Dunkin Brands, Inc.
DUNKIN' BRANDS GROUP, INC. (Form: 10-Q, Received: 08/07/2017 16:45:26)
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 July 1, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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, 2017 , 90,241,464 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)
 
July 1,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
264,662

 
361,425

Restricted cash
74,952

 
69,746

Accounts receivable, net of allowance for doubtful accounts of $4,646 and $4,778 as of July 1, 2017 and December 31, 2016, respectively
51,910

 
44,512

Notes and other receivables, net of allowance for doubtful accounts of $371 and $339 as of July 1, 2017 and December 31, 2016, respectively
32,095

 
40,672

Restricted assets of advertising funds
58,807

 
40,338

Prepaid income taxes
13,206

 
20,926

Prepaid expenses and other current assets
37,941

 
28,739

Total current assets
533,573

 
606,358

Property and equipment, net of accumulated depreciation of $131,333 and $124,675 as of July 1, 2017 and December 31, 2016, respectively
170,013

 
176,662

Equity method investments
124,679

 
114,738

Goodwill
888,291

 
888,272

Other intangible assets, net of accumulated amortization of $240,684 and $230,364 as of July 1, 2017 and December 31, 2016, respectively
1,368,026

 
1,378,720

Other assets
63,336

 
62,632

Total assets
$
3,147,918

 
3,227,382

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

 
25,000

Capital lease obligations
618

 
589

Accounts payable
19,414

 
12,682

Liabilities of advertising funds
64,953

 
52,271

Deferred income
38,714

 
35,393

Other current liabilities
237,236

 
298,266

Total current liabilities
385,935

 
424,201

Long-term debt, net
2,392,732

 
2,401,998

Capital lease obligations
7,221

 
7,550

Unfavorable operating leases acquired
10,550

 
11,378

Deferred income
10,826

 
12,154

Deferred income taxes, net
453,511

 
461,810

Other long-term liabilities
72,544

 
71,549

Total long-term liabilities
2,947,384

 
2,966,439

Commitments and contingencies (note 9)

 

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; 90,512,007 shares issued and 90,485,230 shares outstanding as of July 1, 2017; 91,464,229 shares issued and 91,437,452 shares outstanding as of December 31, 2016
90

 
91

Additional paid-in capital
763,055

 
807,492

Treasury stock, at cost; 26,777 shares as of July 1, 2017 and December 31, 2016
(1,060
)
 
(1,060
)
Accumulated deficit
(929,490
)
 
(945,797
)
Accumulated other comprehensive loss
(17,996
)
 
(23,984
)
Total stockholders’ deficit
(185,401
)
 
(163,258
)
Total liabilities and stockholders’ deficit
$
3,147,918

 
3,227,382


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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Revenues:
 
 
 
 
 
 
 
Franchise fees and royalty income
$
145,066

 
137,195

 
275,135

 
260,978

Rental income
27,408

 
25,769

 
51,830

 
48,994

Sales of ice cream and other products
32,862

 
33,966

 
58,159

 
59,857

Sales at company-operated restaurants

 
4,643

 

 
10,313

Other revenues
13,186

 
14,736

 
24,070

 
25,943

Total revenues
218,522

 
216,309

 
409,194

 
406,085

Operating costs and expenses:
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
14,287

 
13,614

 
28,425

 
26,810

Cost of ice cream and other products
22,199

 
22,827

 
39,121

 
40,061

Company-operated restaurant expenses

 
5,297

 

 
11,790

General and administrative expenses, net
62,382

 
63,459

 
123,617

 
124,654

Depreciation
5,071

 
5,178

 
10,155

 
10,311

Amortization of other intangible assets
5,333

 
5,568

 
10,660

 
11,329

Long-lived asset impairment charges
60

 
4

 
107

 
97

Total operating costs and expenses
109,332

 
115,947

 
212,085

 
225,052

Net income of equity method investments
4,327

 
3,717

 
7,146

 
6,681

Other operating income, net
33

 
2,062

 
588

 
3,760

Operating income
113,550

 
106,141

 
204,843

 
191,474

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
425

 
124

 
746

 
273

Interest expense
(24,885
)
 
(24,972
)
 
(49,756
)
 
(49,853
)
Other income (losses), net
28

 
(102
)
 
215

 
(472
)
Total other expense, net
(24,432
)
 
(24,950
)
 
(48,795
)
 
(50,052
)
Income before income taxes
89,118

 
81,191

 
156,048

 
141,422

Provision for income taxes
33,414

 
31,601

 
52,877

 
54,678

Net income
$
55,704

 
49,590

 
103,171

 
86,744

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.61

 
0.54

 
1.13

 
0.95

Common—diluted
0.60

 
0.54

 
1.11

 
0.94

Cash dividends declared per common share
0.32

 
0.30

 
0.65

 
0.60

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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Net income
$
55,704

 
49,590

 
103,171

 
86,744

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense (benefit) of $36 and $(231) for the three months ended July 1, 2017 and June 25, 2016, respectively, and $573 and $(429) for the six months ended July 1, 2017 and June 25, 2016, respectively
(2,768
)
 
312

 
5,971

 
2,569

Effect of interest rate swaps, net of deferred tax benefit of $217 for each of the three months ended July 1, 2017 and June 25, 2016 and $434 for each of the six months ended July 1, 2017 and June 25, 2016
(318
)
 
(318
)
 
(636
)
 
(636
)
Other, net
(1
)
 
(178
)
 
653

 
(203
)
Total other comprehensive income (loss), net
(3,087
)
 
(184
)
 
5,988

 
1,730

Comprehensive income
$
52,617

 
49,406

 
109,159

 
88,474

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
 
July 1,
2017
 
June 25,
2016
Cash flows from operating activities:
 
 
 
Net income
$
103,171

 
86,744

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,815

 
21,640

Amortization of debt issuance costs
3,234

 
3,134

Deferred income taxes
(8,333
)
 
(7,590
)
Provision for bad debt
100

 
170

Share-based compensation expense
7,247

 
8,307

Net income of equity method investments
(7,146
)
 
(6,681
)
Dividends received from equity method investments
3,950

 
4,441

Gain on sale of real estate and company-operated restaurants
(29
)
 
(3,754
)
Other, net
(1,818
)
 
(829
)
Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
2,696

 
39,434

Prepaid income taxes, net
7,651

 
9,436

Prepaid expenses and other current assets
(9,027
)
 
(3,470
)
Accounts payable
6,250

 
(1,142
)
Other current liabilities
(61,606
)
 
(68,590
)
Liabilities of advertising funds, net
(5,358
)
 
(2,902
)
Deferred income
1,956

 
1,632

Other, net
201

 
2,156

Net cash provided by operating activities
63,954

 
82,136

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(3,624
)
 
(6,775
)
Proceeds from sale of real estate and company-operated restaurants

 
7,427

Other, net
(99
)
 
(872
)
Net cash used in investing activities
(3,723
)
 
(220
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(12,500
)
 
(12,500
)
Dividends paid on common stock
(58,847
)
 
(54,851
)
Accelerated share repurchases of common stock
(100,000
)

(30,000
)
Exercise of stock options
19,928

 
3,933

Other, net
(799
)
 
(559
)
Net cash used in financing activities
(152,218
)
 
(93,977
)
Effect of exchange rates on cash, cash equivalents, and restricted cash
398

 
27

Decrease in cash, cash equivalents, and restricted cash
(91,589
)
 
(12,034
)
Cash, cash equivalents, and restricted cash, beginning of period
431,832

 
333,115

Cash, cash equivalents, and restricted cash, end of period
$
340,243

 
321,081

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
53,736

 
53,174

Cash paid for interest
46,751

 
47,223

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,535

 
1,096

Purchase of leaseholds in exchange for capital lease obligations

 
389

Noncash financing activity:
 
 
 
Receivable from exercise of stock options included in notes and other receivables, net
1,385

 

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, have owned and operated locations. Through our Dunkin’ Donuts brand, we develop and franchise restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. Additionally, we license Dunkin’ Donuts brand products sold in certain retail outlets such as retail packaged coffee and Dunkin’ K-Cup® pods. 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 July 1, 2017 , the consolidated statements of operations and comprehensive income for the three and six months ended July 1, 2017 and June 25, 2016 , and the consolidated statements of cash flows for the six months ended July 1, 2017 and June 25, 2016 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 31, 2016 , 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 July 1, 2017 and June 25, 2016 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 July 1, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2017 .
(c) Cash, cash equivalents, and 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.

7


Pursuant to new accounting guidance for fiscal year 2017, restricted cash is combined with cash and cash equivalents when reconciling the beginning and end of period balances in the consolidated statements of cash flows (see note 2(f)). Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of July 1, 2017 and December 31, 2016 were as follows (in thousands):
 
July 1,
2017
 
December 31,
2016
Cash and cash equivalents
$
264,662

 
361,425

Restricted cash
74,952

 
69,746

Restricted cash, included in Other assets
629

 
661

Total cash, cash equivalents, and restricted cash
$
340,243

 
431,832

(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.
Financial assets and liabilities measured at fair value on a recurring basis as of July 1, 2017 and December 31, 2016 are summarized as follows (in thousands):
 
July 1, 2017
 
December 31, 2016
 
Significant other observable inputs (Level 2)
 
Total
 
Significant other observable inputs (Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
Company-owned life insurance
$
10,018

 
10,018

 
9,271

 
9,271

Total assets
$
10,018

 
10,018

 
9,271

 
9,271

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
12,534

 
12,534

 
11,126

 
11,126

Total liabilities
$
12,534

 
12,534

 
11,126

 
11,126

The deferred compensation liabilities relate to the Dunkin’ Brands, Inc. non-qualified deferred compensation plans (“NQDC Plans”), which allow 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 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 and estimated fair value of long-term debt as of July 1, 2017 and December 31, 2016 were as follows (in thousands):
 
July 1, 2017
 
December 31, 2016
 
Carrying value
 
Estimated fair value
 
Carrying value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
2,417,732

 
2,459,558

 
2,426,998

 
2,460,544

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.

8


(e) Concentration of credit risk
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees, royalty income, and sales of ice cream 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 July 1, 2017 and December 31, 2016 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 20% and 15% , respectively, of total accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for each of the three and six months ended July 1, 2017 . For the three and six months ended June 25, 2016 , one master licensee, including its majority-owned subsidiaries, accounted for approximately 11% and 10% , respectively, of total revenues.
Additionally, the Company engages various third parties to manufacture and/or distribute certain Dunkin’ Donuts and Baskin-Robbins products under licensing arrangements. As of  July 1, 2017 one  of these third parties accounted for approximately  11%  of total accounts and notes receivable. No individual third party accounted for more than 10% of total accounts and notes receivable as of  December 31, 2016 .
(f) Recent accounting pronouncements
Recently adopted accounting pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. The Company early adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements, and we do not expect any impact from this guidance when performing our annual goodwill impairment test as of the first day of the third quarter of fiscal year 2017.
In November 2016, the FASB issued new guidance addressing diversity in practice that exists in the classification and presentation of changes in restricted cash in the statements of cash flows. The Company early adopted this guidance retrospectively in fiscal year 2017. Accordingly, changes in restricted cash that have historically been included within operating and financing activities have been eliminated, and restricted cash is combined with cash and cash equivalents when reconciling the beginning and end of period balances for all periods presented. The adoption of this guidance primarily resulted in an increase of $289 thousand in net cash provided by operating activities for the six months ended June 25, 2016 and had no impact on the consolidated statements of operations and balance sheets.
In March 2016, 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. The Company adopted this guidance in fiscal year 2017, which had the following impact on the consolidated financial statements:
On a prospective basis, as required, the Company recorded excess tax benefits of $660 thousand and $6.8 million to the provision for income taxes in the consolidated statements of operations for the three and six months ended July 1, 2017 , respectively, instead of additional paid-in capital in the consolidated balance sheets. As a result, net income increased $660 thousand and $6.8 million , for the three and six months ended July 1, 2017 , respectively, and basic and diluted earnings per share increased $0.01 and $0.07 for the three and six months ended July 1, 2017 , respectively.
Excess tax benefits are presented as operating cash inflows instead of financing cash inflows in the consolidated statements of cash flows, which the Company elected to apply on a retrospective basis. As a result, the Company classified $6.8 million and $1.8 million for the six months ended July 1, 2017 and June 25, 2016 , respectively, of excess tax benefits as operating cash inflows included within the change in prepaid income taxes, net in the consolidated statements of cash flows. The retrospective reclassification resulted in increases in cash provided by operating activities and cash used in financing activities of $1.8 million for the six months ended June 25, 2016 .
The Company prospectively excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share under the treasury stock method, which did not have a material impact on diluted earnings per share for the three and six months ended July 1, 2017.

9


Recent accounting pronouncements not yet adopted
Leases
In February 2016, the FASB issued new guidance for lease accounting, which replaces existing lease accounting 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 substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption, thereby having a material impact to its consolidated balance sheet.
Revenue from Contracts with Customers
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. The Company intends to adopt this new guidance in fiscal year 2018 using the full retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption. Additionally, a cumulative effect adjustment will be recorded to the opening balance of accumulated deficit as of the first day of fiscal year 2016, the earliest period presented. Based on the expected impacts described below, the Company expects such cumulative effect adjustment to be material to the opening balance of accumulated deficit.
The Company expects the adoption of the new guidance to change the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal fees. Currently, these fees are generally recognized upfront upon either opening of the respective restaurant or when a renewal agreement becomes effective. The new guidance will generally require these fees to be recognized over the term of the related franchise license for the respective restaurant, which we expect will result in a material impact to revenue recognized for initial franchise fees and renewal fees. The Company does not expect this new guidance to materially impact the recognition of royalty income. Additionally, rental income is outside the scope of this new guidance, and therefore will not be impacted.
The Company also expects the adoption of this new guidance to change the reporting of advertising fund contributions from franchisees and the related advertising fund expenditures, which are not currently included in the consolidated statements of operations. The Company expects the new guidance to require these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. For the fiscal year ended December 31, 2016, franchisee contributions to the U.S. advertising funds were $430.3 million , and therefore we expect this change to have a material impact to our total revenues and expenses. However, we expect such contributions and expenditures to be largely offsetting and therefore do not expect a significant impact on our reported net income.
Though the majority of the assessment phase is complete, the Company continues to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, in addition to the impact on accounting policies and related disclosures. Additionally, the Company is in the process of implementing new accounting systems, business processes, and internal controls related to revenue recognition to assist in the application of the new guidance.
(g) Subsequent events
Subsequent events have been evaluated through the date these consolidated financial statements were filed.

10


(3) Franchise fees and royalty income
Franchise fees and royalty income consisted of the following (in thousands):
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Royalty income
$
134,192

 
126,838

 
253,894

 
240,204

Initial franchise fees and renewal income
10,874

 
10,357

 
21,241

 
20,774

Total franchise fees and royalty income
$
145,066

 
137,195

 
275,135

 
260,978

The changes in franchised and company-operated points of distribution were as follows:
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Systemwide points of distribution:
 
 
 
 
 
 
 
Franchised points of distribution in operation—beginning of period
20,109

 
19,430

 
20,080

 
19,308

Franchised points of distribution—opened
319

 
377

 
602

 
678

Franchised points of distribution—closed
(186
)
 
(179
)
 
(440
)
 
(368
)
Net transfers from company-operated points of distribution

 
12

 

 
22

Franchised points of distribution in operation—end of period
20,242

 
19,640

 
20,242

 
19,640

Company-operated points of distribution—end of period

 
29

 

 
29

Total systemwide points of distribution—end of period
20,242

 
19,669

 
20,242

 
19,669

(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 also 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 or refinanced 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 are 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, though the Company intends to continue to make the scheduled principal payments. Other events and transactions, such as certain asset sales and receipt of various insurance or indemnification proceeds, may trigger additional mandatory prepayments.

11


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  July 1, 2017 , approximately  $733.1 million  and  $1.71 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 July 1, 2017 .
As of July 1, 2017 and December 31, 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 July 1, 2017 or December 31, 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.
(5) Other current liabilities
Other current liabilities consisted of the following (in thousands):
 
July 1,
2017
 
December 31,
2016
Gift card/certificate liability
$
150,880

 
207,628

Gift card breakage liability
7,841

 
13,301

Accrued payroll and benefits
20,262

 
25,071

Accrued legal liabilities (see note 9(c))
6,052

 
5,555

Accrued interest
10,898

 
10,702

Accrued professional costs
2,806

 
2,170

Franchisee profit-sharing liability
9,912

 
11,083

Other
28,585

 
22,756

Total other current liabilities
$
237,236

 
298,266

The decrease in the gift card/certificate liability was driven by the seasonality of our gift card program. The franchisee profit-sharing liability represents amounts owed to franchisees from the net profits primarily on the sale of Dunkin’ K-Cup® pods and retail packaged coffee in certain retail outlets.
(6) 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 rental income. Prior to the sale of all remaining company-operated restaurants in the fourth quarter of fiscal year 2016, Dunkin’

12


Donuts U.S. also derived revenue through retail sales at company-operated restaurants. Baskin-Robbins International primarily derives its revenues from 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, impairment of our equity method investments, 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 generally 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 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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Dunkin’ Donuts U.S.
$
157,080

 
153,660

 
299,042

 
292,473

Dunkin’ Donuts International
4,495

 
5,218

 
9,790

 
12,468

Baskin-Robbins U.S.
14,347

 
13,738

 
24,894

 
24,299

Baskin-Robbins International
33,978

 
34,840

 
60,066

 
61,674

Total reportable segment revenues
209,900

 
207,456

 
393,792

 
390,914

Other
8,622

 
8,853

 
15,402

 
15,171

Total revenues
$
218,522

 
216,309

 
409,194

 
406,085

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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Dunkin’ Donuts U.S.
$
122,548

 
116,085

 
230,522

 
216,529

Dunkin’ Donuts International
1,454

 
1,975

 
3,343

 
5,733

Baskin-Robbins U.S.
10,970

 
10,738

 
18,307

 
18,038

Baskin-Robbins International
12,501

 
11,079

 
20,480

 
19,463

Total reportable segments
147,473

 
139,877

 
272,652

 
259,763

Corporate
(28,530
)
 
(28,164
)
 
(57,042
)
 
(56,863
)
Interest expense, net
(24,460
)
 
(24,848
)
 
(49,010
)
 
(49,580
)
Amortization of other intangible assets
(5,333
)
 
(5,568
)
 
(10,660
)
 
(11,329
)
Long-lived asset impairment charges
(60
)
 
(4
)
 
(107
)
 
(97
)
Other income (losses), net
28

 
(102
)
 
215

 
(472
)
Income before income taxes
$
89,118

 
81,191

 
156,048

 
141,422


13


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 (loss) of equity method investments
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Dunkin’ Donuts International
$
13

 
304

 
(77
)
 
478

Baskin-Robbins International
2,950

 
2,303

 
4,976

 
4,378

Total reportable segments
2,963

 
2,607

 
4,899

 
4,856

Other
1,364

 
1,110

 
2,247

 
1,825

Total net income of equity method investments
$
4,327

 
3,717

 
7,146

 
6,681

(7) Stockholders’ deficit
The changes in total stockholders’ deficit were as follows (in thousands):
 
 
Total stockholders’ deficit
Balance as of December 31, 2016
 
$
(163,258
)
Net income
 
103,171

Other comprehensive income
 
5,988

Dividends paid on common stock
 
(58,847
)
Exercise of stock options
 
21,313

Accelerated share repurchases of common stock
 
(100,000
)
Share-based compensation expense
 
7,247

Other, net
 
(1,015
)
Balance as of July 1, 2017
 
$
(185,401
)
(a) Treasury stock
During the three months ended July 1, 2017 , the Company entered into and completed an accelerated share repurchase agreement (the “May 2017 ASR Agreement”) with a third-party financial institution. Pursuant to the terms of the May 2017 ASR Agreement, the Company paid the financial institution  $100.0 million  in cash and received  1,757,568  shares of the Company’s common stock during the three months ended July 1, 2017 based on a weighted average cost per share of  $56.90  over the term of the May 2017 ASR Agreement.
The Company accounts for treasury stock under the cost method based on the cost of the shares on the dates of repurchase and any direct costs incurred. During the three months ended  July 1, 2017 , the Company retired the  1,757,568  shares of treasury stock repurchased under the May 2017 ASR Agreement. The repurchase and retirement of these shares of treasury stock resulted in a decrease in additional paid-in capital of $14.6 million and an increase in accumulated deficit of  $85.4 million .
(b) Equity incentive plans
During the six months ended July 1, 2017 , the Company granted stock options to purchase 1,172,348 shares of common stock and 78,660 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 a weighted average exercise price of $55.05 per share and have a weighted average grant-date fair value of $9.88 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 $52.71 per share.
In addition, the Company granted 84,024 performance stock units (“PSUs”) to certain employees during the six months ended July 1, 2017 . These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 36,712 PSUs are subject to a service condition and a market vesting condition linked to the level of total shareholder

14


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 47,312 PSUs granted are subject to a service condition and a performance vesting condition based on the level of adjusted operating income growth achieved over the performance period (“AOI PSUs”). The 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 weighted average grant-date fair value of $67.59 per share. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The AOI PSUs have a weighted average grant-date fair value of $52.45 per share. Total compensation cost for the AOI PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome.
Total compensation expense related to all share-based awards was $3.8 million and $4.2 million for the three months ended July 1, 2017 and June 25, 2016 , respectively, and $7.2 million and $8.3 million for the six months ended July 1, 2017 and June 25, 2016 , 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 31, 2016
$
(23,019
)
 
1,144

 
(2,109
)
 
(23,984
)
Other comprehensive income (loss), net
5,971

 
(636
)
 
653

 
5,988

Balance as of July 1, 2017
$
(17,048
)
 
508

 
(1,456
)
 
(17,996
)
(d) Dividends
The Company paid a quarterly dividend of $0.3225 per share of common stock on June 14, 2017 and March 22, 2017 , totaling approximately $29.2 million and $29.6 million , respectively. On July 27, 2017 , the Company announced that its board of directors approved the next quarterly dividend of $0.3225 per share of common stock payable September 6, 2017 to shareholders of record as of the close of business on August 28, 2017 .
(8) Earnings per share
The computation of basic and diluted earnings per common share is as follows (in thousands, except for share and per share data):
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Net income—basic and diluted
$
55,704

 
49,590

 
103,171

 
86,744

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
91,207,455

 
91,504,563

 
91,432,007

 
91,594,704

Common—diluted
92,606,525

 
92,451,913

 
92,863,378

 
92,535,091

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.61

 
0.54

 
1.13

 
0.95

Common—diluted
0.60

 
0.54

 
1.11

 
0.94

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,399,070 and 947,350 equity awards for the three months ended July 1, 2017 and June 25, 2016 , respectively, and includes the dilutive effect of 1,431,371 and 940,387 equity awards for the six months ended July 1, 2017 and June 25, 2016 , 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 July 1, 2017 and June 25, 2016 , 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

15


1,123,482 and 4,210,753 equity awards for the three months ended July 1, 2017 and June 25, 2016 , respectively, and 1,629,480 and 4,361,416 equity awards for the six months ended July 1, 2017 and June 25, 2016 , respectively, as they would be antidilutive.
(9) Commitments and contingencies
(a) S upply 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 July 1, 2017 and December 31, 2016 , the Company was contingently liable under such supply chain agreements for approximately $122.4 million and $136.2 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, we accrued an immaterial amount of reserves related to supply chain commitments as of July 1, 2017 and December 31, 2016 .
(b) Letters of credit
As of July 1, 2017 and December 31, 2016 , the Company had standby letters of credit outstanding for a total of $25.9 million . There were no amounts drawn down on these letters of credit.
(c) Legal matters
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 July 1, 2017 and December 31, 2016 , $6.1 million and $5.6 million , respectively, was 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 all outstanding litigation.
(10) Related-party transactions
(a) Advertising funds
As of July 1, 2017 and December 31, 2016 , the Company had a net payable of $6.1 million and $11.9 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 $2.7 million and $2.5 million for the three months ended July 1, 2017 and June 25, 2016 , respectively, and $5.6 million and $4.8 million for the six months ended July 1, 2017 and June 25, 2016 , respectively. Such management fees are included in the consolidated statements of operations as a reduction in general and administrative expenses, net.
The Company made discretionary contributions to certain advertising funds for the purpose of supplementing national and regional advertising in certain markets of  $2.3 million  during the  three and six months ended   July 1, 2017 . An immaterial amount of such contributions were made during the  three and six months ended   June 25, 2016 . Additionally, the Company made contributions to the advertising funds based on retail sales at company-operated restaurants of $233 thousand and $514 thousand during the three and six months ended June 25, 2016 , which are included in company-operated restaurant expenses in the consolidated statements of operations. No such contributions were made during the three and six months ended July 1, 2017 , as the Company did not have any company-operated restaurants during these periods. The Company also funded advertising fund initiatives of $630 thousand and $495 thousand during the three months ended July 1, 2017 and June 25, 2016 , respectively, and $1.2 million and $1.0 million during the six months ended July 1, 2017 and June 25, 2016 , respectively, which were contributed from the gift card breakage liability included within other current liabilities in the consolidated balance sheets (see note 5).

16


(b) Equity method investments
The Company recognized royalty income from its equity method investees as follows (in thousands):
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
B-R 31 Ice Cream Company., Ltd.
$
587

 
570

 
876

 
891

BR-Korea Co., Ltd.
1,035

 
968

 
2,052

 
1,861

 
$
1,622

 
1,538

 
2,928

 
2,752

As of July 1, 2017 and December 31, 2016 , 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 $742 thousand and $805 thousand during the three months ended July 1, 2017 and June 25, 2016 , respectively, and $1.8 million and $1.6 million during the six months ended July 1, 2017 and June 25, 2016 , respectively, primarily for the purchase of ice cream products.
The Company recognized $958 thousand and $1.3 million during the three months ended July 1, 2017 and June 25, 2016 , respectively, and $2.0 million and $1.7 million during the six months ended July 1, 2017 and June 25, 2016 , respectively, in the consolidated statements of operations from the sale of ice cream and other products to Palm Oasis Ventures Pty. Ltd. (“Australia JV”). As of July 1, 2017 and December 31, 2016 , the Company had $3.0 million and $2.6 million , respectively, of net receivables from the Australia JV, consisting of accounts and notes receivable, net of current liabilities.

17


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 more than 20,000 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 July 1, 2017 , Dunkin’ Donuts had 12,350 global points of distribution with restaurants in 41 U.S. states, the District of Columbia, and 45 foreign countries. Baskin-Robbins had 7,892 global points of distribution as of the same date, with restaurants in 43 U.S. states, the District of Columbia, Puerto Rico, and 51 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 four 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, and (iv) other income including fees for the licensing of our brands for products sold in certain retail outlets, the licensing of the rights to manufacture Baskin-Robbins ice cream products sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, and online training fees. Prior to completing the sale of all remaining company-operated restaurants in fiscal year 2016, we also generated revenue from retail store sales at our company-operated restaurants.
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 no company-operated points of distribution during fiscal year 2017, 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 limit our working capital needs. For the six months ended July 1, 2017 , franchisee contributions to the U.S. advertising funds were $216.3 million.

18

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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 July 1, 2017 and June 25, 2016 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 July 1, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2017 .
Selected operating and financial highlights
  Amounts and percentages may not recalculate due to rounding
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
218,522

 
216,309

 
409,194

 
406,085

Operating income
113,550

 
106,141

 
204,843

 
191,474

Adjusted operating income
118,943

 
111,294

 
215,610

 
202,536

Net income
55,704

 
49,590

 
103,171

 
86,744

Adjusted net income
58,940

 
52,682

 
109,631

 
93,381

Systemwide sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
2,175.0

 
2,056.9

 
4,132.1

 
3,922.2

Dunkin’ Donuts International
169.4

 
175.0

 
344.3

 
342.5

Baskin-Robbins U.S.
187.5

 
183.0

 
316.6

 
312.9

Baskin-Robbins International
370.7

 
360.0

 
639.5

 
616.0

Total systemwide sales
$
2,902.6

 
2,774.9

 
5,432.5

 
5,193.5

Systemwide sales growth
4.6
 %
 
3.8
 %
 
4.6
 %
 
4.1
 %
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
0.8
 %
 
0.5
 %
 
0.4
 %
 
1.2
 %
Dunkin’ Donuts International
(2.8
)%
 
(3.1
)%
 
(1.3
)%
 
(2.6
)%
Baskin-Robbins U.S.
(0.9
)%
 
0.6
 %
 
(1.4
)%
 
2.3
 %
Baskin-Robbins International
3.3
 %
 
(6.6
)%
 
0.9
 %
 
(7.3
)%

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 (decline) 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 (decline) for Dunkin’ Donuts International and Baskin-Robbins International generally represents the growth in local currency average monthly sales for franchisee-operated restaurants, including joint ventures, that have been open at least 13 months and that have reported sales in the current and comparable prior year month.
Overall growth in systemwide sales of 4.6% for each of the three- and six-month periods ended July 1, 2017 over the same periods in the prior fiscal year resulted from the following:
Dunkin’ Donuts U.S. systemwide sales growth of 5.7% and 5.4% for the three and six months ended July 1, 2017 was primarily a result of 375 net new restaurants opened since June 25, 2016 and comparable store sales growth of 0.8% and 0.4%, respectively. The increases in comparable store sales were driven by increased average ticket, offset by a decline in traffic. Growth was primarily driven by sales of breakfast sandwiches. Beverage sales increased for the three months ended July 1, 2017 , led by an increase in iced coffee as Cold Brew sales continue to grow, while beverage sales decreased for the six months ended July 1, 2017 due primarily to a decline in hot coffee, offset by an increase in iced coffee, driven by Cold Brew sales.
Dunkin’ Donuts International systemwide sales declined 3.2% for the three months ended July 1, 2017 , driven primarily by sales declines in South Korea, Southeast Asia, and Europe, offset by sales growth in South America, the Middle East, and China. Systemwide sales grew 0.5% for the six months ended July 1, 2017 , driven primarily by sales

19

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growth in the Middle East, South America, and China, offset by a decline in South Korea. For both the three- and six-month periods, sales in South Korea were positively impacted by foreign exchange rates, while sales in Southeast Asia were negatively impacted by foreign exchange rates. Additionally, sales in South America for the six months ended July 1, 2017 were positively impacted by foreign exchange rates. On a constant currency basis, systemwide sales decreased by approximately 3% for the three months ended July 1, 2017 , while systemwide sales remained flat for the six months ended July 1, 2017 . Dunkin’ Donuts International comparable store sales declined 2.8% and 1.3% for the three and six months ended July 1, 2017 , respectively, due primarily to declines in South Korea, Europe, and the Middle East, offset by growth in South America. Additionally, declines in Southeast Asia contributed to the comparable store sales decline for the three-month period, while growth in Southeast Asia offset the comparable store sales decline for the six-month period.
Baskin-Robbins U.S. systemwide sales growth of 2.5% and 1.2% for the three and six months ended July 1, 2017 , respectively, was primarily a result of 21 net new restaurants opened since June 25, 2016 . Offsetting the systemwide sales growth were comparable store sales declines of 0.9% and 1.4% for the three and six months ended , respectively, driven by a decline in traffic, offset by increased average ticket. Sales of cups and cones, desserts, and beverages decreased, offset by increased sales in take-home products for the three months ended July 1, 2017 . Sales of beverages, soft serve, and sundaes decreased, offset by increased sales in take-home products for the six months ended July 1, 2017 .
Baskin-Robbins International systemwide sales growth of 3.0% and 3.8% for the three and six months ended July 1, 2017 , respectively, was driven by sales growth in South Korea and Japan, offset by declines in Europe and the Middle East. Also contributing to the systemwide sales growth for the six months ended  July 1, 2017  was an increase in sales in Canada, offset by a decline in China. Sales in South Korea were positively impacted by foreign exchange rates, while sales in Japan were negatively impacted by foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 3% for each of the three- and six-month periods ended July 1, 2017 . Baskin-Robbins International comparable store sales growth of 3.3% and 0.9% for the three and six months ended July 1, 2017 was driven primarily by growth in South Korea and Japan, offset by declines in the Middle East.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and six months ended July 1, 2017 and June 25, 2016 were as follows:
 
July 1,
2017
 
June 25,
2016
Points of distribution, at period end:
 
 
 
Dunkin’ Donuts U.S.
8,948

 
8,573

Dunkin’ Donuts International
3,402

 
3,368

Baskin-Robbins U.S.
2,551

 
2,530

Baskin-Robbins International
5,341

 
5,198

Consolidated global points of distribution
20,242

 
19,669

 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Net openings (closings) during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
64

 
73

 
120

 
142

Dunkin’ Donuts International
(1
)
 
35

 
(28
)
 
49

Baskin-Robbins U.S.
12

 
12

 
13

 
1

Baskin-Robbins International
58

 
78

 
57

 
120

Consolidated global net openings
133

 
198

 
162

 
312

Total revenues increased $2.2 million , or 1.0% , and $3.1 million , or 0.8% , for the three and six months ended July 1, 2017 , respectively, due primarily to increased royalty income as a result of systemwide sales growth, as well as an increase in rental income due to an increase in the number of leases for franchised locations. These increases in revenues were offset by a decrease in sales at company-operated restaurants as there were no company-operated points of distribution during 2017. Also offsetting the increases in revenues was a decrease in other revenues due primarily to decreases in transfer fees and refranchising gains, as well as a decrease in sales of ice cream and other products due to a decline in sales of ice cream and other products to the Middle East.

20

Table of Contents

Operating income and adjusted operating income for the three months ended July 1, 2017 increased $7.4 million , or 7.0% , and $7.6 million , or 6.9% , respectively, from the prior year period. Operating income and adjusted operating income for the six months ended July 1, 2017 increased $13.4 million , or 7.0% , and $13.1 million , or 6.5% , respectively, from the prior year period. The increases were primarily a result of the increase in royalty income, an increase in rental margin, and a decrease in general and administrative expenses. Additionally, the prior year periods were unfavorably impacted by the operating results of company-operated restaurants. The increases in operating income and adjusted operating income were offset by a gain recognized in connection with the sale of company-operated restaurants in the prior year periods, as well as the decrease in other revenues.
Net income and adjusted net income for the three months ended July 1, 2017 increased $6.1 million , or 12.3% , and $6.3 million , or 11.9% , respectively, primarily as a result of the increases in operating income and adjusted operating income, offset by an increase in tax expense.
Net income and adjusted net income for the six months ended July 1, 2017 increased $16.4 million , or 18.9% , and $16.3 million , or 17.4% , respectively, primarily as a result of the increases in operating income and adjusted operating income, as well as a decrease in tax expense. Tax expense for the six months ended July 1, 2017 included $6.8 million of excess tax benefits from share-based compensation, which are now included in the provision for income taxes as a result of the required adoption of a new accounting standard in the first quarter (see note 2(f) to the unaudited consolidated financial statements included herein).
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, impairment of our equity method investments, 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.
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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
(In thousands)
Operating income
$
113,550

 
106,141

 
204,843

 
191,474

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
5,333

 
5,568

 
10,660

 
11,329

Long-lived asset impairment charges
60

 
4

 
107

 
97

Transaction-related costs (a)

 
9

 

 
64

Bertico and related litigation

 
(428
)
 

 
(428
)
Adjusted operating income
$
118,943

 
111,294

 
215,610


202,536

Net income
$
55,704

 
49,590

 
103,171

 
86,744

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
5,333

 
5,568

 
10,660

 
11,329

Long-lived asset impairment charges
60

 
4

 
107

 
97

Transaction-related costs (a)

 
9

 

 
64

Bertico and related litigation

 
(428
)
 

 
(428
)
Tax impact of adjustments (b)
(2,157
)
 
(2,061
)
 
(4,307
)
 
(4,425
)
Adjusted net income
$
58,940

 
52,682

 
109,631

 
93,381

(a)
Represents non-capitalizable costs incurred as a result of the securitized financing facility.
(b)
Tax impact of adjustments calculated at a 40% effective tax rate.


21

Table of Contents

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.61

 
0.54

 
1.13

 
0.95

Common—diluted
0.60

 
0.54

 
1.11

 
0.94

Diluted adjusted earnings per share
0.64

 
0.57

 
1.18

 
1.01

Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding. Diluted adjusted earnings per share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per share should not be considered as an alternative to earnings per share derived in accordance with GAAP. Diluted adjusted earnings per share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.
The following table sets forth the computation of diluted adjusted earnings per share:
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
(In thousands, except share and per share data)
Adjusted net income
$
58,940

 
52,682

 
109,631

 
93,381

Weighted average number of common shares—diluted
92,606,525

 
92,451,913

 
92,863,378

 
92,535,091

Diluted adjusted earnings per share
$
0.64

 
0.57

 
1.18

 
1.01

Results of operations
Consolidated results of operations
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Franchise fees and royalty income
$
145,066

 
137,195

 
7,871

 
5.7
 %
 
$
275,135

 
260,978

 
14,157

 
5.4
 %
Rental income
27,408

 
25,769

 
1,639

 
6.4
 %
 
51,830

 
48,994

 
2,836

 
5.8
 %
Sales of ice cream and other products
32,862

 
33,966

 
(1,104
)
 
(3.3
)%
 
58,159

 
59,857

 
(1,698
)
 
(2.8
)%
Sales at company-operated restaurants

 
4,643

 
(4,643
)
 
(100.0
)%
 

 
10,313

 
(10,313
)
 
(100.0
)%
Other revenues
13,186

 
14,736

 
(1,550
)
 
(10.5
)%
 
24,070

 
25,943

 
(1,873
)
 
(7.2
)%
Total revenues
$
218,522

 
216,309

 
2,213

 
1.0
 %
 
$
409,194

 
406,085

 
3,109

 
0.8
 %
Total revenues for the three and six months ended July 1, 2017 increased $2.2 million , or 1.0% , and $3.1 million , or 0.8% , respectively. The increases were due primarily to an increase in franchise fees and royalty income driven by Dunkin’ Donuts U.S. systemwide sales growth, as well as an increase in rental income due to an increase in the number of leases for franchised locations. These increases in revenues were offset by a decrease in sales at company-operated restaurants as there were no company-operated points of distribution during 2017. Also offsetting the increases in revenues was a decrease in other revenues due primarily to decreases in transfer fees and refranchising gains, as well as a decrease in sales of ice cream and other products due to a decline in sales of ice cream products to our licensees in the Middle East.

22

Table of Contents

 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Occupancy expenses—franchised restaurants
$
14,287

 
13,614

 
673

 
4.9
 %
 
$
28,425

 
26,810

 
1,615

 
6.0
 %
Cost of ice cream and other products
22,199

 
22,827

 
(628
)
 
(2.8
)%
 
39,121

 
40,061

 
(940
)
 
(2.3
)%
Company-operated restaurant expenses

 
5,297

 
(5,297
)
 
(100.0
)%
 

 
11,790

 
(11,790
)
 
(100.0
)%
General and administrative expenses, net
62,382

 
63,459

 
(1,077
)
 
(1.7
)%
 
123,617

 
124,654

 
(1,037
)
 
(0.8
)%
Depreciation and amortization
10,404

 
10,746

 
(342
)
 
(3.2
)%
 
20,815

 
21,640

 
(825
)
 
(3.8
)%
Long-lived asset impairment charges
60

 
4

 
56

 
1,400.0
 %
 
107

 
97

 
10

 
10.3
 %
Total operating costs and expenses
$
109,332

 
115,947

 
(6,615
)
 
(5.7
)%
 
$
212,085

 
225,052

 
(12,967
)
 
(5.8
)%
Net income of equity method investments
4,327

 
3,717

 
610

 
16.4
 %
 
7,146

 
6,681

 
465

 
7.0
 %
Other operating income, net
33

 
2,062

 
(2,029
)
 
(98.4
)%
 
588

 
3,760

 
(3,172
)
 
(84.4
)%
Operating income
$
113,550

 
106,141

 
7,409

 
7.0
 %
 
$
204,843

 
191,474

 
13,369

 
7.0
 %
Occupancy expenses for franchised restaurants for the three and six months ended July 1, 2017 increased $0.7 million and $1.6 million , respectively, due primarily to an increase in the number of leases for franchised locations.
Net margin on ice cream and other products for the three and six months ended July 1, 2017 decreased $0.5 million , or 4.3% , and $0.8 million , or 3.8% , respectively, due primarily to a decline in sales.
Company-operated restaurant expenses for the three and six months ended July 1, 2017 decreased $5.3 million and $11.8 million , respectively, as all remaining company-operated points of distribution were sold by the end of fiscal 2016.
General and administrative expenses for the three and six months ended July 1, 2017 decreased $1.1 million and $1.0 million , respectively, due primarily to decreases in professional fees and other general expenses. These decreases in general and administrative expenses were offset by costs incurred during the three months ended July 1, 2017 to support brand-building activities, as well as an increase in personnel costs.
Depreciation and amortization for the three and six months ended July 1, 2017 decreased $0.3 million and $0.8 million , respectively, due primarily to 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 three and six months ended July 1, 2017 increased slightly from the prior year periods, as such charges generally fluctuate based on the timing of lease terminations and the related write-off of favorable lease intangible assets and leasehold improvements.
Net income of equity method investments for the three and six months ended July 1, 2017 increased $0.6 million and $0.5 million , respectively, primarily as a result of an increase in net income from our Japan joint venture.
Other operating income, net, which includes gains recognized in connection with the sale of real estate, fluctuates based on the timing of such transactions. Other operating income, net, for the  three and six months ended June 25, 2016  includes a $2.1 million gain recognized in connection with the sale of twelve company-operated points of distribution.

23

Table of Contents

 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
 
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Interest expense, net
$
24,460

 
24,848

 
(388
)
 
(1.6
)%
 
$
49,010

 
49,580

 
(570
)
 
(1.1
)%
Other losses (income), net
(28
)
 
102

 
(130
)
 
(127.5
)%
 
(215
)
 
472

 
(687
)
 
(145.6
)%
Total other expense
$
24,432

 
24,950

 
(518
)
 
(2.1
)%
 
$
48,795

 
50,052

 
(1,257
)
 
(2.5
)%
The decrease in net interest expense of $0.4 million and $0.6 million for the three and six months ended July 1, 2017 , respectively, was driven primarily by an increase in interest income earned on our cash balances, as well as a decrease in interest expense due to a lower principal balance as a result of principal payments made on our long-term debt since the prior year periods, offset by an increase in amortization of capitalized debt issuance costs.
The fluctuation in other losses (income), net, for the three and six months ended July 1, 2017 resulted primarily from net foreign exchange gains and losses driven primarily by fluctuations in the U.S. dollar against foreign currencies.
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
(In thousands, except percentages)
Income before income taxes
$
89,118

 
81,191

 
156,048

 
141,422

Provision for income taxes
33,414

 
31,601

 
52,877

 
54,678

Effective tax rate
37.5
%
 
38.9
%
 
33.9
%
 
38.7
%
The decrease in the effective tax rate for the three and six months ended July 1, 2017 was driven by $0.7 million and $6.8 million, respectively, of excess tax benefits from share-based compensation, which are now included in the provision for income taxes as a result of the required adoption of a new accounting standard (see note 2(f) to the unaudited consolidated financial statements included herein).
Operating segments
We operate four reportable operating segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We evaluate the performance of our segments and allocate 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. Segment profit for the Dunkin’ Donuts International and Baskin-Robbins International segments includes net income of equity method investments, except for the other-than-temporary impairment charges and the related reduction in depreciation, net of tax, on the underlying long-lived assets.
For reconciliations to total revenues and income before income taxes, see note 6 to the unaudited consolidated financial statements included herein. Revenues for all segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues not included in segment revenues 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.

24

Table of Contents

Dunkin’ Donuts U.S.
 
Three months ended
 
Six months ended
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
 
July 1,
2017
 
June 25,
2016
 
Increase (Decrease)
 
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
119,097

 
112,031

 
7,066

 
6.3
 %
 
$
226,272

 
213,554

 
12,718

 
6.0
 %
Franchise fees
10,065

 
9,337

 
728

 
7.8
 %
 
19,308

 
16,405

 
2,903

 
17.7
 %
Rental income
26,532

 
24,928

 
1,604

 
6.4
 %
 
50,056

 
47,313

 
2,743

 
5.8
 %
Sales at company-operated restaurants

 
4,643

 
(4,643
)
 
(100.0
)%
 

 
10,313

 
(10,313
)
 
(100.0
)%
Other revenues
1,386

 
2,721

 
(1,335
)
 
(49.1
)%
 
3,406

 
4,888

 
(1,482
)
 
(30.3
)%
Total revenues
$
157,080

 
153,660

 
3,420

 
2.2
 %
 
$
299,042

 
292,473

 
6,569

 
2.2
 %
Segment profit
$
122,548

 
116,085

 
6,463