10-Q 1 dnkn-20180929x10q.htm 10-Q Document

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

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 29, 2018
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 every Interactive Data File required to be submitted 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 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, indicate 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 November 2, 2018, 82,597,346 shares of common stock of the registrant were outstanding.



DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 


2


Part I.        Financial Information
Item 1.       Financial Statements
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
September 29,
2018
 
December 30,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
428,179

 
1,018,317

Restricted cash
79,432

 
94,047

Accounts receivable, net of allowance for doubtful accounts of $3,961 and $4,390 as of September 29, 2018 and December 30, 2017, respectively
79,778

 
69,517

Notes and other receivables, net of allowance for doubtful accounts of $975 and $600 as of September 29, 2018 and December 30, 2017, respectively
53,933

 
52,332

Prepaid income taxes
20,826

 
21,927

Prepaid expenses and other current assets
48,214

 
48,193

Total current assets
710,362

 
1,304,333

Property, equipment, and software, net of accumulated depreciation of $155,723 and $143,319 as of September 29, 2018 and December 30, 2017, respectively
205,860

 
181,542

Equity method investments
142,954

 
140,615

Goodwill
888,293

 
888,308

Other intangible assets, net of accumulated amortization of $261,952 and $250,142 as of September 29, 2018 and December 30, 2017, respectively
1,340,034

 
1,357,157

Other assets
66,650

 
65,478

Total assets
$
3,354,153

 
3,937,433

Liabilities and Stockholders’ Deficit
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
31,650

 
31,500

Capital lease obligations
554

 
596

Accounts payable
55,862

 
53,417

Deferred revenue
43,752

 
44,876

Other current liabilities
296,622

 
355,110

Total current liabilities
428,440

 
485,499

Long-term debt, net
3,017,281

 
3,035,857

Capital lease obligations
6,777

 
7,180

Unfavorable operating leases acquired
8,671

 
9,780

Deferred revenue
354,472

 
361,458

Deferred income taxes, net
200,196

 
214,345

Other long-term liabilities
73,874

 
77,853

Total long-term liabilities
3,661,271

 
3,706,473

Commitments and contingencies (note 9)

 

Stockholders’ 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; 82,468,705 shares issued and 82,441,928 shares outstanding as of September 29, 2018; 90,404,022 shares issued and 90,377,245 shares outstanding as of December 30, 2017
82

 
90

Additional paid-in capital
645,505

 
724,114

Treasury stock, at cost; 26,777 shares as of September 29, 2018 and December 30, 2017
(1,060
)
 
(1,060
)
Accumulated deficit
(1,365,010
)
 
(968,148
)
Accumulated other comprehensive loss
(15,075
)
 
(9,535
)
Total stockholders’ deficit
(735,558
)
 
(254,539
)
Total liabilities and stockholders’ deficit
$
3,354,153

 
3,937,433


See accompanying notes to unaudited consolidated financial statements.

3

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

 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Revenues:
 
 
 
 
 
 
 
Franchise fees and royalty income
$
151,991

 
143,734

 
435,740

 
415,343

Advertising fees and related income
132,471

 
122,660

 
375,017

 
355,224

Rental income
27,547

 
27,713

 
79,425

 
79,543

Sales of ice cream and other products
24,867

 
23,173

 
74,784

 
74,358

Other revenues
13,135

 
12,791

 
37,027

 
36,137

Total revenues
350,011

 
330,071

 
1,001,993

 
960,605

Operating costs and expenses:
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
14,765

 
15,333

 
43,059

 
43,758

Cost of ice cream and other products
21,311

 
19,457

 
60,956

 
58,578

Advertising expenses
133,732

 
124,080

 
378,283

 
358,828

General and administrative expenses, net
63,997

 
60,580

 
183,122

 
182,023

Depreciation
4,937

 
4,941

 
15,095

 
15,096

Amortization of other intangible assets
5,230

 
5,341

 
15,912

 
16,001

Long-lived asset impairment charges
55

 
536

 
1,209

 
643

Total operating costs and expenses
244,027

 
230,268

 
697,636

 
674,927

Net income of equity method investments
5,787

 
5,466

 
11,665

 
12,612

Other operating income (loss), net
(179
)
 
3

 
(749
)
 
591

Operating income
111,592

 
105,272

 
315,273

 
298,881

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
1,930

 
624

 
5,088

 
1,370

Interest expense
(31,932
)
 
(24,436
)
 
(96,947
)
 
(74,192
)
Other income (losses), net
(101
)
 
155

 
(700
)
 
370

Total other expense, net
(30,103
)
 
(23,657
)
 
(92,559
)
 
(72,452
)
Income before income taxes
81,489

 
81,615

 
222,714

 
226,429

Provision for income taxes
15,422

 
40,445

 
45,997

 
89,874

Net income
$
66,067

 
41,170

 
176,717

 
136,555

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.80

 
0.46

 
2.10

 
1.50

Common—diluted
0.79

 
0.45

 
2.07

 
1.48

Cash dividends declared per common share
0.35

 
0.32

 
1.04

 
0.97

See accompanying notes to unaudited consolidated financial statements.

4

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

 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income
$
66,067

 
41,170

 
176,717

 
136,555

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense (benefit) of $(17) and $6 for the three months ended September 29, 2018 and September 30, 2017, respectively, and $(63) and $579 for the nine months ended September 29, 2018 and September 30, 2017, respectively
(412
)
 
(637
)
 
(6,156
)
 
5,354

Effect of interest rate swaps, net of deferred tax benefit of $216 and $650 for the three and nine months ended September 30, 2017, respectively

 
(319
)
 

 
(955
)
Other, net
46

 
24

 
616

 
677

Total other comprehensive income (loss), net
(366
)
 
(932
)
 
(5,540
)
 
5,076

Comprehensive income
$
65,701

 
40,238

 
171,177

 
141,631

See accompanying notes to unaudited consolidated financial statements.

5

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

 
Nine months ended
 
September 29,
2018
 
September 30,
2017
Cash flows from operating activities:
 
 
 
Net income
$
176,717

 
136,555

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31,007

 
31,097

Amortization of debt issuance costs
3,761

 
4,843

Deferred income taxes
(13,984
)
 
(10,649
)
Provision for bad debt
340

 
599

Share-based compensation expense
10,862

 
10,896

Net income of equity method investments
(11,665
)
 
(12,612
)
Dividends received from equity method investments
4,509

 
4,711

Other, net
4,397

 
428

Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
(12,504
)
 
(854
)
Prepaid income taxes, net
1,156

 
10,872

Prepaid expenses and other current assets
(137
)
 
(12,606
)
Accounts payable
2,324

 
955

Other current liabilities
(58,390
)
 
(63,962
)
Deferred revenue
(8,302
)
 
29,197

Other, net
(3,562
)
 
(3,290
)
Net cash provided by operating activities
126,529

 
126,180

Cash flows from investing activities:
 
 
 
Additions to property, equipment, and software
(41,450
)
 
(13,649
)
Other, net
20

 
(101
)
Net cash used in investing activities
(41,430
)
 
(13,750
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(23,688
)
 
(18,750
)
Payment of debt issuance and other debt-related costs

 
(312
)
Dividends paid on common stock
(86,035
)
 
(87,911
)
Repurchases of common stock, including accelerated share repurchases
(650,368
)

(127,186
)
Exercise of stock options
71,657

 
33,267

Other, net
(1,101
)
 
(214
)
Net cash used in financing activities
(689,535
)
 
(201,106
)
Effect of exchange rates on cash, cash equivalents, and restricted cash
(350
)
 
576

Decrease in cash, cash equivalents, and restricted cash
(604,786
)
 
(88,100
)
Cash, cash equivalents, and restricted cash, beginning of period
1,114,099

 
431,832

Cash, cash equivalents, and restricted cash, end of period
$
509,313

 
343,732

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
59,245

 
89,882

Cash paid for interest
96,290

 
70,038

Noncash investing activities:
 
 
 
Property, equipment, and software included in accounts payable and other current liabilities
2,865

 
2,533

Purchase of leaseholds in exchange for capital lease obligations

 
330

Purchase of property, equipment, and software in exchange for note payable
1,500

 

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 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’ brand, we franchise restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. Additionally, we license Dunkin’ brand products sold in certain retail outlets such as retail packaged coffee, Dunkin’ K-Cup® pods, and ready-to-drink bottled iced coffee. Through our Baskin-Robbins brand, we franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, we distribute Baskin-Robbins ice cream products to certain international markets for sale in Baskin-Robbins restaurants and certain retail outlets.
Throughout these unaudited consolidated financial statements, “Dunkin’ Brands,” “the Company,” “we,” “us,” “our,” and “management” refer to DBGI and its consolidated subsidiaries taken as a whole.
(2) Summary of significant accounting policies
(a) Unaudited consolidated financial statements
The consolidated balance sheet as of September 29, 2018, the consolidated statements of operations and comprehensive income for the three and nine months ended September 29, 2018 and September 30, 2017, and the consolidated statements of cash flows for the nine months ended September 29, 2018 and September 30, 2017 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 30, 2017, 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 nine-month periods ended September 29, 2018 and September 30, 2017 reflect the results of operations for the 13-week and 39-week periods ended on those dates, respectively. Operating results for the three- and nine-month periods ended September 29, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2018.
(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


Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of September 29, 2018 and December 30, 2017 were as follows (in thousands):
 
September 29,
2018
 
December 30,
2017
Cash and cash equivalents
$
428,179

 
1,018,317

Restricted cash
79,432

 
94,047

Restricted cash, included in Other assets
1,702

 
1,735

Total cash, cash equivalents, and restricted cash
$
509,313

 
1,114,099

(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 September 29, 2018 and December 30, 2017 are summarized as follows (in thousands):
 
September 29, 2018
 
December 30, 2017
 
Significant other observable inputs (Level 2)
 
Total
 
Significant other observable inputs (Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
Company-owned life insurance
$
11,521

 
11,521

 
10,836

 
10,836

Total assets
$
11,521

 
11,521

 
10,836

 
10,836

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
10,952

 
10,952

 
13,543

 
13,543

Total liabilities
$
10,952

 
10,952

 
13,543

 
13,543

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 September 29, 2018 and December 30, 2017 were as follows (in thousands):
 
September 29, 2018
 
December 30, 2017
 
Carrying value
 
Estimated fair value
 
Carrying value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
3,048,931

 
3,044,365

 
3,067,357

 
3,156,099

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, the fair value of 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, advertising fees, and sales of ice cream and other products. In addition, we have

8


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 September 29, 2018 and December 30, 2017, one master licensee, including its majority-owned subsidiaries, accounted for approximately 14% and 11%, respectively, of total accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for any of the three- and nine-month periods ended September 29, 2018 and September 30, 2017.
Additionally, the Company engages various third parties to manufacture and/or distribute certain Dunkin' and Baskin-Robbins products under licensing arrangements. As of September 29, 2018, one of these third parties accounted for approximately 16% of total accounts and notes receivable. No individual third party accounted for more than 10% of total accounts and notes receivable as of December 30, 2017. No individual third party accounted for more than 10% of total revenues for any of the three- and nine-month periods ended September 29, 2018 and September 30, 2017.
(f) Advertising expenses
Advertising expenses in the consolidated statements of operations includes advertising expenses incurred by the Company, including those expenses incurred by the advertising funds and for the administration of the gift card program. The Company expenses production costs of commercial advertising upon first airing and expenses the costs of communicating the advertising in the period in which the advertising occurs. Costs of print advertising and certain promotion-related items are deferred and expensed the first time the advertising is displayed. Prepaid expenses and other current assets in the consolidated balance sheets include $14.3 million and $15.5 million at September 29, 2018 and December 30, 2017, respectively, that was related to advertising. Advertising expenses are allocated to interim periods in relation to the related revenues. When revenues of the advertising fund exceed the related advertising expenses, advertising costs are accrued up to the amount of revenues.
(g) Recent accounting pronouncements
Recently adopted accounting pronouncements
In February 2018, the Financial Accounting Standards Board (the “FASB”) issued new guidance allowing companies the option to reclassify from accumulated other comprehensive loss to accumulated deficit the stranded income tax effects resulting from the Tax Cuts and Jobs Act that was enacted on December 22, 2017. The Company early adopted this standard during the first quarter of fiscal year 2018 and has elected to present the change in the period of adoption. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued new guidance for revenue recognition related to contracts with customers (“ASC 606”), except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. We adopted this new guidance in fiscal year 2018. See note 3 for further disclosure of the impact of the new guidance.
Recent accounting pronouncements not yet adopted
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 with an option to not restate comparative periods in the period of adoption. The Company expects to adopt this new guidance in fiscal year 2019 without restating comparative periods, and 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. We do not expect the adoption of the new guidance to have a material impact on the Company's net income, liquidity, or compliance with debt agreements. The Company expects to elect the package of practical expedients permitted under the new guidance, which includes allowing the Company to continue utilizing historical classification of leases.
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 the Company's consolidated financial statements, as well as 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 lease accounting to assist in the application of the new guidance.
(h) Subsequent events
Subsequent events have been evaluated through the date these consolidated financial statements were filed.

9


(3) Revenue recognition
(a) Updated revenue recognition policies
Franchise fees and royalty income
Domestically, the Company sells individual franchises as well as territory agreements in the form of store development agreements (“SDAs”) that grant the right to develop restaurants in designated areas. The franchise agreements and SDAs typically require the franchisee to pay initial nonrefundable franchise fees prior to opening the respective restaurants and continuing fees, or royalty income, on a weekly basis based upon a percentage of franchisee gross sales. The initial term of domestic franchise agreements is typically 20 years. Prior to the end of the franchise term or as otherwise provided by the Company, a franchisee may elect to renew the term of a franchise agreement, and, if approved, will typically pay a renewal fee upon execution of the renewal term. If approved, a franchisee may transfer a franchise agreement or SDA to a new or existing franchisee, at which point a transfer fee is paid. Occasionally, the Company offers incentive programs to franchisees in conjunction with a franchise/license agreement, territory agreement, or renewal agreement.
Internationally, the Company sells master franchise agreements that grant the master franchisee the right to develop and operate, and in some instances sub-franchise, a certain number of restaurants within a particular geographic area. The master franchisee is typically required to pay an upfront market entry fee upon entering into the master franchise agreement and an upfront initial franchise fee for each developed restaurant prior to each respective opening. For the Dunkin’ brand and in certain Baskin-Robbins international markets, the master franchisee will also pay continuing fees, or royalty income, generally on a monthly basis based upon a percentage of sales. Generally, the master franchise agreement serves as the franchise agreement for the underlying restaurants, and the initial franchise term provided for each restaurant typically ranges between 10 and 20 years.
Generally, the franchise license granted for each individual restaurant within an arrangement represents a single performance obligation. Therefore, initial franchise fees and market entry fees for each arrangement are allocated to each individual restaurant and recognized over the term of the respective franchise agreement from the date of the restaurant opening. Royalty income is also recognized over the term of the respective franchise agreement based on the royalties earned each period as the underlying sales occur. Renewal fees are generally recognized over the renewal term for the respective restaurant from the start of the renewal period. Transfer fees are recognized over the remaining term of the franchise agreement beginning at the time of transfer. Incentives provided to franchisees in conjunction with a franchise/license agreement, territory agreement, or renewal agreement are recognized over the remaining term of the respective agreement. Additionally, for Baskin-Robbins international markets that do not pay a royalty, a portion of the consideration from sales of ice cream and other products is allocated to royalty income as consideration for the use of the franchise license, which is recognized when the related sales occur and is estimated based on royalty rates in effect for markets where the franchise license is sold on a standalone basis. Fees received or receivable that are expected to be recognized as revenue within one year are classified as current deferred revenue in the consolidated balance sheets.
Advertising fees and related income
Domestically and in limited international markets, franchise agreements typically require the franchisee to pay continuing advertising fees on a weekly basis based on a percentage of franchisee gross sales, which are recognized over the term of the respective franchise agreement based on the fees earned each period as the underlying sales occur.
The Company and its franchisees sell gift cards that are redeemable for products in our Dunkin’ and Baskin-Robbins restaurants. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their restaurants. A liability for unredeemed gift cards, as well as historical gift certificates sold, is included in other current liabilities in the consolidated balance sheets.
There are no expiration dates or service fees charged on the gift cards. While the franchisees continue to honor all gift cards presented for payment, the likelihood of redemption may be determined to be remote for certain cards due to long periods of inactivity. In these circumstances, the Company may recognize revenue from unredeemed gift cards (“breakage revenue”) if they are not subject to unclaimed property laws. For Dunkin’ gift cards enrolled in the DD Perks® Rewards loyalty program and other cards with expected similar redemption behavior, breakage is estimated and recognized at the point in time when the likelihood of redemption of any remaining card balance becomes remote, generally after a period of sufficient inactivity. Breakage on all other Dunkin’ gift cards and all Baskin-Robbins gift cards is estimated and recognized over time in proportion to actual gift card redemptions, based on historical redemption rates.

10


The Company also collects gift card program service fees from franchisees to offset the costs to administer the gift card program. The gift card program service fees are based on the volume of gift card transactions processed and are recognized as the underlying transactions occur.
Rental income
Rental income for base rentals is recorded on a straight-line basis over the lease term, including the amortization of any tenant improvement dollars paid. The differences between the straight-line rent amounts and amounts receivable under the leases are recorded as deferred rent assets in current or long-term assets, as appropriate. Contingent rental income is recognized as earned, and any amounts received from lessees in advance of achieving stipulated thresholds are deferred until such thresholds are actually achieved. Deferred contingent rentals are recorded as deferred revenue in current liabilities in the consolidated balance sheets.
Sales of ice cream and other products
We distribute Baskin-Robbins ice cream products and, in limited cases, Dunkin’ products to franchisees in certain international locations. Revenue from the sale of ice cream and other products is recognized when title and risk of loss transfers to the buyer, which is generally upon delivery. Payment for ice cream and other products is generally due within a relatively short period of time subsequent to delivery.
Other revenues
Other revenues include fees generated by licensing our brand names and other intellectual property, as well as gains, net of losses and transactions costs, from the sales of restaurants that were not company-operated to new or existing franchisees. Licensing fees are recognized over the term of the expected license agreement, with sales-based license fees being recognized based on the amount earned each period as the underlying sales occur. Gains on the refranchise or sale of a restaurant are recognized over the term of the related agreement.

11


(b) Disaggregation of revenue
Revenues are disaggregated by timing of revenue recognition and reconciled to reportable segment revenues as follows (in thousands):
 
Three months ended September 29, 2018
 
Dunkin' U.S.
 
Baskin-Robbins U.S.
 
Dunkin' International
 
Baskin-Robbins International
 
U.S. Advertising Funds
 
Total reportable segment revenues
 
Other(a)
 
Total revenues
Revenues recognized under ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized over time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty income
$
124,805

 
8,626

 
5,192

 
2,140

 

 
140,763

 
4,812

 
145,575

Franchise fees
4,840

 
319

 
1,054

 
203

 

 
6,416

 

 
6,416

Advertising fees and related income

 

 

 

 
118,208

 
118,208

 
8,312

 
126,520

Other revenues
597

 
2,994

 
3

 
7

 

 
3,601

 
8,754

 
12,355

Total revenues recognized over time
130,242

 
11,939

 
6,249

 
2,350

 
118,208

 
268,988

 
21,878

 
290,866

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized at a point in time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of ice cream and other products

 
906

 

 
28,625

 

 
29,531

 
(4,664
)
 
24,867

Other revenues
405

 
63

 
7

 
45

 

 
520

 
260

 
780

Total revenues recognized at a point in time
405

 
969

 
7

 
28,670

 

 
30,051

 
(4,404
)
 
25,647

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues recognized under ASC 606
130,647

 
12,908

 
6,256

 
31,020

 
118,208

 
299,039

 
17,474

 
316,513

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues not subject to ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising fees and related income

 

 

 

 

 

 
5,951

 
5,951

Rental income
26,637

 
773

 

 
137

 

 
27,547

 

 
27,547

Total revenues not subject to ASC 606
26,637

 
773

 

 
137

 

 
27,547

 
5,951

 
33,498

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
157,284

 
13,681

 
6,256

 
31,157

 
118,208

 
326,586

 
23,425

 
350,011

(a) Revenues reported as “Other” include revenues earned through certain licensing revenues, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Additionally, the allocation of royalty income from sales of ice cream and other products is reported as “Other.”

12


 
Three months ended September 30, 2017
 
Dunkin' U.S.
 
Baskin-Robbins U.S.
 
Dunkin' International
 
Baskin-Robbins International
 
U.S. Advertising Funds
 
Total reportable segment revenues
 
Other(a)
 
Total revenues
Revenues recognized under ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized over time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty income
$
118,831

 
8,501

 
4,442

 
1,966

 

 
133,740

 
4,380

 
138,120

Franchise fees
4,638

 
190

 
460

 
326

 

 
5,614

 

 
5,614

Advertising fees and related income

 

 

 

 
113,862

 
113,862

 
547

 
114,409

Other revenues
528

 
3,015

 
3

 
6

 

 
3,552

 
8,498

 
12,050

Total revenues recognized over time
123,997

 
11,706

 
4,905

 
2,298

 
113,862

 
256,768

 
13,425

 
270,193

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized at a point in time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of ice cream and other products

 
771

 

 
26,512

 

 
27,283

 
(4,110
)
 
23,173

Other revenues
405

 
47

 
8

 
24

 

 
484

 
257

 
741

Total revenues recognized at a point in time
405

 
818

 
8

 
26,536

 

 
27,767

 
(3,853
)
 
23,914

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues recognized under ASC 606
124,402

 
12,524

 
4,913

 
28,834

 
113,862

 
284,535

 
9,572

 
294,107

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues not subject to ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising fees and related income

 

 

 

 

 

 
8,251

 
8,251

Rental income
26,786

 
798

 

 
129

 

 
27,713

 

 
27,713

Total revenues not subject to ASC 606
26,786

 
798

 

 
129

 

 
27,713

 
8,251

 
35,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
151,188

 
13,322

 
4,913

 
28,963

 
113,862

 
312,248

 
17,823

 
330,071

(a) Revenues reported as “Other” include revenues earned through certain licensing revenues, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Additionally, the allocation of royalty income from sales of ice cream and other products is reported as “Other.”

13


 
Nine months ended September 29, 2018
 
Dunkin' U.S.
 
Baskin-Robbins U.S.
 
Dunkin' International
 
Baskin-Robbins International
 
U.S. Advertising Funds
 
Total reportable segment revenues
 
Other(a)
 
Total revenues
Revenues recognized under ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized over time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty income
$
360,859

 
24,040

 
14,862

 
5,837

 

 
405,598

 
12,222

 
417,820

Franchise fees
14,312

 
911

 
2,037

 
660

 

 
17,920

 

 
17,920

Advertising fees and related income

 

 

 

 
341,549

 
341,549

 
17,062

 
358,611

Other revenues
1,720

 
8,400

 
5

 
8

 

 
10,133

 
24,877

 
35,010

Total revenues recognized over time
376,891

 
33,351

 
16,904

 
6,505

 
341,549

 
775,200

 
54,161

 
829,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized at a point in time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of ice cream and other products

 
2,426

 

 
84,006

 

 
86,432

 
(11,648
)
 
74,784

Other revenues
960

 
213

 
(25
)
 
164

 

 
1,312

 
705

 
2,017

Total revenues recognized at a point in time
960

 
2,639

 
(25
)
 
84,170

 

 
87,744

 
(10,943
)
 
76,801

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues recognized under ASC 606
377,851

 
35,990

 
16,879

 
90,675

 
341,549

 
862,944

 
43,218

 
906,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues not subject to ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising fees and related income

 

 

 

 

 

 
16,406

 
16,406

Rental income
76,734

 
2,303

 

 
388

 

 
79,425

 

 
79,425

Total revenues not subject to ASC 606
76,734

 
2,303

 

 
388

 

 
79,425

 
16,406

 
95,831

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
454,585

 
38,293

 
16,879

 
91,063

 
341,549

 
942,369

 
59,624

 
1,001,993

(a) Revenues reported as “Other” include revenues earned through certain licensing revenues, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Additionally, the allocation of royalty income from sales of ice cream and other products is reported as “Other.”


14


 
Nine months ended September 30, 2017
 
Dunkin' U.S.
 
Baskin-Robbins U.S.
 
Dunkin' International
 
Baskin-Robbins International
 
U.S. Advertising Funds
 
Total reportable segment revenues
 
Other(a)
 
Total revenues
Revenues recognized under ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized over time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty income
$
345,103

 
24,265

 
13,011

 
5,255

 

 
387,634

 
11,353

 
398,987

Franchise fees
13,500

 
589

 
1,368

 
899

 

 
16,356

 

 
16,356

Advertising fees and related income

 

 

 

 
330,007

 
330,007

 
1,270

 
331,277

Other revenues
1,645

 
8,515

 
7

 
7

 

 
10,174

 
23,913

 
34,087

Total revenues recognized over time
360,248

 
33,369

 
14,386

 
6,161

 
330,007

 
744,171

 
36,536

 
780,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized at a point in time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of ice cream and other products

 
2,179

 

 
82,602

 

 
84,781

 
(10,423
)
 
74,358

Other revenues
1,129

 
261

 
(29
)
 
133

 

 
1,494

 
556

 
2,050

Total revenues recognized at a point in time
1,129

 
2,440

 
(29
)
 
82,735

 

 
86,275

 
(9,867
)
 
76,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues recognized under ASC 606
361,377

 
35,809

 
14,357

 
88,896

 
330,007

 
830,446

 
26,669

 
857,115

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues not subject to ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising fees and related income

 

 

 

 

 

 
23,947

 
23,947

Rental income
76,842

 
2,346

 

 
355

 

 
79,543

 

 
79,543

Total revenues not subject to ASC 606
76,842

 
2,346

 

 
355

 

 
79,543

 
23,947

 
103,490

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
438,219

 
38,155

 
14,357

 
89,251

 
330,007

 
909,989

 
50,616

 
960,605

(a) Revenues reported as “Other” include revenues earned through certain licensing revenues, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Additionally, the allocation of royalty income from sales of ice cream and other products is reported as “Other.

15


(c) Contract balances
Information about receivables and deferred revenue subject to ASC 606 is as follows (in thousands):
 
September 29,
2018
 
December 30,
2017
 
Balance Sheet Classification
Receivables
$
103,097

 
76,455

 
Accounts receivable, net and Notes and other receivables, net
 
 
 
 
 
 
Deferred revenue:
 
 
 
 
 
Current
$
30,724

 
27,724

 
Deferred revenue—current
Long-term
354,472

 
361,458

 
Deferred revenue—long term
Total
$
385,196

 
389,182

 
 
Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, sales of ice cream and other products, and licensing fees. Deferred revenue primarily represents the Company’s remaining performance obligations under its franchise and license agreements for which consideration has been received or is receivable, and is generally recognized on a straight-line basis over the remaining term of the related agreement.
The decrease in the deferred revenue balance as of September 29, 2018 is primarily driven by $24.0 million of revenues recognized that were included in the deferred revenue balance as of December 30, 2017, as well as franchisee incentives provided during fiscal year 2018, offset by cash payments received or due in advance of satisfying our performance obligations.
As of September 29, 2018 and December 30, 2017, there were no contract assets from contracts with customers.
(d) Transaction price allocated to remaining performance obligations
Estimated revenue expected to be recognized in the future related to performance obligations that are either unsatisfied or partially satisfied at September 29, 2018 is as follows (in thousands):
Fiscal year:
 
2018(a)
$
9,279

2019
26,031

2020
22,744

2021
22,628

2022
22,441

Thereafter
244,692

Total
$
347,815

 
 
(a) Represents the estimate for remainder of fiscal year 2018 which excludes the nine months ended September 29, 2018.
The estimated revenue in the table above does not contemplate future franchise renewals or new franchise agreements for restaurants for which a franchise agreement or SDA does not exist at September 29, 2018. Additionally, the table above excludes $63.6 million of consideration allocated to restaurants that are not yet open at September 29, 2018. The Company has applied the sales-based royalty exemption which permits exclusion of variable consideration in the form of sales-based royalties from the disclosure of remaining performance obligations in the table above. Additionally, the Company has applied the transition practical expedient that allows the Company to omit the above disclosures for the fiscal year ended December 30, 2017.
(e) Change in accounting principle
In fiscal year 2018, the Company adopted new revenue recognition guidance which 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 Company adopted the guidance using the full retrospective transition method which results in restating each prior reporting period presented. The restated amounts include the application of a practical expedient that permitted the Company to reflect the aggregate effect of all modifications that occurred prior to fiscal year 2016 when identifying the satisfied and unsatisfied performance obligations,

16


determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations. The Company implemented new business processes, internal controls, and modified information technology systems to assist in the ongoing application of the new guidance.
Franchise Fees
The adoption of the new guidance changed the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal and transfer fees. Previously, these fees were generally recognized upfront upon either opening of the respective restaurant, when a renewal agreement became effective, or upon transfer of a franchise agreement. The new guidance generally requires these fees to be recognized over the term of the related franchise license for the respective restaurant. Additionally, transfer fees were previously included within other revenues, but are now included within franchise fees and royalty income in the consolidated statements of operations. The new guidance did not materially impact the recognition of royalty income.
Advertising
The adoption of the new guidance changed the reporting of advertising fund contributions from franchisees and the related advertising fund expenditures, which were not previously included in the consolidated statements of operations. The new guidance requires these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. The assets and liabilities held by the advertising funds, which were previously reported as restricted assets and liabilities of advertising funds, respectively, are now included within the respective balance sheet caption to which the assets and liabilities relate. Additionally, advertising costs that have been incurred by the Company outside of the advertising funds were previously included within general and administrative expenses, net, but are now included within advertising expenses in the consolidated statements of operations.
Previously, breakage from Dunkin’ and Baskin-Robbins gift cards was recorded as a reduction to general and administrative expenses, net, to offset the related gift card program costs. In accordance with the new guidance, breakage revenue is now reported on a gross basis in the consolidated statements of operations within advertising fees and related income, and the related gift card program costs are included in advertising expenses.
Ice Cream Royalty Allocation
The adoption of the new guidance requires a portion of sales of ice cream products to be allocated to royalty income as consideration for the use of the franchise license. As such, a portion of sales of ice cream and other products has been reclassified to franchise fees and royalty income in the consolidated statements of operations under the new guidance. This allocation has no impact on the timing of recognition of the related sales of ice cream products or royalty income.
Other Revenue Transactions
The adoption of the new guidance requires certain fees generated by licensing of our brand names and other intellectual property to be recognized over the term of the related agreement, including a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in fiscal year 2015. Additionally, gains associated with the refranchise, sale, or transfer of restaurants that were not company-operated to new or existing franchisees are recognized over the term of the related agreement under the new guidance, instead of upon closing of the sale transaction or transfer.

17


Impacts to Prior Period Information
The new guidance for revenue recognition impacted the Company's previously reported financial statements as follows:
Consolidated Balance Sheets
December 30, 2017
(In thousands)
 
 
 
 
Adjustments for new revenue recognition guidance
 
 
 
 
Previously reported
 
Franchise fees
 
Advertising
 
Other revenue transactions
 
Restated
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,018,317

 

 
—   

 

 
1,018,317

Restricted cash
 
94,047

 

 
—   

 

 
94,047

Accounts receivables, net
 
51,442

 

 
18,075

 

 
69,517

Notes and other receivables, net
 
51,082

 

 
1,250

 

 
52,332

Restricted assets of advertising funds
 
47,373

 

 
(47,373
)
 

 

Prepaid income taxes
 
21,879

 

 
48

 

 
21,927

Prepaid expenses and other current assets
 
32,695

 

 
15,498

 

 
48,193

Total current assets
 
1,316,835

 

 
(12,502
)
 

 
1,304,333

Property and equipment, net
 
169,005

 

 
12,537

 

 
181,542

Equity method investments
 
140,615

 

 
—   

 

 
140,615

Goodwill
 
888,308

 

 
—   

 

 
888,308

Other intangibles assets, net
 
1,357,157

 

 
—   

 

 
1,357,157

Other assets
 
65,464

 

 
14

 

 
65,478

Total assets
 
$
3,937,384

 

 
49

 

 
3,937,433

Liabilities and Stockholders’ Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
31,500

 
—   

 
—   

 
—   

 
31,500

Capital lease obligations
 
596

 
—   

 
—   

 
—   

 
596

Accounts payable
 
16,307

 
—   

 
37,110

 
—   

 
53,417

Liabilities of advertising funds
 
58,014

 
—   

 
(58,014
)
 
—   

 

Deferred revenue
 
39,395

 
1,502

 
(550
)
 
4,529

 
44,876

Other current liabilities
 
326,078

 
—   

 
29,032

 
—   

 
355,110

Total current liabilities
 
471,890

 
1,502

 
7,578

 
4,529

 
485,499

Long-term debt, net
 
3,035,857

 
—   

 
—   

 
—   

 
3,035,857

Capital lease obligations
 
7,180

 
—   

 
—   

 
—   

 
7,180

Unfavorable operating leases acquired
 
9,780

 
—   

 
—   

 
—   

 
9,780

Deferred revenue
 
11,158

 
328,183

 
(7,518
)
 
29,635

 
361,458

Deferred income taxes, net
 
315,249

 
(91,488
)
 
—   

 
(9,416
)
 
214,345

Other long-term liabilities
 
77,823

 
—   

 
30

 
—   

 
77,853

Total long-term liabilities
 
3,457,047

 
236,695

 
(7,488
)
 
20,219

 
3,706,473

Stockholders’ equity (deficit)
 
 
 
 
 
 
 
 
 
 
Preferred stock
 

 
—   

 
—   

 
—   

 

Common stock
 
90

 
—   

 
—   

 
—   

 
90

Additional paid-in-capital
 
724,114

 
—   

 
—   

 
—   

 
724,114

Treasury stock, at cost
 
(1,060
)
 
—   

 
—   

 
—   

 
(1,060
)
Accumulated deficit
 
(705,007
)
 
(238,197
)
 
(196
)
 
(24,748
)
 
(968,148
)
Accumulated other comprehensive loss
 
(9,690
)
 
—   

 
155

 
—   

 
(9,535
)
Stockholders’ equity (deficit)
 
8,447

 
(238,197
)
 
(41
)
 
(24,748
)
 
(254,539
)
Total liabilities and stockholders’ equity (deficit)
 
$
3,937,384

 

 
49

 

 
3,937,433



18


Consolidated Statements of Operations
Three months ended September 30, 2017
(In thousands, except per share data)
 
 
 
 
Adjustments for new revenue recognition guidance
 
 
 
 
Previously reported
 
Franchise fees
 
Advertising
 
Ice cream royalty allocation
 
Other revenue transactions
 
Restated
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Franchise fees and royalty income
 
$
151,809

 
(12,453
)
 

 
4,378

 

 
143,734

Advertising fees and related income
 

 

 
122,660

 

 

 
122,660

Rental income
 
27,713

 

 

 

 

 
27,713

Sales of ice cream and other products
 
27,551

 

 

 
(4,378
)
 

 
23,173

Other revenues
 
17,095

 
(2,346
)
 

 

 
(1,958
)
 
12,791

Total revenues
 
224,168

 
(14,799
)
 
122,660

 

 
(1,958
)
 
330,071

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
 
15,333

 

 

 

 

 
15,333

Cost of ice cream and other products
 
19,457

 

 

 

 

 
19,457

Advertising expenses
 

 

 
124,080

 

 

 
124,080

General and administrative expenses, net
 
61,996

 

 
(1,416
)
 

 

 
60,580

Depreciation
 
4,941

 

 

 

 

 
4,941

Amortization of other intangible assets
 
5,341

 

 

 

 

 
5,341

Long-lived asset impairment charges
 
536

 

 

 

 

 
536

Total operating costs and expenses
 
107,604

 

 
122,664

 

 

 
230,268

Net income of equity method investments
 
5,466

 

 

 

 

 
5,466

Other operating income, net
 
3

 

 

 

 

 
3

Operating income
 
122,033

 
(14,799
)
 
(4
)
 

 
(1,958
)
 
105,272

Other income (expense), net:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
624

 

 

 

 

 
624

Interest expense
 
(24,436
)
 

 

 

 

 
(24,436
)
Other gains, net
 
155

 

 

 

 

 
155

Total other expense, net
 
(23,657
)
 

 

 

 

 
(23,657
)
Income before income taxes
 
98,376

 
(14,799
)
 
(4
)
 

 
(1,958
)
 
81,615

Provision (benefit) for income taxes
 
46,130

 
(4,716
)
 

 

 
(969
)
 
40,445

Net income
 
$
52,246

 
(10,083
)
 
(4
)
 

 
(989
)
 
41,170

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share—basic
 
$
0.58

 
 
 
 
 
 
 
 
 
0.46

Earnings per share—diluted
 
0.57

 
 
 
 
 
 
 
 
 
0.45


19


Consolidated Statements of Operations
Nine months ended September 30, 2017
(In thousands, except per share data)
 
 
 
 
Adjustments for new revenue recognition guidance
 
 
 
 
Previously reported
 
Franchise fees
 
Advertising
 
Ice cream royalty allocation
 
Other revenue transactions
 
Restated
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Franchise fees and royalty income
 
$
426,944

 
(22,953
)
 

 
11,352

 

 
415,343

Advertising fees and related income
 

 

 
355,224

 

 

 
355,224

Rental income
 
79,543

 

 

 

 

 
79,543

Sales of ice cream and other products
 
85,710

 

 

 
(11,352
)
 

 
74,358

Other revenues
 
41,165

 
(4,501
)
 

 

 
(527
)
 
36,137

Total revenues
 
633,362

 
(27,454
)
 
355,224

 

 
(527
)
 
960,605

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
 
43,758

 

 

 

 

 
43,758

Cost of ice cream and other products
 
58,578

 

 

 

 

 
58,578

Advertising expenses
 

 

 
358,828

 

 

 
358,828

General and administrative expenses, net
 
185,613

 

 
(3,590
)
 

 

 
182,023

Depreciation
 
15,096

 

 

 

 

 
15,096

Amortization of other intangible assets
 
16,001

 

 

 

 

 
16,001

Long-lived asset impairment charges
 
643

 

 

 

 

 
643

Total operating costs and expenses
 
319,689

 

 
355,238

 

 

 
674,927

Net income of equity method investments
 
12,612

 

 

 

 

 
12,612

Other operating income, net
 
591

 

 

 

 

 
591

Operating income
 
326,876

 
(27,454
)
 
(14
)
 

 
(527
)
 
298,881

Other income (expense), net:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
1,370

 

 

 

 

 
1,370

Interest expense
 
(74,192
)
 

 

 

 

 
(74,192
)
Other gains, net
 
370

 

 

 

 

 
370

Total other expense, net
 
(72,452
)
 

 

 

 

 
(72,452
)
Income before income taxes
 
254,424

 
(27,454
)
 
(14
)
 

 
(527
)
 
226,429

Provision (benefit) for income taxes
 
99,007

 
(8,550
)
 

 

 
(583
)
 
89,874

Net income
 
$
155,417

 
(18,904
)
 
(14
)
 

 
56

 
136,555

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share—basic
 
$
1.71

 
 
 
 
 
 
 
 
 
1.50

Earnings per share—diluted
 
1.68

 
 
 
 
 
 
 
 
 
1.48


20


The adoption of the new revenue recognition guidance had no impact on the Company’s total cash flows. Adjustments presented in the cash flow information below result from full consolidation of the advertising funds, and reflect the investing activities, consisting solely of additions to property, equipment, and software, of such funds.
Select Cash Flow Information
(In thousands)
 
 
 
 
 
Nine months ended September 30, 2017
 
 
Previously reported
 
Adjustments for new revenue recognition guidance
 
Restated
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
121,529

 
4,651

 
126,180

Net cash used in investing activities
 
(9,099
)
 
(4,651
)
 
(13,750
)
Net cash used in financing activities
 
(201,106
)
 

 
(201,106
)
Decrease in cash, cash equivalents, and restricted cash
 
(88,100
)
 

 
(88,100
)
(4) Debt
Debt at September 29, 2018 and December 30, 2017 consisted of the following (in thousands):
 
September 29,
2018
 
December 30,
2017
2015 Class A-2-II Notes
$
1,688,750

 
1,701,875

2017 Class A-2-I Notes
595,500

 
600,000

2017 Class A-2-II Notes
794,000

 
800,000

Other
1,438

 

Debt issuance costs, net of amortization
(30,757
)
 
(34,518
)
Total debt
3,048,931

 
3,067,357

Less current portion of long-term debt
31,650

 
31,500

Total long-term debt
$
3,017,281

 
3,035,857

The Company's outstanding debt consists of Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Class A-2-II Notes”), Series 2017-1 3.629% Fixed Rate Senior Secured Notes, Class A-2-I (the “2017 Class A-2-I Notes”), and Series 2017-1 4.030% Fixed Rate Senior Secured Notes, Class A-2-II (the “2017 Class A-2-II Notes” and, together with the 2017 Class A-2-I Notes, the “2017 Class A-2 Notes”) issued by DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of DBGI. In addition, the Master Issuer issued Series 2017-1 Variable Funding Senior Secured Notes, Class A-1 (the “2017 Variable Funding Notes” and, together with the 2017 Class A-2 Notes, the “2017 Notes”), which allow for the issuance of up to $150.0 million of 2017 Variable Funding Notes and certain other credit instruments, including letters of credit.
As of September 29, 2018 and December 30, 2017, $32.4 million and $32.3 million, respectively, of letters of credit were outstanding against the 2017 Variable Funding Notes which relate primarily to interest reserves required under the base indenture and related supplemental indentures. There were no amounts drawn down on these letters of credit as of September 29, 2018 or December 30, 2017.
The 2015 Class A-2-II Notes and 2017 Notes were each 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 2015 Class A-2-II Notes and 2017 Notes and that have pledged substantially all of their assets to secure the 2015 Class A-2-II Notes and 2017 Notes.

21


(5) Other current liabilities
Other current liabilities consisted of the following (in thousands):
 
September 29,
2018
 
December 30,
2017
Gift card/certificate liability
$
156,938

 
228,783

Accrued payroll and benefits
29,846

 
30,768

Accrued interest
13,640

 
17,902

Accrued professional costs
6,587

 
5,527

Accrued advertising expenses
40,450

 
35,210

Franchisee profit-sharing liability
8,392

 
13,243

Other
40,769

 
23,677

Total other current liabilities
$
296,622

 
355,110

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, retail packaged coffee, and ready-to-drink bottled iced coffee in certain retail outlets.
(6) Segment information
The Company is strategically aligned into two global brands, Dunkin’ and Baskin-Robbins, which are further segregated between U.S. operations and international operations. Additionally, the Company administers and directs the development of all advertising and promotional programs in the U.S. advertising funds. As such, the Company has determined that it has five reportable segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. Dunkin’ U.S., Baskin-Robbins U.S., and Dunkin’ 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’ U.S. also derives revenue through rental income. Baskin-Robbins International primarily derives its revenues from sales of ice cream products, as well as royalty income, franchise fees, and license fees. U.S. Advertising Funds primarily derive revenues through continuing advertising fees from Dunkin’ and Baskin-Robbins franchisees. 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 and sales of Dunkin’ branded ready-to-drink bottled iced coffee and retail packaged coffee, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Revenues by segment were as follows (in thousands):
 
Revenues
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Dunkin’ U.S.
$
157,284

 
151,188

 
454,585

 
438,219

Dunkin’ International
6,256

 
4,913

 
16,879

 
14,357

Baskin-Robbins U.S.
13,681

 
13,322

 
38,293

 
38,155

Baskin-Robbins International
31,157

 
28,963

 
91,063

 
89,251

U.S. Advertising Funds
118,208

 
113,862

 
341,549

 
330,007

Total reportable segment revenues
326,586

 
312,248

 
942,369

 
909,989

Other
23,425

 
17,823

 
59,624

 
50,616

Total revenues
$
350,011

 
330,071

 
1,001,993

 
960,605


22


Amounts included in “Corporate and other” 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
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Dunkin’ U.S.
$
121,667

 
115,398

 
346,292

 
333,205

Dunkin’ International
4,549

 
1,195

 
11,258

 
4,193

Baskin-Robbins U.S.
10,183

 
10,035

 
28,040

 
28,283

Baskin-Robbins International
12,009

 
11,573

 
30,976

 
32,274

U.S. Advertising Funds

 

 

 

Total reportable segments
148,408

 
138,201

 
416,566

 
397,955

Corporate and other
(31,531
)
 
(27,052
)
 
(84,172
)
 
(82,430
)
Interest expense, net
(30,002
)
 
(23,812
)
 
(91,859
)
 
(72,822
)
Amortization of other intangible assets
(5,230
)
 
(5,341
)
 
(15,912
)
 
(16,001
)
Long-lived asset impairment charges
(55
)
 
(536
)
 
(1,209
)
 
(643
)
Other income (losses), net
(101
)
 
155

 
(700
)
 
370

Income before income taxes
$
81,489

 
81,615

 
222,714

 
226,429

Net income of equity method investments is included in segment profit for the Dunkin’ 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
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Dunkin’ International
$
85

 
9

 
(299
)
 
(68
)
Baskin-Robbins International
4,863

 
4,492

 
9,516

 
9,468

Total reportable segments
4,948

 
4,501

 
9,217

 
9,400

Other
839

 
965

 
2,448

 
3,212

Total net income of equity method investments
$
5,787

 
5,466

 
11,665

 
12,612

(7) Stockholders’ deficit
The changes in total stockholders’ deficit were as follows (in thousands):
 
 
Total stockholders’ deficit
Balance as of December 30, 2017
 
$
(254,539
)
Net income
 
176,717

Other comprehensive loss, net
 
(5,540
)
Dividends paid on common stock
 
(86,035
)
Exercise of stock options
 
71,657

Accelerated share repurchases of common stock
 
(650,368
)
Share-based compensation expense
 
10,862

Other, net
 
1,688

Balance as of September 29, 2018
 
$
(735,558
)

23


(a) Treasury stock
In February 2018, the Company entered into two accelerated share repurchase agreements (the “February 2018 ASR Agreements”) with two third-party financial institutions. Pursuant to the terms of the February 2018 ASR Agreements, the Company paid the financial institutions $650.0 million from cash on hand and received initial deliveries totaling 8,478,722 shares of the Company's common stock in February 2018, representing an estimate of 80% of the total shares expected to be delivered under the February 2018 ASR Agreements. Upon final settlement of the February 2018 ASR Agreements in August 2018, the Company received additional deliveries totaling 1,691,832 shares of its common stock based on a weighted average cost per share of $63.91 over the term of the February 2018 ASR Agreements.

The Company accounts for treasury stock under the cost method based on the cost of the shares on the dates of repurchase plus any direct costs incurred. During the nine months ended September 29, 2018, the Company retired 10,170,554 shares of treasury stock repurchased under the February 2018 ASR Agreements. The repurchase and retirement of these shares of treasury stock resulted in a decrease in additional paid-in capital of $77.7 million and an increase in accumulated deficit of $572.6 million.
(b) Equity incentive plans
During the nine months ended September 29, 2018, the Company granted stock options to purchase 909,027 shares of common stock and 86,605 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 $59.60 per share and have a weighted average grant-date fair value of $10.44 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 $60.80 per share.
In addition, the Company granted 67,993 performance stock units (“PSUs”) to certain employees during the nine months ended September 29, 2018. These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 30,974 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 37,019 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 grant-date fair value of $65.52 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 grant-date fair value of $57.10 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 $3.9 million and $3.6 million for the three months ended September 29, 2018 and September 30, 2017, respectively, and $10.9 million for each of the nine months ended September 29, 2018 and September 30, 2017 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
 
Other        
 
Accumulated other comprehensive loss
Balance as of December 30, 2017
$
(8,084
)
 
(1,451
)
 
(9,535
)
Other comprehensive income (loss), net
(6,156
)
 
616

 
(5,540
)
Balance as of September 29, 2018
$
(14,240
)
 
(835
)
 
(15,075
)
(d) Dividends
The Company paid a quarterly dividend of $0.3475 per share of common stock on March 21, 2018, June 6, 2018, and September 5, 2018 totaling approximately $28.6 million, $28.8 million, and $28.6 million, respectively. On October 25, 2018,

24


the Company announced that its board of directors approved the next quarterly dividend of $0.3475 per share of common stock payable December 5, 2018 to shareholders of record as of the close of business on November 26, 2018.
(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
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income—basic and diluted
$
66,067

 
41,170

 
176,717

 
136,555

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
82,770,757

 
90,290,361

 
84,030,391

 
91,051,458

Common—diluted
84,107,840

 
91,433,076

 
85,366,264

 
92,386,611

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.80

 
0.46

 
2.10

 
1.50

Common—diluted
0.79

 
0.45

 
2.07

 
1.48

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,337,083 and 1,142,715 equity awards for the three months ended September 29, 2018 and September 30, 2017, respectively, and includes the dilutive effect of 1,335,873 and 1,335,153 equity awards for the nine months ended September 29, 2018 and September 30, 2017, 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 September 29, 2018 and September 30, 2017, there were 189,077 and 150,000 shares, respectively, related to equity awards 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 22,289 and 1,315,258 equity awards for the three months ended September 29, 2018 and September 30, 2017, respectively, and 962,547 and 1,524,739 equity awards for the nine months ended September 29, 2018 and September 30, 2017, respectively, as they would be antidilutive.
(9) Commitments and contingencies
(a) 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 September 29, 2018 and December 30, 2017, the Company was contingently liable under such supply chain agreements for approximately $109.7 million and $116.7 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 September 29, 2018 and December 30, 2017.
(b) Letters of credit
As of September 29, 2018 and December 30, 2017, the Company had standby letters of credit outstanding for a total of $32.4 million and $32.3 million, respectively. 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 September 29, 2018 and December 30, 2017, $1.9 million and $3.6 million, respectively, was included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the probable losses incurred in connection with all outstanding litigation.

25


(10) Related-party transactions
The Company recognized revenues from its equity method investees, consisting of royalty income and sales of ice cream and other products, as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
B-R 31 Ice Cream Company., Ltd.
$
603

 
588

 
1,574

 
1,464

BR-Korea Co., Ltd.
1,277

 
1,122

 
3,404

 
3,174

Palm Oasis Ventures Pty. Ltd.
1,856

 
702

 
3,329

 
2,669

 
$
3,736

 
2,412

 
8,307

 
7,307

As of September 29, 2018 and December 30, 2017, the Company had $5.7 million and $5.1 million, respectively, of receivables 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 $889 thousand and $958 thousand during the three months ended September 29, 2018 and September 30, 2017, respectively, and $2.8 million during each of the nine months ended September 29, 2018 and September 30, 2017 primarily for the purchase of ice cream products.
(11) Advertising funds
Assets and liabilities of the advertising funds, which are restricted in their use, included in the consolidated balance sheets were as follows (in thousands):
 
September 29,
2018
 
December 30,
2017
Accounts receivable, net
$
20,360

 
18,075

Notes and other receivables, net
7,661

 
1,250

Prepaid income taxes
62

 
48

Prepaid expenses and other current assets
14,247

 
15,498

Total current assets
42,330

 
34,871

Property, equipment, and software, net
15,302

 
12,537

Other assets
1,361

 
14

Total assets
$
58,993

 
47,422

 
 
 
 
Accounts payable
$
42,346

 
37,110

Deferred revenue—current(a)
(743
)
 
(550
)
Other current liabilities
32,252

 
29,032

Total current liabilities
73,855

 
65,592

Deferred revenue—long-term(a)
(6,965
)
 
(7,518
)
Other long-term liabilities
19

 
30

Total liabilities
$
66,909

 
58,104

(a) Amounts represent franchisee incentives that have been deferred and are being recognized over the terms of the respective franchise agreements.
(12) Income taxes
Tax Reform
On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly changes U.S. tax law by, among other things, reducing the corporate income tax rate from 35% to 21% effective January 1, 2018, establishing a territorial-style system for taxing foreign-source income of domestic multinational corporations, and imposing a one-time mandatory transition tax on deemed repatriated

26


earnings of certain foreign joint ventures and subsidiaries. As a result of the Tax Act, the Company recorded a provisional net tax benefit of $143.4 million during fiscal year 2017.
The provisional amount included a $145.1 million tax benefit for the remeasurement of certain U.S. deferred tax assets and liabilities. In addition, the provisional amount included a $1.7 million tax expense for the income tax on the deemed repatriation of unremitted foreign earnings, net of estimated foreign tax credits. The provisional net tax benefit was computed based on information available to the Company at the time. There have been no material changes to these provisional amounts during the nine months ended September 29, 2018. There is still uncertainty as to the application of the Tax Act, including as it relates to state income taxes, because, while some regulations have been released, the guidance is not complete. Certain estimates which were used in computing the provisional amount were finalized upon the filing of the Company's 2017 U.S. federal tax return with no material change to the provisional amount. As we complete our analysis of U.S. tax reform in fiscal year 2018, we may make adjustments to the provisional amounts, which may impact our provision for income taxes in the period in which the adjustments are made.

27


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 success of our investments in the Dunkin' U.S. Blueprint for Growth; 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’ and Baskin-Robbins brands. With more than 20,700 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 September 29, 2018, Dunkin’ had 12,740 global points of distribution with restaurants in 43 U.S. states, the District of Columbia, and 42 foreign countries. Baskin-Robbins had 8,024 global points of distribution as of the same date, with restaurants in 44 U.S. states, the District of Columbia, Puerto Rico, and 54 foreign countries.
We are organized into five reporting segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. We generate revenue from five primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) continuing advertising fees from Dunkin’ and Baskin-Robbins franchisees and breakage and other revenue related to the gift card program, (iii) rental income from restaurant properties that we lease or sublease to franchisees, (iv) sales of ice cream and other products to franchisees in certain international markets, and (v) 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.
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 as of September 29, 2018, we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators.
We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and nine-month periods ended September 29, 2018 and September 30, 2017 reflect the results of operations for the 13-week and 39-week periods ended on

28


those dates. Operating results for the three- and nine-month periods ended September 29, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2018.
As a result of the adoption of new guidance related to revenue recognition during fiscal year 2018 (see note 3 of the unaudited consolidated financial statements included herein), all prior period amounts included below have been restated to reflect the new guidance.
Selected operating and financial highlights
 Amounts and percentages may not recalculate due to rounding
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
350,011

 
330,071

 
1,001,993

 
960,605

Operating income
111,592

 
105,272

 
315,273

 
298,881

Adjusted operating income
116,877

 
111,149

 
332,394

 
315,525

Net income
66,067

 
41,170

 
176,717

 
136,555

Adjusted net income
69,872

 
44,696

 
189,044

 
146,541

Systemwide sales (in millions):
 
 
 
 
 
 
 
Dunkin’ U.S.
$
2,266.9

 
2,166.3

 
6,558.4

 
6,298.4

Dunkin’ International
194.9

 
189.3

 
568.6

 
533.6

Baskin-Robbins U.S.
180.6

 
177.0

 
501.0

 
493.6

Baskin-Robbins International
425.4

 
382.2

 
1,129.8

 
1,021.8

Total systemwide sales
$
3,067.8

 
2,914.8

 
8,757.8

 
8,347.4

Systemwide sales growth
5.2
%
 
3.3
 %
 
4.9
%
 
4.2
 %
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ U.S.
1.3
%
 
0.6
 %
 
0.8
%
 
0.5
 %
Dunkin’ International
2.5
%
 
1.3
 %
 
2.6
%
 
(0.1
)%
Baskin-Robbins U.S.
1.8
%
 
(0.4
)%
 
0.1
%
 
(1.1
)%
Baskin-Robbins International
7.5
%
 
(4.3
)%
 
4.6
%
 
(1.0
)%

Our financial results are largely driven by changes in systemwide sales, which include sales by all points of distribution, whether owned by our franchisees or joint ventures. While we do not record sales by franchisees 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’ U.S. and Baskin-Robbins U.S. is calculated by including only sales from franchisee-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’ International and Baskin-Robbins International generally represents the growth (decline) 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 5.2% and 4.9% for the three- and nine-month periods ended September 29, 2018 over the same periods in the prior fiscal year resulted from the following:
Dunkin’ U.S. systemwide sales growth of 4.6% and 4.1% for the three and nine months ended September 29, 2018, respectively, was primarily a result of 298 net new restaurants opened since September 30, 2017 and comparable store sales growth of 1.3% and 0.8%, respectively. The increases in comparable store sales were driven by increased average ticket, offset by a decline in traffic. Comparable store sales growth for the three and nine months ended September 29, 2018 was driven primarily by beverage sales, including iced coffee and frozen beverages, and breakfast sandwich sales.
Dunkin’ International systemwide sales growth of 2.9% for the three months ended September 29, 2018 was driven by sales growth in the Middle East, offset by a sales decline in Asia. For the three months ended September 29, 2018, sales in Asia were negatively impacted by unfavorable foreign exchange rates. Dunkin’ International systemwide sales growth of 6.6% for the nine months ended September 29, 2018 was driven by sales growth across all regions. For the nine months ended September 29, 2018, sales in South Korea, Europe, and Latin America were positively impacted by

29


foreign exchange rates, while sales in Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 5% for each of the each of the three- and nine-month periods ended September 29, 2018. Dunkin’ International comparable store sales grew 2.5% and 2.6% for the three and nine months ended September 29, 2018, respectively, due primarily to growth in the Middle East, Asia, and Latin America, offset by a decline in Europe.
Baskin-Robbins U.S. systemwide sales grew 2.0% and 1.5% for the three and nine months ended September 29, 2018, respectively, primarily as a result of comparable store sales growth of 1.8% and 0.1%, respectively, offset by four net restaurant closures since September 30, 2017. The increases in comparable store sales were driven by increased average ticket, offset by a decline in traffic. Sales of beverages, including shakes and smoothies, as well as the take-home category, grew during the three and nine months ended September 29, 2018.
Baskin-Robbins International systemwide sales growth of 11.3% and 10.6% for the three and nine months ended September 29, 2018, respectively, was driven by sales growth in South Korea, the Middle East, Japan, and Canada. Sales in Asia declined for the three-month period, while they grew for the nine-month period. For the three months ended September 29, 2018, sales in South Korea were positively impacted by favorable foreign exchange rates, while all other regions were negatively impacted by unfavorable foreign exchange rates. For the nine months ended September 29, 2018, sales in South Korea, Japan, and Asia were positively impacted by favorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 12% and 8% for the three and nine months ended September 29, 2018, respectively. Baskin-Robbins International comparable store sales growth of 7.5% and 4.6% for the three and nine months ended September 29, 2018, respectively, was driven primarily by growth in South Korea.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and nine months ended September 29, 2018 and September 30, 2017 were as follows:
 
September 29,
2018
 
September 30,
2017
Points of distribution, at period end:
 
 
 
Dunkin’ U.S.
9,313

 
9,015

Dunkin’ International
3,427

 
3,420

Baskin-Robbins U.S.
2,558

 
2,562

Baskin-Robbins International
5,466

 
5,382

Consolidated global points of distribution
20,764

 
20,379

 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net openings (closings) during the period:
 
 
 
 
 
 
 
Dunkin’ U.S.
52

 
67

 
172

 
187

Dunkin’ International
12

 
18

 
30

 
(10
)
Baskin-Robbins U.S.
(3
)
 
11

 
(2
)
 
24

Baskin-Robbins International
16

 
41

 
44

 
98

Consolidated global net openings
77

 
137

 
244

 
299

Total revenues for the three and nine months ended September 29, 2018 increased $19.9 million, or 6.0%, and $41.4 million, or 4.3%, respectively, due primarily to increases in franchise fees and royalty income driven by Dunkin’ U.S. systemwide sales growth, as well as advertising fees and related income. The increases in advertising fees and related income were due primarily to additional gift card program service fees and increases in advertising fees, offset by declines in breakage income. Also contributing to the increases in revenues were increases in sales of ice cream and other products, as well as increases in other revenues driven primarily by license fees related to Dunkin’ K-Cup® pods.
Operating income and adjusted operating income for the three months ended September 29, 2018 increased $6.3 million, or 6.0%, and $5.7 million, or 5.2%, respectively, from the prior year period. Operating income and adjusted operating income for the nine months ended September 29, 2018 increased $16.4 million, or 5.5%, and $16.9 million, or 5.3%, respectively, from the prior year period. The increases were primarily a result of the increases in royalty income, offset by increases in general and administrative expenses, decreases in net margin on ice cream due primarily to an increase in commodity costs, and decreases in net income from our Japan joint venture. Additionally, an increase in net income from our South Korea joint venture contributed to the increases in operating income and adjusted operating income for the three-month period. The increases in

30


general and administrative expenses were due primarily to expenses incurred in connection with our 2018 Global Convention held in the third quarter of fiscal year 2018 as well as expenses incurred in fiscal year 2018 to support initiatives for the Dunkin’ U.S. Blueprint for Growth, our multi-year strategic growth plan.
Net income and adjusted net income for the three months ended September 29, 2018 increased $24.9 million, or 60.5%, and $25.2 million, or 56.3%, respectively. Net income and adjusted net income for the nine months ended September 29, 2018 increased $40.2 million, or 29.4%, and $42.5 million, or 29.0%, respectively. These increases were primarily a result of decreases in income tax expense and the increases in operating income and adjusted operating income, offset by increases in net interest expense. The decreases in income tax expense were driven by a lower tax rate due to the enactment of the Tax Cuts and Jobs Act in the fourth quarter of fiscal year 2017, a valuation allowance recorded on foreign tax credit carryforwards of $8.9 million in the third quarter of fiscal year 2017, and increases in excess tax benefits from share-based compensation. The increase in net interest expense was driven by additional borrowings incurred in conjunction with the refinancing transaction completed during the fourth quarter of fiscal year 2017.
Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairments, and certain 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
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands)
Operating income
$
111,592

 
105,272

 
315,273

 
298,881

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
5,230

 
5,341

 
15,912

 
16,001

Long-lived asset impairment charges
55

 
536

 
1,209

 
643

Adjusted operating income
$
116,877

 
111,149

 
332,394


315,525

 
 
 
 
 
 
 
 
Net income
$
66,067

 
41,170

 
176,717

 
136,555

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
5,230

 
5,341

 
15,912

 
16,001

Long-lived asset impairment charges
55

 
536

 
1,209

 
643

Tax impact of adjustments(a)
(1,480
)
 
(2,351
)
 
(4,794
)
 
(6,658
)
Adjusted net income
$
69,872

 
44,696

 
189,044

 
146,541

(a)
Tax impact of adjustments calculated at effective tax rates of 28% for the three and nine months ended September 29, 2018 and 40% for the three and nine months ended September 30, 2017.

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.80

 
0.46

 
2.10

 
1.50

Common—diluted
0.79

 
0.45

 
2.07

 
1.48

Diluted adjusted earnings per share
0.83

 
0.49

 
2.21

 
1.59


31


Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding. Diluted adjusted earnings per share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per share should not be considered as an alternative to earnings per share derived in accordance with GAAP. Diluted adjusted earnings per share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.
The following table sets forth the computation of diluted adjusted earnings per share:
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands, except share and per share data)
Adjusted net income
$
69,872

 
44,696

 
189,044

 
146,541

Weighted average number of common shares—diluted
84,107,840

 
91,433,076

 
85,366,264

 
92,386,611

Diluted adjusted earnings per share
$
0.83

 
0.49

 
2.21

 
1.59

Results of operations
Consolidated results of operations
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Franchise fees and royalty income
$
151,991

 
143,734

 
8,257

 
5.7
 %
 
$
435,740

 
415,343

 
20,397

 
4.9
 %
Advertising fees and related income
132,471

 
122,660

 
9,811

 
8.0
 %
 
375,017

 
355,224

 
19,793

 
5.6
 %
Rental income
27,547

 
27,713

 
(166
)
 
(0.6
)%
 
79,425

 
79,543

 
(118
)
 
(0.1
)%
Sales of ice cream and other products
24,867

 
23,173

 
1,694

 
7.3
 %
 
74,784

 
74,358

 
426

 
0.6
 %
Other revenues
13,135

 
12,791

 
344

 
2.7
 %
 
37,027

 
36,137

 
890

 
2.5
 %
Total revenues
$
350,011

 
330,071

 
19,940

 
6.0
 %
 
$
1,001,993

 
960,605

 
41,388

 
4.3
 %
Total revenues for the three and nine months ended September 29, 2018 increased $19.9 million, or 6.0%, and $41.4 million, or 4.3%, respectively, due primarily to increases in franchise fees and royalty income driven by Dunkin’ U.S. systemwide sales growth, as well as advertising fees and related income. The increases in advertising fees and related income were due primarily to additional gift card program service fees and increases in advertising fees, offset by declines in breakage income. Also contributing to the increases in revenues were increases in sales of ice cream and other products as well as increases in other revenues driven primarily by license fees related to Dunkin’ K-Cup® pods. The additional gift card program service fees were collected beginning in the second quarter of 2018 to cover certain gift card program costs, and such fees may not be required to be collected in future periods.

32


 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Occupancy expenses—franchised restaurants
$
14,765

 
15,333

 
(568
)
 
(3.7
)%
 
$
43,059

 
43,758

 
(699
)
 
(1.6
)%
Cost of ice cream and other products
21,311

 
19,457

 
1,854

 
9.5
 %
 
60,956

 
58,578

 
2,378

 
4.1
 %
Advertising expenses
133,732

 
124,080

 
9,652

 
7.8
 %
 
378,283

 
358,828

 
19,455

 
5.4
 %
General and administrative expenses, net
63,997

 
60,580

 
3,417

 
5.6
 %
 
183,122

 
182,023

 
1,099

 
0.6
 %
Depreciation and amortization
10,167

 
10,282

 
(115
)
 
(1.1
)%
 
31,007

 
31,097

 
(90
)
 
(0.3
)%
Long-lived asset impairment charges
55

 
536

 
(481
)
 
(89.7
)%
 
1,209

 
643

 
566

 
88.0
 %
Total operating costs and expenses
$
244,027

 
230,268

 
13,759

 
6.0
 %
 
$
697,636

 
674,927

 
22,709

 
3.4
 %
Net income of equity method investments
5,787

 
5,466

 
321

 
5.9
 %
 
11,665

 
12,612

 
(947
)
 
(7.5
)%
Other operating income (loss), net
(179
)
 
3

 
(182
)
 
(6,066.7
)%
 
(749
)
 
591

 
(1,340
)
 
(226.7
)%
Operating income
$
111,592

 
105,272

 
6,320

 
6.0
 %
 
$
315,273

 
298,881

 
16,392

 
5.5
 %
Occupancy expenses for franchised restaurants for the three and nine months ended September 29, 2018 decreased $0.6 million and $0.7 million, respectively, due primarily to expenses incurred in the prior year periods to record lease-related liabilities.
Net margin on ice cream and other products for the three and nine months ended September 29, 2018 decreased $0.2 million, or 4.3%, and $2.0 million, or 12.4%, respectively, due primarily to an increase in commodity costs.
Advertising expenses for the three and nine months ended September 29, 2018 increased $9.7 million and $19.5 million, respectively, driven by the increases in advertising fees and related income.
General and administrative expenses for the three and nine months ended September 29, 2018 increased $3.4 million and $1.1 million, respectively, due primarily to expenses incurred in connection with our 2018 Global Convention held in the third quarter of fiscal year 2018, as well as expenses incurred in fiscal year 2018 to support the Dunkin’ U.S. Blueprint for Growth initiatives. Offsetting these increases in general and administrative expenses were decreases in personnel costs and other general expenses.
Depreciation and amortization for each of the three- and nine-month periods ended September 29, 2018 decreased $0.1 million resulting primarily from a decrease in amortization due to favorable lease intangible assets being written off upon termination of the related leases.
Long-lived asset impairment charges decreased $0.5 million for the three months ended September 29, 2018, whereas such charges increased $0.6 million for the nine months ended September 29, 2018. Long-lived asset impairment 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 months ended September 29, 2018 increased $0.3 million primarily as a result of an increase in net income from our South Korea joint venture, offset by a decrease in net income from our Japan joint

33


venture. Net income of equity method investments for the nine months ended September 29, 2018 decreased $0.9 million primarily as a result of a decrease in net income from our Japan joint venture.
Other operating income (loss), net, which includes net gains and losses recognized in connection with the sale or disposal of property, equipment, and software, fluctuates based on the timing of such transactions.
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Interest expense, net
$
30,002

 
23,812

 
6,190

 
26.0
%
 
$
91,859

 
72,822

 
19,037

 
26.1
%
Other losses (income), net
101

 
(155
)
 
256

 
n/m

 
700

 
(370
)
 
1,070

 
n/m

Total other expense
$
30,103

 
23,657

 
6,446

 
27.2
%
 
$
92,559

 
72,452

 
20,107

 
27.8
%
Net interest expense increased $6.2 million and $19.0 million for the three and nine months ended September 29, 2018, respectively, driven primarily by the securitization refinancing transaction that occurred in October 2017, which resulted in additional borrowings and an increase in the weighted average interest rate, offset by an increase in interest income earned on our cash balances.
The fluctuation in other losses (income), net, for the three and nine months ended September 29, 2018 resulted primarily from net foreign exchange gains and losses driven primarily by fluctuations in the U.S. dollar against foreign currencies.
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands, except percentages)
Income before income taxes
$
81,489

 
81,615

 
222,714

 
226,429

Provision for income taxes
15,422

 
40,445

 
45,997

 
89,874

Effective tax rate
18.9
%
 
49.6
%
 
20.7
%
 
39.7
%
The decreases in the effective tax rate for the three and nine months ended September 29, 2018 were driven primarily by the enactment of the Tax Cuts and Jobs Act in the fourth quarter of fiscal year 2017, which reduced the corporate tax rate. Additionally, a valuation allowance recorded on foreign tax credit carryforwards of $8.9 million in the third quarter of fiscal year 2017 unfavorably impacted the provision for income taxes in the prior year periods. Excess tax benefits from share-based compensation also reduced the provision for income taxes by $7.4 million and $16.4 million for the three and nine months ended September 29, 2018, respectively, compared to $0.5 million and $7.3 million for the three and nine months ended September 30, 2017, respectively.
Operating segments
We operate five reportable operating segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. 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’ International and Baskin-Robbins International segments includes net income of equity method investments, except for 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 breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Additionally, allocation of the consideration from sales of ice cream and other products to royalty income as consideration for the use of the franchise license is not reflected within segment revenues, but has no impact to total revenues for any segment.

34


Dunkin’ U.S.
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
124,805

 
118,831

 
5,974

 
5.0
 %
 
$
360,859

 
345,103

 
15,756

 
4.6
 %
Franchise fees
4,840

 
4,638

 
202

 
4.4
 %
 
14,312

 
13,500

 
812

 
6.0
 %
Rental income
26,637

 
26,786

 
(149
)
 
(0.6
)%
 
76,734

 
76,842

 
(108
)
 
(0.1
)%
Other revenues
1,002

 
933

 
69

 
7.4
 %
 
2,680

 
2,774

 
(94
)
 
(3.4
)%
Total revenues
$
157,284

 
151,188

 
6,096

 
4.0
 %
 
$
454,585

 
438,219

 
16,366

 
3.7
 %
Segment profit
$
121,667

 
115,398

 
6,269

 
5.4
 %
 
$
346,292

 
333,205

 
13,087

 
3.9
 %
Dunkin’ U.S. revenues increased $6.1 million and $16.4 million for the three and nine months ended September 29, 2018, respectively, due primarily to increases in royalty income driven by systemwide sales growth, as well as increases in franchise fees.
Dunkin’ U.S. segment profit increased $6.3 million and $13.1 million for the three and nine months ended September 29, 2018, respectively, which was driven primarily by the increases in royalty income and franchise fees, as well as an increase in rental margin due primarily to expenses incurred in the prior year periods to record lease-related liabilities. These increases were offset by increases in general and administrative expenses, due primarily to expenses incurred in fiscal year 2018 to support the Dunkin’ U.S. Blueprint for Growth initiatives.
Dunkin’ International
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
5,192

 
4,442

 
750

 
16.9
 %
 
$
14,862

 
13,011

 
1,851

 
14.2
 %
Franchise fees
1,054

 
460

 
594

 
129.1
 %
 
2,037

 
1,368

 
669

 
48.9
 %
Other revenues
10

 
11

 
(1
)
 
(9.1
)%
 
(20
)
 
(22
)
 
2

 
(9.1
)%
Total revenues
$
6,256

 
4,913

 
1,343

 
27.3
 %
 
$
16,879

 
14,357

 
2,522

 
17.6
 %
Segment profit
$
4,549

 
1,195

 
3,354

 
280.7
 %
 
$
11,258

 
4,193

 
7,065

 
168.5
 %
Dunkin’ International revenues for the three and nine months ended September 29, 2018 increased by $1.3 million and $2.5 million, respectively, primarily as a result of increases in royalty income driven by systemwide sales growth, as well as an increase in franchise fees due primarily to recognition of deferred revenue upon the closure of certain international markets.
Segment profit for Dunkin’ International for the three and nine months ended September 29, 2018 increased $3.4 million and $7.1 million, respectively, primarily as a result of the increases in revenues, as well as decreases in general and administrative expenses due primarily to decreases in personnel costs.

35


Baskin-Robbins U.S.
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
8,626

 
8,501

 
125

 
1.5
 %
 
$
24,040

 
24,265

 
(225
)
 
(0.9
)%
Franchise fees
319

 
190

 
129

 
67.9
 %
 
911

 
589

 
322

 
54.7
 %
Rental income
773

 
798

 
(25
)
 
(3.1
)%
 
2,303

 
2,346

 
(43
)
 
(1.8
)%
Sales of ice cream and other products
906

 
771

 
135

 
17.5
 %
 
2,426

 
2,179

 
247

 
11.3
 %
Other revenues
3,057

 
3,062

 
(5
)
 
(0.2
)%
 
8,613

 
8,776

 
(163
)
 
(1.9
)%
Total revenues
$
13,681

 
13,322

 
359

 
2.7
 %
 
$
38,293

 
38,155

 
138

 
0.4
 %
Segment profit
$
10,183

 
10,035

 
148

 
1.5
 %
 
$
28,040

 
28,283

 
(243
)
 
(0.9
)%
Baskin-Robbins U.S. revenues for the three and nine months ended September 29, 2018 increased $0.4 million and $0.1 million, respectively, due primarily to increases in franchise fees and sales of ice cream products. The increases for the nine-month period were offset by decreases in royalty income and other revenues, whereas an increase in royalty income contributed to the increase in revenues for the three-month period.
Baskin-Robbins U.S. segment profit for the three months ended September 29, 2018 increased $0.1 million primarily as a result of the increases in franchise fees and royalty income, offset by an increase in general and administrative expenses.
Baskin-Robbins U.S. segment profit for the nine months ended September 29, 2018 decreased $0.2 million, primarily as a result of an increase in general and administrative expenses, as well as the decreases in royalty income and other revenues, offset by the increase in franchise fees.
Baskin-Robbins International
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
2,140

 
1,966

 
174

 
8.9
 %
 
$
5,837

 
5,255

 
582

 
11.1
 %
Franchise fees
203

 
326

 
(123
)
 
(37.7
)%
 
660

 
899

 
(239
)
 
(26.6
)%
Rental income
137

 
129

 
8

 
6.2
 %
 
388

 
355

 
33

 
9.3
 %
Sales of ice cream and other products
28,625

 
26,512

 
2,113

 
8.0
 %
 
84,006

 
82,602

 
1,404

 
1.7
 %
Other revenues
52

 
30

 
22

 
73.3
 %
 
172

 
140

 
32

 
22.9
 %
Total revenues
$
31,157

 
28,963

 
2,194

 
7.6
 %
 
$
91,063

 
89,251

 
1,812

 
2.0
 %
Segment profit
$
12,009

 
11,573

 
436

 
3.8
 %
 
$
30,976

 
32,274

 
(1,298
)
 
(4.0
)%
Baskin-Robbins International revenues for the three and nine months ended September 29, 2018 increased $2.2 million and $1.8 million, respectively, due primarily to increases in sales of ice cream products and royalty income.
Baskin-Robbins International segment profit for the three months ended September 29, 2018 increased $0.4 million primarily as a result of an increase in net income from our South Korea joint venture, a decrease in general and administrative expenses, and an increase in royalty income, offset by a decrease in net margin on ice cream driven primarily by an increase in commodity costs, as well as a decrease in net income from our Japan joint venture.
Baskin-Robbins International segment profit for the nine months ended September 29, 2018 decreased $1.3 million as a result of a decrease in net margin on ice cream driven primarily by an increase in commodity costs, as well as a decrease in net income from our Japan joint venture. These decreases were offset by an increase in net income from our South Korea joint venture, a decrease in general and administrative expenses, and the increase in royalty income.

36


U.S. Advertising Funds
 
Three months ended
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
September 29,
2018
 
September 30,
2017
 
Increase (Decrease)
 
$
 
%
 
 
 
$
 
%
 
(In thousands, except percentages)
Advertising fees and related income
$
118,208

 
113,862

 
4,346

 
3.8
%
 
$
341,549

 
330,007

 
11,542

 
3.5
%
Total revenues
$
118,208

 
113,862

 
4,346

 
3.8
%
 
$
341,549

 
330,007

 
11,542

 
3.5
%
Segment profit
$

 

 

 
%
 
$

 

 

 
%
U.S. Advertising Funds revenues for the three and nine months ended September 29, 2018 increased $4.3 million, or 3.8%, and $11.5 million, or 3.5%, respectively, compared to the prior year periods due primarily to Dunkin’ U.S. systemwide sales growth. Expenses for the U.S. Advertising Funds were equivalent to revenues in each period, resulting in no segment profit.
Liquidity and capital resources
As of September 29, 2018, we held $428.2 million of cash and cash equivalents and $79.4 million of short-term restricted cash that was restricted under our securitized financing facility. Included in cash and cash equivalents is $132.1 million of cash held for advertising funds and reserved for gift card/certificate programs. In addition, as of September 29, 2018, we had a borrowing capacity of $117.6 million under our $150.0 million 2017 Variable Funding Notes (as defined below).
As a result of the adoption of new guidance related to revenue recognition during fiscal year 2018 (see note 3 of the unaudited consolidated financial statements included herein), all prior period amounts included below have been restated to reflect the new guidance.
Operating, investing, and financing cash flows
Net cash provided by operating activities was $126.5 million for the nine months ended September 29, 2018, as compared to $126.2 million in the prior year period. The $0.3 million increase in operating cash flows was driven primarily by a decrease in cash paid for income taxes, as well as favorable cash flows related to our gift card program due primarily to the timing of holidays and our prior year fiscal year end. Offsetting these increases in operating cash inflows were increases in cash paid for interest and other changes in working capital.
Net cash used in investing activities was $41.4 million for the nine months ended September 29, 2018, as compared to $13.8 million in the prior year period. The $27.7 million increase in investing cash outflows was driven primarily by an increase in capital expenditures of $27.8 million primarily due to investments in technology infrastructure to support the Dunkin' U.S. Blueprint for Growth strategy.
Net cash used in financing activities was $689.5 million for the nine months ended September 29, 2018, as compared to $201.1 million in the prior year period. The $488.4 million increase in financing cash outflows was driven primarily by incremental cash used in the current year period for repurchases of common stock of $523.2 million, as well as an increase in the repayment of long-term debt of $4.9 million primarily as a result of the refinancing completed in October 2017. Offsetting these increases in financing cash outflows was incremental cash generated from the exercise of stock options in the current year period of $38.4 million, as well as a decrease in cash used to pay quarterly dividends of $1.9 million.
Adjusted operating and investing cash flow
Net cash flows from operating and investing activities for the nine months ended September 29, 2018 and September 30, 2017 include decreases of $43.6 million and $69.2 million, respectively, in cash held for advertising funds and reserved for gift card/certificate programs, which were primarily driven by the timing of holidays relative to our fiscal year end. Excluding cash held for advertising funds and reserved for gift card/certificate programs, we generated $128.7 million and $181.7 million of adjusted operating and investing cash flow during the nine months ended September 29, 2018 and September 30, 2017, respectively. The decrease in adjusted operating and investing cash flow was driven primarily by an increase in capital expenditures, an increase in cash paid for interest, and other changes in working capital, offset by a decrease in cash paid for income taxes.
Adjusted operating and investing cash flow is a non-GAAP measure reflecting net cash provided by operating and investing activities, excluding the cash flows related to advertising funds and gift card/certificate programs. We use adjusted operating and investing cash flow as a key liquidity measure for the purpose of evaluating our ability to generate cash. We also believe adjusted operating and investing cash flow provides our investors with useful information regarding our historical cash flow results. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with

37


GAAP, and adjusted operating and investing cash flow does not represent residual cash flows available for discretionary expenditures. Use of the term adjusted operating and investing cash flow may differ from similar measures reported by other companies.
Adjusted operating and investing cash flow is reconciled from net cash provided by operating activities determined under GAAP as follows (in thousands):
 
Nine months ended
 
September 29,
2018
 
September 30,
2017
Net cash provided by operating activities
$
126,529

 
126,180

Plus: Decrease in cash held for advertising funds and gift card/certificate programs
43,575

 
69,224

Plus: Net cash used in investing activities
(41,430
)
 
(13,750
)
Adjusted operating and investing cash flow
$
128,674

 
181,654

Borrowing capacity
As of September 29, 2018, our securitized financing facility included original borrowings of approximately $1.75 billion, $1.40 billion, and $150.0 million related to the 2015 Class A-2-II Notes (as defined below), the 2017 Class A-2 Notes (as defined below), and the 2017 Variable Funding Notes (as defined below), respectively. As of September 29, 2018, there was approximately $3.08 billion of total principal outstanding on the 2015 Class A-2-II Notes and 2017 Class A-2 Notes, while there was $117.6 million in available commitments under the 2017 Variable Funding Notes as $32.4 million of letters of credit were outstanding.
In January 2015, DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of Dunkin’ Brands Group, Inc. (“DBGI”), issued Series 2015-1 3.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “2015 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 “2015 Class A-2-II Notes” and, together with the 2015 Class A-2-I Notes, the “2015 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 “2015 Variable Funding Notes” and, together with the 2015 Class A-2 Notes, the “2015 Notes”), which allowed the Master Issuer to borrow up to $100.0 million on a revolving basis. The 2015 Variable Funding Notes could also be used to issue letters of credit.
In October 2017, the Master Issuer issued Series 2017-1 3.629% Fixed Rate Senior Secured Notes, Class A-2-I (the “2017 Class A-2-I Notes”) with an initial principal amount of $600.0 million and Series 2017-1 4.030% Fixed Rate Senior Secured Notes, Class A-2-II (the “2017 Class A-2-II Notes” and, together with the 2017 Class A-2-I Notes, the “2017 Class A-2 Notes”) with an initial principal amount of $800.0 million. In addition, the Master Issuer issued Series 2017-1 Variable Funding Senior Secured Notes, Class A-1 (the “2017 Variable Funding Notes” and, together with the 2017 Class A-2 Notes, the “2017 Notes”), which allows for the issuance of up to $150.0 million of 2017 Variable Funding Notes and certain other credit instruments, including letters of credit.
A portion of the proceeds of the 2017 Notes was used to repay the remaining $731.3 million of principal outstanding on the 2015 Class A-2-I Notes and to pay related transaction fees. The additional net proceeds were used for general corporate purposes, which included a return of capital to the Company’s shareholders in 2018, as discussed below. In connection with the issuance of the 2017 Variable Funding Notes, the Master Issuer terminated the commitments with respect to its existing 2015 Variable Funding Notes.
The 2015 Notes and 2017 Notes were issued pursuant to a base indenture and related supplemental indentures (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. The legal final maturity date of the 2015 Class A-2-II Notes and 2017 Class A-2 Notes is in February 2045 and November 2047, respectively, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2015 Class A-2-II Notes will be repaid by February 2022, the 2017 Class A-2-I Notes will be repaid by November 2024, and the 2017 Class A-2-II Notes will be repaid by November 2027 (the “Anticipated Repayment Dates”). Principal amortization payments, payable quarterly, are required to be made on the 2015 Class A-2-II Notes, 2017 Class A-2-I Notes, and 2017 Class A-2-II Notes equal to $17.5 million, $6.0 million, and $8.0 million, respectively, per calendar year through the respective Anticipated Repayment Dates. 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. If the 2015 Class A-2-II Notes or the 2017 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 2015 Class A-2-II Notes and the 2017 Class A-2 Notes. Various

38


other events, including failure to maintain a minimum ratio of net cash flows to debt service, may also cause a rapid amortization event.
It is anticipated that the principal and interest on the 2017 Variable Funding Notes will be repaid in full on or prior to November 2022, subject to two additional one-year extensions.
In February 2018, we entered into two accelerated share repurchase agreements (the “February 2018 ASR Agreements”) with two third-party financial institutions. Pursuant to the terms of the February 2018 ASR Agreements, we paid the financial institutions $650.0 million from cash on hand and received initial deliveries totaling 8,478,722 shares of our common stock on February 16, 2018, representing an estimate of 80% of the total shares expected to be delivered under the February 2018 ASR Agreements. Upon final settlement of the February 2018 ASR Agreements in August 2018, we received additional deliveries totaling 1,691,832 shares of our common stock based on a weighted average cost per share of $63.91 over the term of the February 2018 ASR Agreements.
In order to assess our current debt levels, including servicing our long-term debt, and our ability to take on additional borrowings, we monitor a leverage ratio of our long-term debt, net of cash (“Net Debt”), to adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”). This leverage ratio, and the related Net Debt and Adjusted EBITDA measures used to compute it, are non-GAAP measures, and our use of the terms Net Debt and Adjusted EBITDA may vary from other companies, including those in our industry, due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Net Debt reflects the gross principal amount outstanding under our securitized financing facility, notes payable, and capital lease obligations, less short-term cash, cash equivalents, and restricted cash, excluding cash reserved for gift card/certificate programs. Adjusted EBITDA is defined in our securitized financing facility as net income before interest, taxes, depreciation and amortization, and impairment charges, as adjusted for certain items that are summarized in the table below. Net Debt should not be considered as an alternative to debt, total liabilities, or any other obligations derived in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income, operating income, or any other performance measures derived in accordance with GAAP, as a measure of operating performance, or as an alternative to cash flows as a measure of liquidity. Net Debt, Adjusted EBITDA, and the related leverage ratio have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. However, we believe that presenting Net Debt, Adjusted EBITDA, and the related leverage ratio are appropriate to provide additional information to investors to demonstrate our current debt levels and ability to take on additional borrowings.

39


As of September 29, 2018, we had a Net Debt to Adjusted EBITDA ratio of 5.2 to 1.0. The following is a reconciliation of our Net Debt and Adjusted EBITDA to the corresponding GAAP measures as of and for the twelve months ended September 29, 2018, respectively (in thousands):
 
September 29, 2018
Principal outstanding under 2017 Class A-2 Notes
$
1,688,750

Principal outstanding under 2015 Class A-2 Notes
1,389,500

Other notes payable
1,438

Total capital lease obligations
7,331

Less: cash and cash equivalents
(428,179
)
Less: restricted cash, current
(79,432
)
Plus: cash held for gift card/certificate programs
129,680

Net Debt
$
2,709,088

 
Twelve months ended
 
September 29, 2018
Net income
$
311,371

Interest expense
127,178

Income tax benefit
(31,759
)
Depreciation and amortization
41,329

Impairment charges
2,183

EBITDA
450,302

Adjustments:
 
Share-based compensation expense
14,893

Loss on debt extinguishment and refinancing transactions
6,996

Increase in deferred revenue related to franchise and licensing agreements
37,617

Other(a) 
10,680

Total adjustments
70,186

Adjusted EBITDA
$
520,488

(a)
Represents costs and fees associated with various franchisee-related investments, including investments in the Dunkin' U.S. Blueprint for Growth, bank fees, legal reserves, the allocation of share-based compensation expense to the advertising funds, and other non-cash gains and losses.
Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and amounts available under our 2017 Variable Funding Notes will be adequate to meet our anticipated debt service requirements, capital expenditures, and working capital needs for at least the next twelve months. We believe that we will be able to meet these obligations even if we experience no growth in sales or profits. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our 2017 Variable Funding Notes or otherwise to enable us to service our indebtedness, including our securitized financing facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend, or refinance the securitized financing facility will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond our control.
Recently Issued Accounting Standards
See note 2(g) and note 3 to the unaudited consolidated financial statements included in Item 1 of Part I of this Form 10-Q, for a detailed description of recent accounting pronouncements.
Item 3.       Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the foreign exchange or interest rate risks discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

40


Item 4.       Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 29, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 29, 2018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
During the nine month period ended September 29, 2018, we adopted new revenue recognition guidance. We implemented internal controls to ensure we adequately evaluated our contracts with customers and properly assessed the impact of the new guidance to facilitate the adoption. Additionally, we implemented new business processes, internal controls, and modified information technology systems to assist in the ongoing application of the new guidance.

41


Part II.        Other Information
Item 1.       Legal Proceedings
We are engaged in several matters of litigation arising in the ordinary course of our 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 us. As of September 29, 2018, $1.9 million is recorded within other current liabilities in the consolidated balance sheet in connection with all outstanding litigation.
Item 1A.       Risk Factors.
There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information regarding purchases of our common stock made during the quarter ended September 29, 2018 by or on behalf of Dunkin’ Brands Group, Inc. or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934:
 
 
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(2)
07/01/18 - 07/28/18
 

 
$

 

 
$
250,000,000

07/29/18 - 09/01/18(1)
 
1,691,832

 
63.91

 
1,691,832

 
250,000,000

09/02/18 - 09/29/18
 

 

 

 
250,000,000

Total
 
1,691,832

 
$
63.91

 
1,691,832

 
 
(1)
In February 2018, the Company entered into two accelerated share repurchase agreements (the “February 2018 ASR Agreements”) with two third-party financial institutions. Pursuant to the terms of the February 2018 ASR Agreements, the Company paid the financial institutions $650.0 million from cash on hand and received initial deliveries totaling 8,478,722 shares of the Company's common stock in February 2018, representing an estimate of 80% of the total shares expected to be delivered under the February 2018 ASR Agreements. Upon final settlement of the February 2018 ASR Agreements in August 2018, the Company received additional deliveries totaling 1,691,832 shares of its common stock based on a weighted average cost per share of $63.91 over the term of the February 2018 ASR Agreements.
 
 
(2)
On May 16, 2018, our board of directors authorized a new share repurchase program for up to an aggregate of $250.0 million of our outstanding common stock. This repurchase authorization is valid for a period of two years. Under the program, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions.
Item 3.       Defaults Upon Senior Securities
None.
Item 4.       Mine Safety Disclosures
Not Applicable.
Item 5.       Other Information
None.

42


Item 6.       Exhibits
(a) Exhibits:
 
 
 
 
  
 
 
 
  
 
 
  
 
 
  
 
Ex. 101.INS XBRL Instance Document
 
Ex. 101.SCH XBRL Taxonomy Extension Schema Document
 
Ex. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
Ex. 101.LAB XBRL Taxonomy Extension Label Linkbase Document
 
Ex. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
Ex. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 


43


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DUNKIN’ BRANDS GROUP, INC.
 
 
 
 
 
 
 
Date:
November 7, 2018
 
By:
 
/s/ David Hoffmann
 
 
 
 
 
David Hoffmann
Chief Executive Officer

44