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
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.
(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
|
|
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
.
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
|
)
|
|
|
|
|
|
|
|
(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.
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
|
|
(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
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.
(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
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
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.