 2.3% , due primarily to an increase in franchise fees and royalty income of $6.1 million as a result of Dunkin’ Donuts U.S. systemwide sales growth and an increase in other revenues of $4.1 million due primarily to increased license fees recognized in connection with the Dunkin’ K-Cup® pod licensing agreement and an increase in transfer fee income. These increases in revenues were offset by a decrease in sales at company-operated restaurants of $3.1 million driven by a net decrease in the number of company-operated restaurants, as well as a decrease in sales of ice cream and other products of $1.4 million .
Total revenues for the six months ended June 25, 2016 increased $8.8 million , or 2.2% , due primarily to an increase in franchise fees and royalty income of $14.5 million as a result of Dunkin’ Donuts U.S. systemwide sales growth and an increase in sales of ice cream and other products of $1.4 million due primarily to sales of ice cream products to the Middle East. These increases in revenues were offset by a decrease in sales at company-operated restaurants of $4.0 million driven by a net decrease in the number of company-operated restaurants, a decrease in other revenues of $2.0 million due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015, and a decrease in rental income of $1.2 million .


24

Table of Contents

 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
Increase (Decrease)
 
June 25,
2016
 
June 27,
2015
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
 
(In thousands, except percentages)
Occupancy expenses—franchised restaurants
$
13,614

 
13,717

 
(103
)
 
(0.8
)%
 
$
26,810

 
27,235

 
(425
)
 
(1.6
)%
Cost of ice cream and other products
22,827

 
22,876

 
(49
)
 
(0.2
)%
 
40,061

 
38,222

 
1,839

 
4.8
 %
Company-operated restaurant expenses
5,297

 
7,757

 
(2,460
)
 
(31.7
)%
 
11,790

 
14,615

 
(2,825
)
 
(19.3
)%
General and administrative expenses, net
63,459

 
68,349

 
(4,890
)
 
(7.2
)%
 
124,654

 
126,189

 
(1,535
)
 
(1.2
)%
Depreciation and amortization
10,746

 
11,172

 
(426
)
 
(3.8
)%
 
21,640

 
22,482

 
(842
)
 
(3.7
)%
Long-lived asset impairment charges
4

 

 
4

 
n/m

 
97

 
264

 
(167
)
 
(63.3
)%
Total operating costs and expenses
$
115,947

 
123,871

 
(7,924
)
 
(6.4
)%
 
$
225,052

 
229,007

 
(3,955
)
 
(1.7
)%
Net income of equity method investments
3,717

 
3,951

 
(234
)
 
(5.9
)%
 
6,681

 
6,898

 
(217
)
 
(3.1
)%
Other operating income, net
2,062

 
1,084

 
978

 
90.2
 %
 
3,760

 
1,108

 
2,652

 
239.4
 %
Operating income
$
106,141

 
92,588

 
13,553

 
14.6
 %
 
$
191,474

 
176,328

 
15,146

 
8.6
 %
Occupancy expenses for franchised restaurants for the three and six months ended June 25, 2016 decreased from the prior fiscal year periods due primarily to the reversal of deferred straight-line rent obligations in the current fiscal year periods as a result of lease terminations.
Net margin on ice cream and other products for the three months ended June 25, 2016 decreased from the prior fiscal year period to approximately $11.1 million due primarily to a decline in sales volume and an increase in commodity costs. Net margin on ice cream and other products for the six months ended June 25, 2016 decreased from the prior fiscal year period to approximately $19.8 million due primarily to an increase in commodity costs.
Company-operated restaurant expenses for the three and six months ended June 25, 2016 decreased $2.5 million and $2.8 million , respectively, primarily as a result of a net decrease in the number of company-operated restaurants.
General and administrative expenses for the three and six months ended June 25, 2016 decreased $4.9 million and $1.5 million , respectively, from the prior fiscal year periods driven by decreases in personnel costs due primarily to costs incurred in the prior fiscal year periods related to the final settlement of our Canadian pension plan and reduced incentive compensation expense in the current fiscal year periods. Also contributing to the decreases were decreases in bad debt expense and costs incurred in the prior fiscal year periods to support brand-building activities. These decreases in general and administrative expenses were offset by increases in professional fees. Also offsetting the decrease in general and administrative expenses for the six-month period was a reduction in legal reserves recorded in the prior year fiscal period.
Depreciation and amortization for the three and six months ended June 25, 2016 decreased $0.4 million and $0.8 million , respectively, from the prior fiscal year periods as a result of certain intangible assets becoming fully amortized and favorable lease intangible assets being written-off upon termination of the related leases.
Long-lived asset impairment charges for the six months ended June 25, 2016 decreased $0.2 million , driven primarily by the timing of lease terminations, which resulted in the write-off of favorable lease intangible assets and leasehold improvements.
Net income of equity method investments for the three and six months ended June 25, 2016 decreased $0.2 million from the prior fiscal year periods as a result of decreases in net income from our South Korea joint venture, offset by increases in net income from our Japan joint venture. The increase in net income from our Japan joint venture was due primarily to the reduction of depreciation and amortization, net of tax, as a result of an impairment charge recorded in fiscal year 2015 related to our Japan joint venture.
Other operating income, net includes gains recognized in connection with the sale of real estate and company-operated restaurants and fluctuates based on the timing of such transactions. Other operating income for the three and six months ended

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Table of Contents

June 25, 2016 includes a $2.1 million gain recognized in connection with the sale of twelve company-operated points of distribution in the Dallas, Texas market.
 
Three months ended
 
Six months ended
 
June 25,
2016
 
June 27,
2015
 
Increase (Decrease)
 
June 25,
2016
 
June 27,
2015
 
Increase (Decrease)
 
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Interest expense, net
$
24,848

 
24,979

 
(131
)
 
(0.5
)%
 
$
49,580

 
47,021

 
2,559

 
5.4
 %
Loss on debt extinguishment and refinancing transactions