Notes to Consolidated Financial Statements
(Unaudited)
(1) Description of Business and Organization
Dunkin’ Brands Group, Inc. (“DBGI”), together with its consolidated subsidiaries, is one of the world’s leading franchisors of restaurants serving coffee and baked goods, as well as ice cream, within the quick service restaurant segment of the restaurant industry. We develop, franchise, and license a system of both traditional and nontraditional quick service restaurants and, in limited circumstances, own and operate individual locations. Through our Dunkin’ Donuts brand, we develop and franchise restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. Through our Baskin-Robbins brand, we develop and franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, we distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in certain international markets.
Throughout these unaudited consolidated financial statements, “Dunkin’ Brands,” “the Company,” “we,” “us,” “our,” and “management” refer to DBGI and its consolidated subsidiaries taken as a whole.
(2) Summary of Significant Accounting Policies
(a) Unaudited Consolidated Financial Statements
The consolidated balance sheet as of
March 26, 2016
and the consolidated statements of operations, comprehensive income, and cash flows for the
three months ended
March 26, 2016
and
March 28, 2015
are unaudited.
The accompanying unaudited consolidated financial statements include the accounts of DBGI and its consolidated subsidiaries and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. All significant transactions and balances between subsidiaries and affiliates have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with U.S. GAAP have been recorded. Such adjustments consisted only of normal recurring items. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended
December 26, 2015
, included in the Company’s Annual Report on Form 10-K.
(b) Fiscal Year
The Company operates and reports financial information on a
52
- or
53
-week year on a
13
-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three-month periods ended
March 26, 2016
and
March 28, 2015
reflect the results of operations for the 13-week periods ended on those dates. Operating results for the three-month period ended
March 26, 2016
are not necessarily indicative of the results that may be expected for the fiscal year ending
December 31, 2016
. The data periods contained within the three- and twelve-month periods ending
December 31, 2016
will reflect the results of operations for the 14-week and 53-week periods ending on those dates.
(c) Restricted Cash
In accordance with the Company’s securitized financing facility, certain cash accounts have been established in the name of Citibank, N.A. (the “Trustee”) for the benefit of the Trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents (i) cash collections held by the Trustee, (ii) interest, principal, and commitment fee reserves held by the Trustee related to the Company’s Notes (see note 4), and (iii) real estate reserves used to pay real estate obligations. Changes in restricted cash accounts are presented as either a component of cash flows from operating or financing activities in the consolidated statements of cash flows based on the nature of the restricted balance.
(d) Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis as of
March 26, 2016
and
December 26, 2015
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 26, 2016
|
|
December 26, 2015
|
|
Significant other observable inputs (Level 2)
|
|
Total
|
|
Significant other observable inputs (Level 2)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Company-owned life insurance
|
$
|
5,673
|
|
|
5,673
|
|
|
5,802
|
|
|
5,802
|
|
Total assets
|
$
|
5,673
|
|
|
5,673
|
|
|
5,802
|
|
|
5,802
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
$
|
9,676
|
|
|
9,676
|
|
|
9,068
|
|
|
9,068
|
|
Total liabilities
|
$
|
9,676
|
|
|
9,676
|
|
|
9,068
|
|
|
9,068
|
|
The deferred compensation liabilities relate to the Dunkin’ Brands, Inc. non-qualified deferred compensation plans (“NQDC Plans”), which allows for pre-tax deferral of compensation for certain qualifying employees and directors. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, as defined under U.S. GAAP, because their inputs are derived principally from observable market data by correlation to hypothetical investments. The Company holds assets, which include company-owned life insurance policies, to partially offset the Company’s liabilities under the NQDC Plans. The changes in the fair value of any company-owned life insurance policies are derived using determinable cash surrender value. As such, the company-owned life insurance policies are classified within Level 2, as defined under U.S. GAAP.
The carrying value and estimated fair value of long-term debt as of
March 26, 2016
and
December 26, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 26, 2016
|
|
December 26, 2015
|
|
Carrying value
|
|
Estimated fair value
|
|
Carrying value
|
|
Estimated fair value
|
Financial liabilities
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
2,440,909
|
|
|
2,416,141
|
|
|
2,445,600
|
|
|
2,443,687
|
|
The estimated fair value of our long-term debt is estimated primarily based on current market rates for debt with similar terms and remaining maturities or current bid prices for our long-term debt. Judgment is required to develop these estimates. As such, our long-term debt is classified within Level 2, as defined under U.S. GAAP.
(e) Concentration of Credit Risk
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees, royalty income, and sales of ice cream and other products. In addition, we have note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. As of
March 26, 2016
and
December 26, 2015
,
one
master licensee, including its majority-owned subsidiaries, accounted for approximately
23%
and
13%
, respectively, of total accounts and notes receivable.
No
individual franchisee or master licensee accounted for more than 10% of total revenues for the
three months ended
March 26, 2016
or
March 28, 2015
.
Additionally, the Company engages various third parties to manufacture and/or distribute certain Dunkin’ Donuts and Baskin-Robbins products under licensing arrangements. As of
December 26, 2015
, net receivables for
one
of these third parties accounted for approximately
13%
of total accounts and notes receivable.
No
third party receivables accounted for more than 10% of total accounts and notes receivable as of
March 26, 2016
.
(f) Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance for employee share-based compensation which simplifies several aspects of accounting for share-based payment transactions, including excess tax
benefits, forfeiture estimates, statutory tax withholding requirements, and classification in the statements of cash flows. This guidance is effective for the Company in fiscal year 2017 with early adoption permitted. The Company expects to adopt this new guidance in fiscal year 2017. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets. During fiscal year 2015 and the three months ended March 26, 2016,
$11.5 million
and
$538 thousand
, respectively, of excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes if this new guidance had been adopted as of the respective dates. The Company is further evaluating the impact the adoption of this new standard will have on the Company’s accounting policies, consolidated financial statements, and related disclosures, as well as the transition methods.
In March 2016, the FASB issued new guidance related to the recognition of breakage for certain prepaid stored-value products which requires breakage for those liabilities to be recognized in a way that is consistent with how it will be recognized under the new revenue recognition guidance, eliminating any current or future diversity in practice. This guidance is effective for the Company in fiscal year 2018 with early adoption permitted. The Company does not expect the adoption of this guidance to have any impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued a new standard for lease accounting, which replaces existing lease guidance. The new standard 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 standard is effective for the Company in fiscal year 2019 with early adoption permitted, and modified retrospective application is required. The Company expects to adopt this new standard in fiscal year 2019 and is currently evaluating the impact the adoption of this new standard will have on the Company’s consolidated financial statements and related disclosures. The Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
In May 2014, the FASB issued a new standard for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new standard provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard is effective for the Company in fiscal year 2018 with early adoption permitted in fiscal year 2017. The Company expects to adopt this new standard in fiscal year 2018 and is currently evaluating the impact the adoption of this new standard will have on the Company’s accounting policies, consolidated financial statements, and related disclosures, and has not yet selected a transition method.
(g) Reclassifications
The Company has revised the presentation of revenues and related costs from the sale of Dunkin’ Donuts products in certain international markets within the consolidated statements of operations due to the growth in and the nature of such transactions. To conform to the current period presentation, revenues totaling
$477 thousand
have been reclassified from other revenues to sales of ice cream and other products and expenses totaling
$467 thousand
have been reclassified from general and administrative expenses, net to cost of ice cream and other products for the three months ended March 28, 2015. There was no impact to total revenues, total operating costs and expenses, operating income, income before income taxes, or net income as a result of these reclassifications.
(h) Subsequent Events
Subsequent events have been evaluated through the date these consolidated financial statements were filed.
(3) Franchise Fees and Royalty Income
Franchise fees and royalty income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Royalty income
|
$
|
113,366
|
|
|
106,121
|
|
Initial franchise fees and renewal income
|
10,417
|
|
|
9,204
|
|
Total franchise fees and royalty income
|
$
|
123,783
|
|
|
115,325
|
|
The changes in franchised and company-operated points of distribution were as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Systemwide Points of Distribution:
|
|
|
|
Franchised points of distribution in operation—beginning of period
|
19,308
|
|
|
18,821
|
|
Franchised points of distribution—opened
|
301
|
|
|
298
|
|
Franchised points of distribution—closed
|
(189
|
)
|
|
(219
|
)
|
Net transfers from (to) company-operated points of distribution
|
10
|
|
|
(2
|
)
|
Franchised points of distribution in operation—end of period
|
19,430
|
|
|
18,898
|
|
Company-operated points of distribution—end of period
|
41
|
|
|
43
|
|
Total systemwide points of distribution—end of period
|
19,471
|
|
|
18,941
|
|
(4) Debt
Securitized Financing Facility
In January 2015, DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of DBGI, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2015-1
3.262%
Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of
$750.0 million
and Series 2015-1
3.980%
Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of
$1.75 billion
. In addition, the Master Issuer issued Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”), which allow the Master Issuer to borrow up to
$100.0 million
on a revolving basis. The Variable Funding Notes may also be used to issue letters of credit. The Notes were issued in a securitization transaction pursuant to which most of the Company’s domestic and certain of its foreign revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets to secure the Notes.
The legal final maturity date of the Class A-2 Notes is in
February 2045
, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in
February 2019
and the Class A-2-II Notes will be repaid in
February 2022
(the “Anticipated Repayment Dates”). If the Class A-2 Notes have not been repaid in full by their respective Anticipated Repayment Dates, a rapid amortization event will occur in which residual net cash flows of the Master Issuer, after making certain required payments, will be applied to the outstanding principal of the Class A-2 Notes. Various other events, including failure to maintain a minimum ratio of net cash flows to debt service (“DSCR”), may also cause a rapid amortization event. Borrowings under the Class A-2-I and Class A-2-II Notes bear interest at a fixed rate equal to
3.262%
and
3.980%
, respectively. If the Class A-2 Notes are not repaid or refinanced prior to their respective Anticipated Repayment Dates, incremental interest will accrue. Principal payments are required to be made on the Class A-2-I and Class A-2-II Notes equal to
$7.5 million
and
$17.5 million
, respectively, per calendar year, payable in quarterly installments. No principal payments will be required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the Indenture), is less than or equal to
5.0
to 1.0. Other events and transactions, such as certain asset sales and receipt of various insurance or indemnification proceeds, may trigger additional mandatory prepayments.
It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior to
February 2020
, subject to two additional one-year extensions. Borrowings under the Variable Funding Notes bear interest at a rate equal to a base rate, a LIBOR rate plus
2.25%
, or the lenders’ commercial paper funding rate plus
2.25%
. If the Variable Funding Notes are not repaid prior to
February 2020
or prior to the end of an extension period, if applicable, incremental interest will accrue. In addition, the Company is required to pay a
2.25%
fee for letters of credit amounts outstanding and a commitment fee on the unused portion of the Variable Funding Notes which ranges from
0.50%
to
1.00%
based on utilization.
As of
March 26, 2016
, approximately
$742.5 million
and
$1.73 billion
of principal were outstanding on the Class A-2-I Notes and Class A-2-II Notes, respectively. Total debt issuance costs incurred and capitalized in connection with the issuance of the Notes were
$41.3 million
. The effective interest rate, including the amortization of debt issuance costs, was
3.5%
and
4.3%
for the Class A-2-I Notes and Class A-2-II Notes, respectively, as of
March 26, 2016
.
As of
March 26, 2016
,
$25.9 million
of letters of credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the Indenture. There were
no
amounts drawn down on these letters of credit as of
March 26, 2016
.
The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments, including mandatory prepayments in the event of a change of control as defined in the Indenture and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information, and similar matters. As noted above, the Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated DSCR, failure to maintain an aggregate level of Dunkin’ Donuts U.S. retail sales on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.
Senior Credit Facility
During the
three months ended
March 28, 2015
, the Company recorded a loss on debt extinguishment of
$20.6 million
, consisting primarily of the write-off of the remaining original issuance discount and debt issuance costs related to the senior credit facility.
(5) Derivative Instruments and Hedging Transactions
In December 2014, the Company terminated all interest rate swap agreements with its counterparties. The total fair value of the interest rate swaps at the termination date was
$6.3 million
, excluding accrued interest owed to the counterparties of
$1.0 million
. Upon termination, cash flow hedge accounting was discontinued and the cumulative pre-tax gain was recorded in accumulated other comprehensive loss, which is being amortized on a straight-line basis to interest expense in the consolidated statements of operations through November 23, 2017, the original maturity date of the swaps.
As of
March 26, 2016
and
December 26, 2015
, a pre-tax gain of
$3.6 million
and
$4.1 million
, respectively, was recorded in accumulated other comprehensive loss. During the next twelve months, the Company estimates that
$2.2 million
will be reclassified from accumulated other comprehensive loss as a reduction of interest expense.
The table below summarizes the effects of derivative instruments on the consolidated statements of operations and comprehensive income, which were equivalent for the
three months ended
March 26, 2016
and
March 28, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 26, 2016 and March 28, 2015
|
Derivatives designated as cash flow hedging instruments
|
|
Amount of net gain (loss) reclassified into earnings
|
|
Consolidated statement of operations classification
|
|
Total effect on other comprehensive income
|
Interest rate swaps
|
|
$
|
535
|
|
|
Interest expense
|
|
$
|
(535
|
)
|
Income tax effect
|
|
(217
|
)
|
|
Provision for income taxes
|
|
217
|
|
Net of income taxes
|
|
$
|
318
|
|
|
|
|
$
|
(318
|
)
|
|
|
|
|
|
|
|
(6) Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
March 26,
2016
|
|
December 26,
2015
|
Gift card/certificate liability
|
$
|
123,067
|
|
|
176,080
|
|
Gift card breakage liability
|
23,816
|
|
|
23,955
|
|
Accrued payroll and benefits
|
14,546
|
|
|
29,540
|
|
Accrued legal liabilities (see note 10(c))
|
19,188
|
|
|
18,267
|
|
Accrued interest
|
9,444
|
|
|
9,522
|
|
Accrued professional costs
|
2,788
|
|
|
4,814
|
|
Franchisee profit-sharing liability
|
3,391
|
|
|
8,406
|
|
Other
|
23,318
|
|
|
22,275
|
|
Total other current liabilities
|
$
|
219,558
|
|
|
292,859
|
|
The decrease in the gift card/certificate liability was driven by the seasonality of our gift card program. The decrease in
accrued payroll and benefits was primarily due to incentive compensation payments made during the three months ended
March 26, 2016
related to fiscal year 2015.
(7) Segment Information
The Company is strategically aligned into two global brands, Dunkin’ Donuts and Baskin-Robbins, which are further segregated between U.S. operations and international operations. As such, the Company has determined that it has
four
operating segments, which are its reportable segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. Dunkin’ Donuts U.S., Baskin-Robbins U.S., and Dunkin’ Donuts International primarily derive their revenues through royalty income and franchise fees. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement and rental income. Dunkin’ Donuts U.S. also derives revenue through retail sales at company-operated restaurants and rental income. Baskin-Robbins International primarily derives its revenues from the sales of ice cream and other products, as well as royalty income, franchise fees, and license fees. The operating results of each segment are regularly reviewed and evaluated separately by the Company’s senior management, which includes, but is not limited to, the chief executive officer. Senior management primarily evaluates the performance of its segments and allocates resources to them based on operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, and other infrequent or unusual charges, which does not reflect the allocation of any corporate charges. This profitability measure is referred to as segment profit. When senior management reviews a balance sheet, it is at a consolidated level. The accounting policies applicable to each segment are consistent with those used in the consolidated financial statements.
Beginning in the first quarter of fiscal year 2016, certain segment profit amounts in the tables below have been reclassified as a result of the realignment of the Company’s organizational structure to better support its segment operations, including the allocation of previously unallocated costs. Additionally, revenues and segment profit amounts related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility. Prior period amounts in the tables below have been revised to reflect these changes for all periods presented.
Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenues earned through certain licensing arrangements with third parties in which our brand names are used, including the licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement, revenues generated from online training programs for franchisees, and revenues from the sale of Dunkin’ Donuts products in certain international markets, all of which are not allocated to a specific segment. Revenues by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Dunkin’ Donuts U.S.
|
$
|
138,813
|
|
|
133,867
|
|
Dunkin’ Donuts International
|
7,250
|
|
|
6,578
|
|
Baskin-Robbins U.S.
|
10,561
|
|
|
10,309
|
|
Baskin-Robbins International
|
26,834
|
|
|
23,130
|
|
Total reportable segment revenues
|
183,458
|
|
|
173,884
|
|
Other
|
6,318
|
|
|
12,021
|
|
Total revenues
|
$
|
189,776
|
|
|
185,905
|
|
Amounts included in “Corporate” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services, net of “Other” revenues reported above. Segment profit by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Segment profit
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Dunkin’ Donuts U.S.
|
$
|
100,444
|
|
|
93,714
|
|
Dunkin’ Donuts International
|
3,758
|
|
|
3,674
|
|
Baskin-Robbins U.S.
|
7,300
|
|
|
6,088
|
|
Baskin-Robbins International
|
8,384
|
|
|
7,057
|
|
Total reportable segments
|
119,886
|
|
|
110,533
|
|
Corporate
|
(28,699
|
)
|
|
(20,329
|
)
|
Interest expense, net
|
(24,732
|
)
|
|
(22,042
|
)
|
Amortization of other intangible assets
|
(5,761
|
)
|
|
(6,200
|
)
|
Long-lived asset impairment charges
|
(93
|
)
|
|
(264
|
)
|
Loss on debt extinguishment and refinancing transactions
|
—
|
|
|
(20,554
|
)
|
Other losses, net
|
(370
|
)
|
|
(545
|
)
|
Income before income taxes
|
$
|
60,231
|
|
|
40,599
|
|
Net income of equity method investments is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Amounts reported as “Other” in the segment profit table below include the reduction in depreciation and amortization, net of tax, reported by our equity method investees as a result of previously recorded impairment charges. Net income of equity method investments by reportable segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Net income of equity method investments
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Dunkin’ Donuts International
|
$
|
174
|
|
|
289
|
|
Baskin-Robbins International
|
2,075
|
|
|
2,565
|
|
Total reportable segments
|
2,249
|
|
|
2,854
|
|
Other
|
715
|
|
|
93
|
|
Total net income of equity method investments
|
$
|
2,964
|
|
|
2,947
|
|
(8) Stockholders’ Deficit
The changes in total stockholders’ deficit were as follows (in thousands):
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
Balance as of December 26, 2015
|
|
$
|
(220,743
|
)
|
Net income
|
|
37,154
|
|
Other comprehensive income
|
|
1,914
|
|
Dividends paid on common stock
|
|
(27,395
|
)
|
Exercise of stock options
|
|
1,086
|
|
Repurchases of common stock
|
|
(30,000
|
)
|
Share-based compensation expense
|
|
4,140
|
|
Excess tax benefits from share-based compensation
|
|
538
|
|
Deconsolidation of noncontrolling interest
|
|
(208
|
)
|
Other, net
|
|
(1,078
|
)
|
Balance as of March 26, 2016
|
|
$
|
(234,592
|
)
|
(a) Treasury Stock
On October 22, 2015, the Company entered into an accelerated share repurchase agreement (the “October 2015 ASR Agreement”) with a third-party financial institution. Pursuant to the terms of the October 2015 ASR Agreement, the Company paid the financial institution
$125.0 million
in cash and received an initial delivery of
2,527,167
shares of the Company’s common stock in fiscal year 2015, representing an estimate of 80% of the total shares expected to be delivered under the October 2015 ASR Agreement. Upon final settlement of the October 2015 ASR Agreement during the
three months ended
March 26, 2016
, the Company received an additional delivery of
483,913
shares of its common stock based on a weighted average cost per share of
$41.51
over the term of the October 2015 ASR Agreement.
On February 4, 2016, the Company entered into an accelerated share repurchase agreement (the “February 2016 ASR Agreement”) with a third-party financial institution. Pursuant to the terms of the February 2016 ASR Agreement, the Company paid the financial institution
$30.0 million
in cash and received
702,239
shares of the Company’s common stock during the
three months ended
March 26, 2016
based on a weighted average cost per share of
$42.72
over the term of the February 2016 ASR Agreement.
The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of
$55.0 million
during the
three months ended
March 26, 2016
for the shares repurchased under the accelerated share repurchase agreements, based on the cost of the shares on the dates of repurchase and any direct costs incurred. During the
three
months ended
March 26, 2016
, the Company retired
1,186,152
shares of treasury stock, resulting in decreases in treasury stock and additional paid-in capital of
$55.0 million
and
$11.3 million
, respectively, and an increase in accumulated deficit of
$43.7 million
.
(b) Equity Incentive Plans
During the
three
months ended
March 26, 2016
, the Company granted stock options to purchase
1,384,294
shares of common stock and
73,794
restricted stock units (“RSUs”) to certain employees. The stock options generally vest in equal annual amounts over a
four
-year period subsequent to the grant date, and have a maximum contractual term of
seven
years. The stock options were granted with an exercise price of
$44.35
per share and have a weighted average grant-date fair value of
$7.40
per share. The RSUs granted to employees vest in equal annual amounts over a
three
-year period subsequent to the grant date and have a weighted average grant-date fair value of
$41.76
per share.
In addition, the Company granted
92,487
performance stock units (“PSUs”) to certain employees during the three months ended March 26, 2016. These PSUs are eligible to vest on February 23, 2019, subject to two separate vesting conditions. Of the total PSUs granted,
39,684
PSUs are subject to a service condition and a market vesting condition linked to the level of total shareholder return received by the Company’s shareholders during the performance period measured against the companies in the S&P 500 Composite Index (“TSR PSUs”). The remaining
52,803
PSUs granted are subject to a service condition and a
performance vesting condition linked to adjusted operating income growth over the performance period (“AOI PSUs”). The maximum vesting percentage that could be realized for each of the TSR PSUs and the AOI PSUs is 200% based on the level of performance achieved for the respective awards. All of the PSUs are also subject to a one-year post-vesting holding period. The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total shareholder return market condition, resulting in a grant-date fair value of
$55.36
per share. The AOI PSUs have a grant-date fair value of
$41.61
per share.
Total compensation expense related to all share-based awards was
$4.1 million
and
$3.7 million
for the three months ended
March 26, 2016
and
March 28, 2015
, respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.
(c) Accumulated Other Comprehensive Loss
The changes in the components of accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation
|
|
Unrealized gains on interest rate swaps
|
|
Other
|
|
Accumulated other comprehensive gain (loss)
|
Balance as of December 26, 2015
|
$
|
(20,459
|
)
|
|
2,443
|
|
|
(2,030
|
)
|
|
(20,046
|
)
|
Other comprehensive income (loss), net
|
2,257
|
|
|
(318
|
)
|
|
(25
|
)
|
|
1,914
|
|
Balance as of March 26, 2016
|
$
|
(18,202
|
)
|
|
2,125
|
|
|
(2,055
|
)
|
|
(18,132
|
)
|
(d) Dividends
The Company paid a quarterly dividend of
$0.30
per share of common stock on
March 16, 2016
totaling approximately
$27.4 million
. On
April 28, 2016
, the Company announced that its board of directors approved the next quarterly dividend of
$0.30
per share of common stock payable
June 8, 2016
to shareholders of record at the close of business on
May 31, 2016
.
(9) Earnings per Share
The computation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Net income attributable to Dunkin’ Brands—basic and diluted (in thousands)
|
$
|
37,154
|
|
|
25,631
|
|
Weighted average number of common shares:
|
|
|
|
Common—basic
|
91,684,844
|
|
|
100,271,701
|
|
Common—diluted
|
92,618,269
|
|
|
101,502,438
|
|
Earnings per common share:
|
|
|
|
Common—basic
|
$
|
0.41
|
|
|
0.26
|
|
Common—diluted
|
0.40
|
|
|
0.25
|
|
The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of
933,425
and
1,230,737
equity awards for the three months ended
March 26, 2016
and
March 28, 2015
, respectively, using the treasury stock method. The weighted average number of common shares in the common diluted earnings per share calculation for all periods excludes all contingently issuable equity awards for which the contingent vesting criteria were not yet met as of the fiscal period end. As of
March 26, 2016
and
March 28, 2015
, there were
150,000
restricted shares that were contingently issuable and for which the contingent vesting criteria were not yet met as of the fiscal period end. Additionally, the weighted average number of common shares in the common diluted earnings per share calculation excludes
4,512,079
and
3,084,195
equity awards for the three months ended
March 26, 2016
and
March 28, 2015
, respectively, as they would be antidilutive.
(10) Commitments and Contingencies
(a) Guarantees
Financial Guarantees
The Company has established agreements with certain financial institutions whereby the Company’s franchisees can obtain financing with terms of approximately
3
to
10
years for various business purposes. Substantially all loan proceeds are used by the franchisees to finance store improvements, new store development, new central production locations, equipment purchases, related business acquisition costs, working capital, and other costs. In limited instances, the Company guarantees a portion of the payments and commitments of the franchisees, which is collateralized by the store equipment owned by the franchisee. Under the terms of the agreements, in the event that all outstanding borrowings come due simultaneously, the Company would be contingently liable for
$1.9 million
and
$2.0 million
as of
March 26, 2016
and
December 26, 2015
, respectively. As of
March 26, 2016
and
December 26, 2015
, there were
no
amounts under such guarantees that were due. The Company assesses the risk of performing under these guarantees for each franchisee relationship on a quarterly basis. As of
March 26, 2016
, the Company recorded an immaterial amount of reserves for such guarantees. No reserves were recorded as of
December 26, 2015
.
Supply Chain Guarantees
The Company has various supply chain agreements that provide for purchase commitments, the majority of which result in the Company being contingently liable upon early termination of the agreement. As of
March 26, 2016
and
December 26, 2015
, the Company was contingently liable under such supply chain agreements for approximately
$152.5 million
and
$157.8 million
, respectively. For certain supply chain commitments, as product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. The Company assesses the risk of performing under each of these guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and ability to extend contract terms, there was
no
accrual required as of
March 26, 2016
or
December 26, 2015
related to these commitments.
Lease Guarantees
The Company is contingently liable on certain lease agreements typically resulting from assigning our interest in obligations under property leases as a condition of refranchising certain restaurants and the guarantee of certain other leases. These leases have varying terms, the latest of which expires in
2024
. As of
March 26, 2016
and
December 26, 2015
, the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was
$3.6 million
and
$3.7 million
, respectively. Our franchisees are the primary lessees under the majority of these leases. The Company generally has cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of nonpayment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, we do not believe it is probable that the Company will be required to make payments under such leases, and we have not recorded a liability for such contingent liabilities.
(b) Letters of Credit
As of
March 26, 2016
and
December 26, 2015
, the Company had standby letters of credit outstanding for a total of
$25.9 million
and
$26.3 million
, respectively. There were
no
amounts drawn down on these letters of credit as of
March 26, 2016
and
December 26, 2015
.
(c) Legal Matters
In May 2003, a group of Dunkin’ Donuts franchisees from Quebec, Canada filed a lawsuit against the Company on a variety of claims, including but not limited to, alleging that the Company breached its franchise agreements and provided inadequate management and support to Dunkin’ Donuts franchisees in Quebec (the “Bertico litigation”). In June 2012, the Quebec Superior Court found for the plaintiffs and issued a judgment against the Company in the amount of approximately
C$16.4 million
, plus costs and interest, representing loss in value of the franchises and lost profits. The Company appealed the decision, and in April 2015, the Quebec Court of Appeals (Montreal) ruled to reduce the damages to approximately C
$10.9 million
, plus costs and interest. The Company sought leave to appeal the decision with the Supreme Court of Canada, but was denied in March 2016. Similar claims have also been made against the Company by other former Dunkin’ Donuts franchisees in Canada. As a result of the Bertico litigation appellate ruling and assessment of similar claims, the Company reduced its aggregate legal reserves for the Bertico litigation and similar claims by approximately
$2.8 million
during the
three months ended
March 28, 2015
, which is recorded within general and administrative expenses, net in the consolidated statements of operations. No amounts have yet been paid with respect to these matters, and an estimated liability of
$19.0 million
is recorded within other current liabilities in the consolidated balance sheets as of
March 26, 2016
.
Additionally, the Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. As of
March 26, 2016
and
December 26, 2015
,
no
material amounts, excluding the Bertico litigation and related matters, have been recorded in connection with any litigation.
(11) Related-Party Transactions
(a) Advertising Funds
As of
March 26, 2016
and
December 26, 2015
, the Company had a net payable of
$5.2 million
and
$11.6 million
, respectively, to the various advertising funds.
To cover administrative expenses of the advertising funds, the Company charges each advertising fund a management fee for items such as facilities, accounting services, information technology, data processing, product development, legal, administrative support services, and other operating expenses, as well as share-based compensation expense for employees that provide services directly to the advertising funds. Management fees totaled
$2.4 million
for each of the
three months ended
March 26, 2016
and
March 28, 2015
. Such management fees are included in the consolidated statements of operations as a reduction in general and administrative expenses, net.
Additionally, the Company made net contributions to the advertising funds based on retail sales at company-operated restaurants of
$281 thousand
and
$265 thousand
during the
three months ended
March 26, 2016
and
March 28, 2015
, respectively, which are included in company-operated restaurant expenses in the consolidated statements of operations. The Company also funded advertising fund initiatives of
$505 thousand
and
$512 thousand
during the
three months ended
March 26, 2016
and
March 28, 2015
, respectively, which were contributed from the gift card breakage liability included within other current liabilities in the consolidated balance sheets (see note 6).
(b) Equity Method Investments
The Company recognized royalty income from its equity method investees as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
B-R 31 Ice Cream Co., Ltd.
|
$
|
321
|
|
|
242
|
|
BR-Korea Co., Ltd.
|
893
|
|
|
1,013
|
|
|
$
|
1,214
|
|
|
1,255
|
|
As of
March 26, 2016
and
December 26, 2015
, the Company had
$881 thousand
and
$1.1 million
, respectively, of royalties receivable from its equity method investees, which were recorded in accounts receivable, net of allowance for doubtful accounts, in the consolidated balance sheets.
The Company made net payments to its equity method investees totaling approximately
$820 thousand
and
$998 thousand
during the
three months ended
March 26, 2016
and
March 28, 2015
, respectively, primarily for the purchase of ice cream and other products.
As of
March 26, 2016
and
December 26, 2015
, the Company had
$2.1 million
of notes receivable from Coffee Alliance S.L., an equity method investee, which were fully reserved as of the respective dates. The notes receivable, net of the reserve, are included in other assets in the consolidated balance sheets.
The Company recognized
$463 thousand
and
$449 thousand
during the
three months ended
March 26, 2016
and
March 28, 2015
, respectively, in the consolidated statements of operations from the sale of ice cream and other products to Palm Oasis Ventures Pty. Ltd. (“Australia JV”), of which the Company owns a
20%
equity interest. As of
March 26, 2016
and
December 26, 2015
, the Company had
$2.5 million
and
$3.1 million
, respectively, of net receivables from the Australia JV,
consisting of accounts receivable and notes and other receivables, net of current liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained herein are not based on historical fact and are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” or “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These risks and uncertainties include, but are not limited to: the ongoing level of profitability of franchisees and licensees; our franchisees
’
and licensees
’
ability to sustain same store sales growth; successful westward expansion; changes in working relationships with our franchisees and licensees and the actions of our franchisees and licensees; our master franchisees’ relationships with sub-franchisees; the strength of our brand in the markets in which we compete; changes in competition within the quick service restaurant segment of the food industry; changes in consumer behavior resulting from changes in technologies or alternative methods of delivery; economic and political conditions in the countries where we operate; our substantial indebtedness; our ability to protect our intellectual property
rights; consumer preferences, spending patterns and demographic trends; the impact of seasonal changes, including weather effects, on our business; the success of our growth strategy and international development; changes in commodity and food prices, particularly coffee, dairy products and sugar, and other operating costs; shortages of coffee; failure of our network and information technology systems; interruptions or shortages in the supply of products to our franchisees and licensees; the impact of food borne-illness or food safety issues or adverse public or media opinions regarding the health effects of consuming our products; our ability to collect royalty payments from our franchisees and licensees; uncertainties relating to litigation; the ability of our franchisees and licensees to open new restaurants and keep existing restaurants in operation; our ability to retain key personnel; any inability to protect consumer credit card data and catastrophic events.
Forward-looking statements reflect management’s analysis as of the date of this quarterly report. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our most recent annual report on Form 10-K. Except as required by applicable law, we do not undertake to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.
Introduction and Overview
We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin’ Donuts and Baskin-Robbins brands. With over 19,000 points of distribution in more than 60 countries worldwide, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of
March 26, 2016
, Dunkin’ Donuts had
11,833
global points of distribution with restaurants in 41 U.S. states and the District of Columbia and in 43 foreign countries. Baskin-Robbins had
7,638
global points of distribution as of the same date, with restaurants in 43 U.S. states and the District of Columbia and in 47 foreign countries.
We are organized into four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We generate revenue from five primary sources: (i) royalty income and fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream and other products to franchisees in certain international markets, (iv) retail store revenue at our company-operated restaurants, and (v) other income including fees for the licensing of our brands for products sold in non-franchised outlets (such as retail packaged coffee and Dunkin’ Donuts K-Cup® pods), the licensing of the rights to manufacture Baskin-Robbins ice cream products to a third party for sale to U.S. franchisees, refranchising gains, transfer fees from franchisees, and online training fees.
Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With only
41
company-operated points of distribution as of
March 26, 2016
, we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators.
Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing, research and development, and innovation personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For the
three
months ended
March 26, 2016
, franchisee contributions to the U.S. advertising funds were $97.2 million.
We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the
three
-month periods ended
March 26, 2016
and
March 28, 2015
reflect the results of operations for the 13-week periods ended on those dates. Operating results for the
three
-month period ended
March 26, 2016
are not necessarily indicative of the results that may be expected for the fiscal year ending
December 31, 2016
. The data periods contained within our three- and twelve-month periods ending
December 31, 2016
will reflect the results of operations for the 14-week and 53-week periods ending on those dates.
Selected Operating and Financial Highlights
|
|
|
|
|
|
|
|
Amounts and percentages may not recalculate due to rounding
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Systemwide sales (in millions)
(a)
:
|
|
|
|
Dunkin’ Donuts U.S.
|
$
|
1,865.3
|
|
|
1,750.8
|
|
Dunkin’ Donuts International
|
167.5
|
|
|
168.2
|
|
Baskin-Robbins U.S.
|
129.9
|
|
|
123.1
|
|
Baskin-Robbins International
|
255.9
|
|
|
275.6
|
|
Total systemwide sales
|
$
|
2,418.6
|
|
|
2,317.6
|
|
Systemwide sales growth
|
4.4
|
%
|
|
6.2
|
%
|
Comparable store sales growth (decline)
(b)
:
|
|
|
|
Dunkin’ Donuts U.S.
|
2.0
|
%
|
|
2.7
|
%
|
Dunkin’ Donuts International
|
(2.3
|
)%
|
|
1.7
|
%
|
Baskin-Robbins U.S.
|
5.0
|
%
|
|
8.6
|
%
|
Baskin-Robbins International
|
(8.2
|
)%
|
|
0.3
|
%
|
Financial data (in thousands):
|
|
|
|
Total revenues
|
$
|
189,776
|
|
|
185,905
|
|
Operating income
|
85,333
|
|
|
83,740
|
|
Adjusted operating income
|
91,242
|
|
|
87,605
|
|
Net income attributable to Dunkin’ Brands
|
37,154
|
|
|
25,631
|
|
Adjusted net income
|
40,699
|
|
|
40,282
|
|
|
|
(a)
|
Prior period amounts have been revised to reflect a change from franchisee-reported sales to systemwide sales, as we believe the systemwide sales information is a more complete metric in obtaining an understanding of our financial performance. Additionally, franchisee sales related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility.
|
|
|
(b)
|
Comparable store sales growth for Dunkin’ Donuts U.S. and Baskin-Robbins U.S. for the three months ended
March 28, 2015
has been revised to include only those restaurants that have been open at least 78 weeks (approximately 18 months) to conform to the current period calculation, whereas previously reported figures included only those restaurants that were open at least 54 weeks (approximately 12 months). The calculation of this operating measure was revised in the third quarter of fiscal 2015 to more accurately reflect sales growth at comparable stores by minimizing the impact of strong new store openings, particularly as we develop in newer markets. International comparable store sales growth has not been revised at this time to include only sales from restaurants that have been open at least 78 weeks, similar to the U.S., given that store-level sales information resides on multiple, non-uniform systems owned and controlled by our international partners.
|
Our financial results are largely driven by changes in systemwide sales, which include sales by all points of distribution, whether owned by Dunkin’ Brands or by our franchisees and licensees, including joint ventures. While we do not record sales by franchisees, licensees, or joint ventures as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue and in evaluating our performance relative to competitors.
Comparable store sales growth for Dunkin’ Donuts U.S. and Baskin-Robbins U.S. is calculated by including only sales from franchisee- and company-operated restaurants that have been open at least 78 weeks and that have reported sales in the current and comparable prior year week. Comparable store sales growth for Dunkin’ Donuts International and Baskin-Robbins International represents the growth in local currency average weekly sales for franchisee-operated restaurants, including joint ventures, that have been open at least 54 weeks and that have reported sales in the current and comparable prior year week.
Overall growth in systemwide sales of
4.4%
for the
three months ended
March 26, 2016
, over the same period in the prior fiscal year resulted from the following:
|
|
•
|
Dunkin’ Donuts U.S. systemwide sales growth of
6.5%
for the
three months ended
March 26, 2016
, as a result of
340
net new restaurants opened since
March 28, 2015
and comparable store sales growth of
2.0%
. The increase in comparable store sales was driven by increased average ticket and traffic. Growth was driven by strong beverage sales, led by iced coffee and hot and iced coffee espresso-based beverages, and breakfast sandwiches led by limited-time-offer products. The in-restaurant K-Cup® and packaged coffee categories had a negative impact on comparable store sales, while traffic was positively impacted by weather.
|
|
|
•
|
Dunkin’ Donuts International systemwide sales decline of
0.4%
for the
three months ended
March 26, 2016
, driven primarily by sales declines in South Korea, offset by sales growth in Europe and the Middle East. Sales in South Korea, Asia, and South America were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for the
three months ended
March 26, 2016
increased by approximately 7%. Dunkin’ Donuts International comparable store sales declined
2.3%
driven primarily by declines in South Korea and Europe, offset by growth in South America.
|
|
|
•
|
Baskin-Robbins U.S. systemwide sales growth of
5.6%
for the
three months ended
March 26, 2016
, resulting primarily from comparable store sales growth of
5.0%
, driven by increased sales of cups and cones, beverages, desserts, and sundaes, as well as increased sales of cakes. Comparable store sales growth was driven primarily by an increase in traffic, which was positively impacted by weather.
|
|
|
•
|
Baskin-Robbins International systemwide sales decline of
7.1%
for the
three months ended
March 26, 2016
, driven by sales declines in South Korea and the Middle East, offset by sales growth in Japan and Europe. Sales in South Korea were also negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for the three months ended
March 26, 2016
decreased by approximately 3%. Baskin-Robbins International comparable store sales declined
8.2%
driven primarily by declines in South Korea, the Middle East, and Asia.
|
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution information related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility. Prior period amounts in the tables below have been revised to reflect these changes for all periods presented. Points of distribution and net openings as of and for the
three months ended
March 26, 2016
and
March 28, 2015
were as follows:
|
|
|
|
|
|
|
|
March 26, 2016
|
|
March 28, 2015
|
Points of distribution, at period end:
|
|
|
|
Dunkin’ Donuts U.S.
|
8,500
|
|
|
8,160
|
|
Dunkin’ Donuts International
|
3,333
|
|
|
3,207
|
|
Baskin-Robbins U.S.
|
2,518
|
|
|
2,526
|
|
Baskin-Robbins International
|
5,120
|
|
|
5,048
|
|
Consolidated global points of distribution
|
19,471
|
|
|
18,941
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26, 2016
|
|
March 28, 2015
|
Net openings (closings) during the period:
|
|
|
|
Dunkin’ Donuts U.S.
|
69
|
|
|
78
|
|
Dunkin’ Donuts International
|
14
|
|
|
(21
|
)
|
Baskin-Robbins U.S.
|
(11
|
)
|
|
(3
|
)
|
Baskin-Robbins International
|
42
|
|
|
25
|
|
Consolidated global net openings
|
114
|
|
|
79
|
|
Total revenues increased
$3.9 million
, or
2.1%
, for the
three months ended
March 26, 2016
, driven primarily by an increase in franchise fees and royalty income of
$8.5 million
driven by the increase in Dunkin’ Donuts U.S. systemwide sales and additional franchise fees due to development in new international markets. Additionally, sales of ice cream and other products increased
$2.8 million
, offset by a decrease in other revenues of
$6.1 million
due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015.
Operating income and adjusted operating income for the
three months ended
March 26, 2016
increased
$1.6 million
, or
1.9%
, and
$3.6 million
, or
4.2%
, respectively, primarily as a result of the increase in franchise fees and royalty income, as well as a gain recognized in connection with the sale of real estate, offset by the decrease in other revenues due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015. Operating income in the prior fiscal year period was also favorably impacted by a reduction in legal reserves.
Net income attributable to Dunkin’ Brands increased
$11.5 million
for the three months ended
March 26, 2016
primarily as a result of the
$20.6 million
loss on debt extinguishment and refinancing transactions recorded in the prior fiscal year period, as well as the
$1.6 million
increase in operating income, offset by a
$7.9 million
increase in income tax expense and additional interest expense of
$2.7 million
, driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed in January 2015.
Adjusted net income increased
$0.4 million
for the three months ended
March 26, 2016
, primarily as a result of the
$3.6 million
increase in adjusted operating income, offset by increases in interest expense and income tax expense.
Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairments, impairments of investments in joint ventures, and other non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. We use adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies.
Adjusted operating income and adjusted net income are reconciled from operating income and net income, respectively, determined under GAAP as follows:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
(In thousands)
|
Operating income
|
$
|
85,333
|
|
|
83,740
|
|
Adjustments:
|
|
|
|
Amortization of other intangible assets
|
5,761
|
|
|
6,200
|
|
Long-lived asset impairment charges
|
93
|
|
|
264
|
|
Transaction-related costs
(a)
|
55
|
|
|
154
|
|
Bertico and related litigation
(b)
|
—
|
|
|
(2,753
|
)
|
Adjusted operating income
|
$
|
91,242
|
|
|
87,605
|
|
Net income attributable to Dunkin’ Brands
|
$
|
37,154
|
|
|
25,631
|
|
Adjustments:
|
|
|
|
Amortization of other intangible assets
|
5,761
|
|
|
6,200
|
|
Long-lived asset impairment charges
|
93
|
|
|
264
|
|
Transaction-related costs
(a)
|
55
|
|
|
154
|
|
Bertico and related litigation
(b)
|
—
|
|
|
(2,753
|
)
|
Loss on debt extinguishment and refinancing transactions
|
—
|
|
|
20,554
|
|
Tax impact of adjustments
(c)
|
(2,364
|
)
|
|
(9,768
|
)
|
Adjusted net income
|
$
|
40,699
|
|
|
40,282
|
|
|
|
(a)
|
Represents non-capitalizable costs incurred as a result of the securitized financing facility, which was completed in January 2015.
|
|
|
(b)
|
Represents a net reduction to legal reserves for the Bertico litigation and related matters, as a result of the Quebec Court of Appeals (Montreal) ruling to reduce the damages assessed against the Company in the Bertico litigation from approximately C$16.4 million to approximately C$10.9 million, plus costs and interest.
|
|
|
(c)
|
Tax impact of adjustments calculated at a 40% effective tax rate.
|
Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
Earnings per share:
|
|
|
|
Common—basic
|
$
|
0.41
|
|
|
0.26
|
|
Common—diluted
|
0.40
|
|
|
0.25
|
|
Diluted adjusted earnings per share
|
0.44
|
|
|
0.40
|
|
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
|
|
March 26,
2016
|
|
March 28,
2015
|
|
(In thousands, except share and per share data)
|
Adjusted net income
|
$
|
40,699
|
|
|
40,282
|
|
Weighted average number of common shares—diluted
|
92,618,269
|
|
|
101,502,438
|
|
Diluted adjusted earnings per share
|
$
|
0.44
|
|
|
0.40
|
|
Results of operations
Consolidated results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Franchise fees and royalty income
|
$
|
123,783
|
|
|
115,325
|
|
|
8,458
|
|
|
7.3
|
%
|
Rental income
|
23,225
|
|
|
23,627
|
|
|
(402
|
)
|
|
(1.7
|
)%
|
Sales of ice cream and other products
|
25,891
|
|
|
23,068
|
|
|
2,823
|
|
|
12.2
|
%
|
Sales at company-operated restaurants
|
5,670
|
|
|
6,558
|
|
|
(888
|
)
|
|
(13.5
|
)%
|
Other revenues
|
11,207
|
|
|
17,327
|
|
|
(6,120
|
)
|
|
(35.3
|
)%
|
Total revenues
|
$
|
189,776
|
|
|
185,905
|
|
|
3,871
|
|
|
2.1
|
%
|
Total revenues for the
three months ended
March 26, 2016
increased
$3.9 million
, or
2.1%
, due primarily to an increase in franchise fees and royalty income of
$8.5 million
as a result of Dunkin’ Donuts U.S. systemwide sales growth and an increase in sales of ice cream and other products of
$2.8 million
due primarily to sales of ice cream products to the Middle East. The increases in revenues were offset by a decrease in other revenues of
$6.1 million
due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015, as well as a decrease in sales at company-operated restaurants of
$0.9 million
driven by a net decrease in the number of company-operated restaurants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Occupancy expenses—franchised restaurants
|
$
|
13,196
|
|
|
13,518
|
|
|
(322
|
)
|
|
(2.4
|
)%
|
Cost of ice cream and other products
|
17,234
|
|
|
15,346
|
|
|
1,888
|
|
|
12.3
|
%
|
Company-operated restaurant expenses
|
6,493
|
|
|
6,858
|
|
|
(365
|
)
|
|
(5.3
|
)%
|
General and administrative expenses, net
|
61,195
|
|
|
57,840
|
|
|
3,355
|
|
|
5.8
|
%
|
Depreciation and amortization
|
10,894
|
|
|
11,310
|
|
|
(416
|
)
|
|
(3.7
|
)%
|
Long-lived asset impairment charges
|
93
|
|
|
264
|
|
|
(171
|
)
|
|
(64.8
|
)%
|
Total operating costs and expenses
|
$
|
109,105
|
|
|
105,136
|
|
|
3,969
|
|
|
3.8
|
%
|
Net income of equity method investments
|
2,964
|
|
|
2,947
|
|
|
17
|
|
|
0.6
|
%
|
Other operating income, net
|
1,698
|
|
|
24
|
|
|
1,674
|
|
|
6,975.0
|
%
|
Operating income
|
$
|
85,333
|
|
|
83,740
|
|
|
1,593
|
|
|
1.9
|
%
|
Occupancy expenses for franchised restaurants for the
three months ended
March 26, 2016
decreased from the prior fiscal year period due primarily to the reversal of a lease reserve in the current year fiscal period as a result of entering into a new sublease agreement.
Net margin on ice cream and other products for the
three months ended
March 26, 2016
increased from the prior fiscal year period to approximately
$8.7 million
due primarily to increases in sales volume and pricing.
Company-operated restaurant expenses for the
three months ended
March 26, 2016
decreased
$0.4 million
, primarily as a result of a net decrease in the number of company-operated restaurants.
General and administrative expenses for the
three months ended
March 26, 2016
increased
$3.4 million
from the prior fiscal year period driven by a reduction in legal reserves for the Bertico litigation and related matters recorded in the prior year fiscal period, as well as increased support of our consumer packaged goods business.
Depreciation and amortization for the three months ended
March 26, 2016
decreased
$0.4 million
from the prior fiscal year period as a result of certain intangible assets becoming fully amortized and favorable lease intangible assets being written-off upon termination of the related leases.
Long-lived asset impairment charges for the
three months ended
March 26, 2016
decreased
$0.2 million
, driven primarily by the timing of lease terminations, which resulted in the write-off of favorable lease intangible assets and leasehold improvements.
Net income of equity method investments for the
three months ended
March 26, 2016
remained consistent with the prior fiscal year period as a result of an increase in net income from our Japan joint venture, offset by a decrease in net income from our South Korea joint venture. The increase in net income from our Japan joint venture was due primarily to the reduction of depreciation and amortization, net of tax, as a result of an impairment charge recorded in fiscal year 2015 related to our Japan joint venture.
Other operating income, net includes gains recognized in connection with the sale of real estate and fluctuates based on the timing of such transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Interest expense, net
|
$
|
24,732
|
|
|
22,042
|
|
|
2,690
|
|
|
12.2
|
%
|
Loss on debt extinguishment and refinancing transactions
|
—
|
|
|
20,554
|
|
|
(20,554
|
)
|
|
(100.0
|
)%
|
Other losses, net
|
370
|
|
|
545
|
|
|
(175
|
)
|
|
(32.1
|
)%
|
Total other expense
|
$
|
25,102
|
|
|
43,141
|
|
|
(18,039
|
)
|
|
(41.8
|
)%
|
The increase in net interest expense of
$2.7 million
for the
three months ended
March 26, 2016
was driven primarily by the securitization refinancing transaction that occurred in January 2015, which resulted in additional borrowings and an increase in the weighted average interest rate, as well as an increase in amortization of capitalized debt issuance costs compared to the prior fiscal year period.
The loss on debt extinguishment and refinancing transactions for the
three months ended
March 28, 2015
of
$20.6 million
resulted from the January 2015 securitization refinancing transaction.
The fluctuation in other losses, net, for the
three months ended
March 26, 2016
resulted primarily from net foreign exchange losses driven primarily by fluctuations in the U.S. dollar against the Canadian dollar and Australian dollar.
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
(In thousands, except percentages)
|
Income before income taxes
|
$
|
60,231
|
|
|
40,599
|
|
Provision for income taxes
|
23,077
|
|
|
15,174
|
|
Effective tax rate
|
38.3
|
%
|
|
37.4
|
%
|
The increase in the effective tax rate for the
three months ended
March 26, 2016
was primarily a result of additional income earned in the U.S. relative to income earned in lower tax rate foreign jurisdictions.
Operating segments
We operate four reportable operating segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We evaluate the performance of our segments and allocate resources to them based on operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, and other infrequent or unusual charges, which does not reflect the allocation of any corporate charges. This profitability measure is referred to as segment profit. Segment profit for the Dunkin’ Donuts International and Baskin-Robbins International segments includes net income of equity method investments, except for the other-than-temporary impairment charges and related reduction in depreciation, net of tax, on the underlying long-lived assets.
Beginning in the first quarter of fiscal year 2016, certain segment profit amounts in the tables below have been reclassified as a result of the realignment of our organizational structure to better support our segment operations, including the allocation of previously unallocated costs. Additionally, revenues, segment profit, and points of distribution information related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility. Prior period amounts in the tables below have been revised to reflect these changes for all periods presented.
For reconciliations to total revenues and income before income taxes, see note 7 to the unaudited consolidated financial statements included herein. Revenues for all segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues not included in segment revenues include revenue earned through certain licensing arrangements with third parties in which our brand names are used, revenue generated from online training programs for franchisees, and revenues from the sale of Dunkin’ Donuts products in certain international markets, all of which are not allocated to a specific segment.
Dunkin’ Donuts U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Royalty income
|
$
|
101,523
|
|
|
95,007
|
|
|
6,516
|
|
|
6.9
|
%
|
Franchise fees
|
7,068
|
|
|
8,264
|
|
|
(1,196
|
)
|
|
(14.5
|
)%
|
Rental income
|
22,385
|
|
|
22,681
|
|
|
(296
|
)
|
|
(1.3
|
)%
|
Sales at company-operated restaurants
|
5,670
|
|
|
6,558
|
|
|
(888
|
)
|
|
(13.5
|
)%
|
Other revenues
|
2,167
|
|
|
1,357
|
|
|
810
|
|
|
59.7
|
%
|
Total revenues
|
$
|
138,813
|
|
|
133,867
|
|
|
4,946
|
|
|
3.7
|
%
|
Segment profit
|
$
|
100,444
|
|
|
93,714
|
|
|
6,730
|
|
|
7.2
|
%
|
Dunkin’ Donuts U.S. revenues increased
$4.9 million
for the
three months ended
March 26, 2016
driven primarily by an increase in royalty income due to an increase in systemwide sales, as well as an increase in other revenues driven primarily by an increase in transfer fee income. These increases in revenues were offset by a decrease in franchise fees due to fewer gross openings and unfavorable development mix, as well as a decrease in renewal income. Also offsetting the increases in revenues was a decrease in sales at company-operated restaurants driven by a net decrease in the number of company-operated restaurants.
Dunkin’ Donuts U.S. segment profit increased
$6.7 million
for the
three months ended
March 26, 2016
, which was driven primarily by growth in royalty income, an increase in other operating income due to a gain recognized in connection with the sale of real estate, and an increase in other revenues. These increases were offset by a decrease in franchise fees and a recovery of bad debt in the prior year period.
Dunkin’ Donuts International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Royalty income
|
$
|
4,240
|
|
|
3,791
|
|
|
449
|
|
|
11.8
|
%
|
Franchise fees
|
2,890
|
|
|
523
|
|
|
2,367
|
|
|
452.6
|
%
|
Rental income
|
—
|
|
|
8
|
|
|
(8
|
)
|
|
(100.0
|
)%
|
Other revenues
|
120
|
|
|
2,256
|
|
|
(2,136
|
)
|
|
(94.7
|
)%
|
Total revenues
|
$
|
7,250
|
|
|
6,578
|
|
|
672
|
|
|
10.2
|
%
|
Segment profit
|
$
|
3,758
|
|
|
3,674
|
|
|
84
|
|
|
2.3
|
%
|
Dunkin’ Donuts International revenues for the
three months ended
March 26, 2016
increased by
$0.7 million
. The increase in revenues was primarily a result of increased franchise fees due to development in new markets, as well as an increase in royalty income, offset by a decline in other revenues due to revenue recorded in the prior year period in connection with a settlement reached with a master licensee.
Segment profit for Dunkin’ Donuts International increased
$0.1 million
for the three months ended
March 26, 2016
primarily as a result of revenue growth, offset by an increase in general and administrative expenses driven primarily by increased personnel costs and an increase in bad debt expense.
Baskin-Robbins U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Royalty income
|
$
|
6,223
|
|
|
5,916
|
|
|
307
|
|
|
5.2
|
%
|
Franchise fees
|
346
|
|
|
220
|
|
|
126
|
|
|
57.3
|
%
|
Rental income
|
713
|
|
|
799
|
|
|
(86
|
)
|
|
(10.8
|
)%
|
Sales of ice cream and other products
|
571
|
|
|
1,319
|
|
|
(748
|
)
|
|
(56.7
|
)%
|
Other revenues
|
2,708
|
|
|
2,055
|
|
|
653
|
|
|
31.8
|
%
|
Total revenues
|
$
|
10,561
|
|
|
10,309
|
|
|
252
|
|
|
2.4
|
%
|
Segment profit
|
$
|
7,300
|
|
|
6,088
|
|
|
1,212
|
|
|
19.9
|
%
|
Baskin-Robbins U.S. revenues for the
three months ended
March 26, 2016
increased
$0.3 million
, due primarily to an increase in other revenues, driven by an increase in licensing income, and increases in royalty income and franchise fees, offset by a decrease in sales of ice cream and other products. The fluctuations in licensing income and sales of ice cream and other products can be attributed to a shift in certain franchisees now purchasing ice cream directly from our third-party ice cream manufacturer.
Baskin-Robbins U.S. segment profit increased
$1.2 million
for the
three months ended
March 26, 2016
, primarily as a result of the increases in other revenues, royalty income, and franchise fees.
Baskin-Robbins International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26,
2016
|
|
March 28,
2015
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
(In thousands, except percentages)
|
Royalty income
|
$
|
1,380
|
|
|
1,407
|
|
|
(27
|
)
|
|
(1.9
|
)%
|
Franchise fees
|
113
|
|
|
197
|
|
|
(84
|
)
|
|
(42.6
|
)%
|
Rental income
|
106
|
|
|
118
|
|
|
(12
|
)
|
|
(10.2
|
)%
|
Sales of ice cream and other products
|
25,063
|
|
|
21,222
|
|
|
3,841
|
|
|
18.1
|
%
|
Other revenues
|
172
|
|
|
186
|
|
|
(14
|
)
|
|
(7.5
|
)%
|
Total revenues
|
$
|
26,834
|
|
|
23,130
|
|
|
3,704
|
|
|
16.0
|
%
|
Segment profit
|
$
|
8,384
|
|
|
7,057
|
|
|
1,327
|
|
|
18.8
|
%
|
Baskin-Robbins International revenues increased
$3.7 million
for the
three months ended
March 26, 2016
due primarily to an increase in sales of ice cream and other products to the Middle East.
Baskin-Robbins International segment profit increased
$1.3 million
for the
three months ended
March 26, 2016
as a result of an increase in net margin on ice cream products driven primarily by increases in sales volume and pricing, as well as a decrease in bad debt expense. These increases in segment profit were offset by a decrease in net income from our South Korea joint venture.
Liquidity and Capital Resources
As of
March 26, 2016
, we held
$223.5 million
of cash and cash equivalents and
$67.7 million
of short-term restricted cash that is restricted under our securitized financing facility. Included in cash and cash equivalents is
$129.7 million
of cash held for advertising funds and reserved for gift card/certificate programs. Cash reserved for gift card/certificate programs also includes cash that will be used to fund initiatives from the gift card breakage liability (see note 6 to the unaudited consolidated financial statements included herein). In addition, as of
March 26, 2016
, we had a borrowing capacity of
$74.1 million
under our
$100.0 million
Variable Funding Notes (as defined below).
Free cash flow
During the
three
months ended
March 26, 2016
, net cash provided by operating activities was
$26.5 million
, as compared to net cash used in operating activities of
$9.0 million
for the
three
months ended
March 28, 2015
. Net cash flows from operating activities for the
three
months ended
March 26, 2016
and
March 28, 2015
include decreases of
$18.9 million
and
$18.0 million
, respectively, in cash held for advertising funds and reserved for gift card/certificate programs, which were primarily driven by the seasonality of our gift card program. Net cash used in operating activities for the
three
months ended
March 28, 2015
includes the net funding of restricted cash accounts of
$65.8 million
, which represents cash restricted in accordance with our securitized financing facility and will be used for operating activities such as to pay interest and real estate obligations, while net cash provided by operating activities for the
three
months ended
March 26, 2016
includes the net release of restricted cash of
$4.2 million
. Excluding cash held for advertising funds and reserved for gift card/certificate programs and excluding the fluctuation in restricted cash, we generated
$40.7 million
and
$67.0 million
of free cash flow during the
three
months ended
March 26, 2016
and
March 28, 2015
, respectively.
The decrease in free cash flow was due primarily to increases in cash paid for income taxes, interest on our long-term debt, and incentive compensation, as well as a reduction in dividends from our joint ventures, driven primarily by timing of the payment from our South Korea joint venture, and the timing of receipts and payments associated with the sale of Dunkin’ K-Cup® pods and the related franchisee profit-sharing program. Offsetting these decreases in free cash flow were an increase in proceeds from the sale of real estate and a reduction in capital expenditures compared to the prior fiscal year period.
Free cash flow is a non-GAAP measure reflecting net cash provided by operating and investing activities, excluding the cash flows related to advertising funds, gift card/certificate programs, and restricted cash. We use free cash flow as a key performance measure for the purpose of evaluating performance internally and our ability to generate cash. We also believe free 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 GAAP. Use of the term free cash flow may differ from similar measures reported by other companies.
Free cash flow is reconciled from net cash provided by operating activities determined under GAAP as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 26, 2016
|
|
March 28, 2015
|
Net cash provided by (used in) operating activities
|
$
|
26,525
|
|
|
(8,980
|
)
|
Plus: Decrease in cash held for advertising funds and gift card/certificate programs
|
18,875
|
|
|
17,982
|
|
Plus: Increase (decrease) in restricted cash
|
(4,236
|
)
|
|
65,772
|
|
Less: Net cash used in investing activities
|
(459
|
)
|
|
(7,732
|
)
|
Free cash flow
|
$
|
40,705
|
|
|
67,042
|
|
Operating, investing, and financing cash flows
Net cash provided by operating activities was
$26.5 million
for the
three
months ended
March 26, 2016
, as compared to
$9.0 million
used in operating activities in the prior fiscal year period. The
$35.5 million
increase in operating cash flows was driven primarily by the fluctuation of restricted cash of
$70.0 million
driven by the funding of restricted cash accounts in accordance with the requirements of our securitized debt structure in the prior fiscal year period combined with the net release of restricted cash in the current fiscal year period. Offsetting this increase in operating cash flows were increases in cash paid for income taxes, interest on our long-term debt, and incentive compensation, as well as a reduction in dividends from our joint ventures, driven primarily by timing of the payment from our South Korea joint venture, and the timing of receipts and payments associated with the sale of Dunkin’ K-Cup® pods and the related franchisee profit-sharing program.
Net cash used in investing activities was
$0.5 million
for the
three
months ended
March 26, 2016
, as compared to
$7.7 million
in the prior fiscal year period. The
$7.3 million
decrease in net cash used in investing activities was driven primarily by a reduction in capital expenditures of
$3.0 million
and proceeds received from the sale of real estate of
$2.6 million
, as well cash paid for the acquisition of a company-operated restaurant in the prior fiscal year period.
Net cash used in financing activities was
$63.1 million
for the
three
months ended
March 26, 2016
, as compared to net cash provided by financing activities in the prior fiscal year period of
$149.4 million
. The
$212.6 million
decrease in financing cash flows compared to the prior fiscal year period was driven primarily by the favorable impact of debt-related activities of
$633.2 million
in the prior fiscal year period, resulting from proceeds from the issuance of long-term debt, net of debt repayment, payment of debt issuance and other debt-related costs, and funding of restricted cash accounts, as well as the repayment of debt in the current fiscal year period of
$6.3 million
. Offsetting the unfavorable impact of debt-related activities was incremental cash used in the prior fiscal year period for repurchases of common stock of
$429.8 million
.
Borrowing capacity
Our securitized financing facility included original aggregate borrowings of approximately
$2.60 billion
, consisting of
$2.50 billion
Class A-2 Notes (as defined below) and
$100.0 million
of Variable Funding Notes (as defined below) which were undrawn at closing. As of
March 26, 2016
, there was approximately
$2.48 billion
of total principal outstanding on the Class A-2 Notes, while there was
$74.1 million
in available commitments under the Variable Funding Notes as
$25.9 million
of letters of credit were outstanding.
On January 26, 2015, DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of Dunkin’ Brands Group, Inc., entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2015-1 3.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $750.0 million and Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of $1.75 billion. In addition, the Master Issuer also issued Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”), which allow the Master Issuer to borrow up to $100.0 million on a revolving basis. The Variable Funding Notes may also be used to issue letters of credit. The Notes were issued in a securitization transaction pursuant to which most of the Company’s domestic and certain of its foreign revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets to secure the Notes.
The legal final maturity date of the Class A-2 Notes is in February 2045, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in February 2019 and the Class A-2-II Notes will be repaid in February 2022 (the “Anticipated Repayment Dates”). Principal amortization repayments, payable quarterly, are required on the Class A-2-I Notes and Class A-2-II Notes equal to $7.5 million and $17.5 million, respectively, per calendar year through the respective Anticipated Repayment Dates. No principal payments will be required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the Indenture), is less than or equal to 5.0 to 1.0. If the Class A-2 Notes have not been repaid in full by their respective Anticipated Repayment Dates, a rapid amortization event will occur in which residual net cash flows of the Master Issuer, after making certain required payments, will be applied to the outstanding principal of the Class A-2 Notes. Various other events, including failure to maintain a minimum ratio of net cash flows to debt service, may also cause a rapid amortization event.
It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior to February 2020, subject to two additional one-year extensions.
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 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.
As of
March 26, 2016
, 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
March 26, 2016
, respectively (in thousands):
|
|
|
|
|
|
March 26, 2016
|
Principal outstanding under Class A-2 Notes
|
$
|
2,475,000
|
|
Total capital lease obligations
|
8,296
|
|
Less: cash and cash equivalents
|
(223,524
|
)
|
Less: restricted cash, current
|
(67,665
|
)
|
Plus: cash held for gift card/certificate programs
|
127,039
|
|
Net Debt
|
$
|
2,319,146
|
|
|
|
|
|
|
|
Twelve months ended
|
|
March 26, 2016
|
Net income including noncontrolling interests
|
$
|
116,958
|
|
Interest expense
|
99,482
|
|
Income tax expense
|
104,262
|
|
Depreciation and amortization
|
44,828
|
|
Impairment charges
|
452
|
|
Japan joint venture impairment
|
54,300
|
|
EBITDA
|
420,282
|
|
Adjustments:
|
|
Non-cash adjustments
(a)
|
15,158
|
|
Other
(b)
|
7,938
|
|
Total adjustments
|
23,096
|
|
Adjusted EBITDA
|
$
|
443,378
|
|
|
|
(a)
|
Represents non-cash adjustments, including stock compensation expense, legal reserves, and other non-cash gains and losses.
|
|
|
(b)
|
Represents loss on settlement of our Canadian pension plan in June 2015 as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012, as well as costs and fees associated with various franchisee-related investments, bank fees, and the net impact of other insignificant adjustments.
|
Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and amounts available under our 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 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
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance for employee share-based compensation which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, forfeiture estimates, statutory tax withholding requirements, and classification in the statements of cash flows. This guidance is effective for us in fiscal year 2017 with early adoption permitted. We expect to adopt this new guidance in fiscal year 2017. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets. During fiscal year 2015 and the three months ended March 26, 2016, $11.5 million and $538 thousand, respectively, of excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes if this new guidance had been adopted as of the respective dates. We are further evaluating the impact the adoption of this new standard will have on our accounting policies, consolidated financial statements, and related disclosures, as well as the transition methods.
In March 2016, the FASB issued new guidance related to the recognition of breakage for certain prepaid stored-value products which requires breakage for those liabilities to be recognized in a way that is consistent with how it will be recognized under the new revenue recognition guidance, eliminating any current or future diversity in practice. This guidance is effective for us in fiscal year 2018 with early adoption permitted. We do not expect the adoption of this guidance to have any impact on our consolidated financial statements.
In February 2016, the FASB issued a new standard for lease accounting, which replaces existing lease guidance. The new standard 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 standard is effective for us in fiscal year 2019 with early adoption permitted, and modified retrospective application is required. We expect to adopt this new standard in fiscal year 2019 and are currently evaluating the impact the adoption of this new standard will have on our consolidated financial statements and related disclosures. We expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
In May 2014, the FASB issued a new standard for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new standard provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard is effective for us in fiscal year 2018 with early adoption permitted in fiscal year 2017. We expect to adopt this new standard in fiscal year 2018 and are currently evaluating the impact the adoption of this new standard will have on our accounting policies, consolidated financial statements, and related disclosures, and have not yet selected a transition method.
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 26, 2015
.
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
March 26, 2016
. 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
March 26, 2016
, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
During the quarterly period ended
March 26, 2016
, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Part II. Other Information