10-Q
Table of Contents

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

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 26, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from              to             
Commission file number 001-35258 
 
 
 
DUNKIN’ BRANDS GROUP, INC.
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
20-4145825
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
130 Royall Street
Canton, Massachusetts 02021
(Address of principal executive offices) (zip code)
(781) 737-3000
(Registrants’ telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
 
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).     YES  ¨    NO  x
As of November 2, 2015, 92,639,560 shares of common stock of the registrant were outstanding.


Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 
 
 
 
 
 
Page    
 
Part I. – Financial Information
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
Part II. – Other Information
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2

Table of Contents

Part I.        Financial Information
Item 1.       Financial Statements
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
September 26,
2015
 
December 27,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
324,530

 
208,080

Restricted cash
72,131

 

Accounts receivable, net of allowance for doubtful accounts of $5,534 and $3,882 as of September 26, 2015 and December 27, 2014, respectively
55,231

 
55,908

Notes and other receivables, net of allowance for doubtful accounts of $882 and $1,278 as of September 26, 2015 and December 27, 2014, respectively
35,351

 
49,152

Deferred income taxes, net
48,311

 
49,216

Restricted assets of advertising funds
38,591

 
34,300

Prepaid income taxes
12,574

 
24,861

Prepaid expenses and other current assets
24,453

 
21,101

Total current assets
611,172

 
442,618

Property and equipment, net of accumulated depreciation of $109,732 and $104,415 as of September 26, 2015 and December 27, 2014, respectively
187,272

 
182,061

Equity method investments
160,022

 
164,493

Goodwill
892,094

 
891,370

Other intangible assets, net of accumulated amortization of $234,857 and $221,042 as of September 26, 2015 and December 27, 2014, respectively
1,407,428

 
1,425,797

Other assets
90,087

 
71,044

Total assets
$
3,348,075

 
3,177,383

Liabilities, Redeemable Noncontrolling Interests, and Stockholders’ Equity (Deficit)
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
25,253

 
3,852

Capital lease obligations
543

 
506

Accounts payable
14,728

 
13,814

Liabilities of advertising funds
45,487

 
48,081

Deferred income
32,786

 
30,374

Other current liabilities
206,660

 
258,892

Total current liabilities
325,457

 
355,519

Long-term debt, net
2,463,477

 
1,807,081

Capital lease obligations
7,168

 
7,575

Unfavorable operating leases acquired
13,388

 
14,795

Deferred income
16,682

 
14,935

Deferred income taxes, net
522,838

 
540,339

Other long-term liabilities
64,856

 
62,189

Total long-term liabilities
3,088,409

 
2,446,914

Commitments and contingencies (note 10)

 

Redeemable noncontrolling interests

 
6,991

Stockholders’ equity (deficit):
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding at September 26, 2015 and December 27, 2014

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 95,163,689 issued and outstanding at September 26, 2015; 104,630,978 shares issued and outstanding at December 27, 2014
95

 
104

Additional paid-in capital
946,460

 
1,093,363

Accumulated deficit
(992,837
)
 
(711,531
)
Accumulated other comprehensive loss
(19,726
)
 
(13,977
)
Total stockholders’ equity (deficit) of Dunkin’ Brands
(66,008
)
 
367,959

Noncontrolling interests
217

 

Total stockholders’ equity (deficit)
(65,791
)
 
367,959

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity (deficit)
$
3,348,075

 
3,177,383


See accompanying notes to unaudited consolidated financial statements.

3

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

 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Revenues:
 
 
 
 
 
 
 
Franchise fees and royalty income
$
133,913

 
126,759

 
380,381

 
355,738

Rental income
26,121

 
25,570

 
76,283

 
73,650

Sales of ice cream and other products
29,554

 
27,617

 
88,032

 
88,678

Sales at company-operated restaurants
7,293

 
5,267

 
21,578

 
16,319

Other revenues
12,926

 
7,427

 
40,862

 
21,111

Total revenues
209,807

 
192,640

 
607,136

 
555,496

Operating costs and expenses:
 
 
 
 
 
 
 
Occupancy expenses—franchised restaurants
13,686

 
13,258

 
40,921

 
39,830

Cost of ice cream and other products
19,788

 
19,802

 
58,010

 
62,914

Company-operated restaurant expenses
7,697

 
5,505

 
22,312

 
16,772

General and administrative expenses, net
61,433

 
56,039

 
187,622

 
171,765

Depreciation
5,177

 
4,960

 
15,278

 
14,803

Amortization of other intangible assets
6,161

 
6,333

 
18,542

 
19,122

Long-lived asset impairment charges

 
633

 
264

 
1,279

Total operating costs and expenses
113,942

 
106,530

 
342,949

 
326,485

Net income of equity method investments
4,059

 
5,366

 
10,957

 
12,514

Other operating income (expense), net
(161
)
 
1,004

 
947

 
7,609

Operating income
99,763

 
92,480

 
276,091

 
249,134

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
86

 
63

 
324

 
201

Interest expense
(24,786
)
 
(16,680
)
 
(72,045
)
 
(51,444
)
Loss on debt extinguishment and refinancing transactions

 

 
(20,554
)
 
(13,735
)
Other losses, net
(449
)
 
(584
)
 
(1,006
)
 
(670
)
Total other expense, net
(25,149
)
 
(17,201
)
 
(93,281
)
 
(65,648
)
Income before income taxes
74,614

 
75,279

 
182,810

 
183,486

Provision for income taxes
28,312

 
20,855

 
68,634

 
60,263

Net income including noncontrolling interests
46,302

 
54,424

 
114,176

 
123,223

Net income (loss) attributable to noncontrolling interests
86

 
(273
)
 
11

 
(621
)
Net income attributable to Dunkin’ Brands
$
46,216

 
54,697

 
114,165

 
123,844

Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.49

 
0.52

 
1.18

 
1.17

Common—diluted
0.48

 
0.52

 
1.16

 
1.16

Cash dividends declared per common share
0.27

 
0.23

 
0.80

 
0.69

See accompanying notes to unaudited consolidated financial statements.

4

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

 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Net income including noncontrolling interests
$
46,302

 
54,424

 
114,176

 
123,223

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Effect of foreign currency translation, net of deferred tax expense of $119 and $74 for the three months ended September 26, 2015 and September 27, 2014, respectively, and $412 and $251 for the nine months ended September 26, 2015 and September 27, 2014, respectively
(4,398
)
 
(5,074
)
 
(6,838
)
 
(1,552
)
Effect of interest rate swaps, net of deferred tax expense (benefit) of $(216) and $1,358 for the three months ended September 26, 2015 and September 27, 2014, respectively, and $(650) and $(709) for the nine months ended September 26, 2015 and September 27, 2014, respectively
(319
)
 
2,026

 
(955
)
 
(1,032
)
Effect of pension plan, net of deferred tax expense of $5 for the three months ended September 27, 2014 and $866 and $15 for the nine months ended September 26, 2015 and September 27, 2014, respectively

 
18

 
2,874

 
53

Other, net
(180
)
 
(92
)
 
(830
)
 
394

Total other comprehensive loss, net
(4,897
)
 
(3,122
)
 
(5,749
)
 
(2,137
)
Comprehensive income including noncontrolling interests
41,405

 
51,302

 
108,427

 
121,086

Comprehensive income (loss) attributable to noncontrolling interests
86

 
(273
)
 
11

 
(621
)
Comprehensive income attributable to Dunkin’ Brands
$
41,319


51,575

 
108,416

 
121,707

See accompanying notes to unaudited consolidated financial statements.

5

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

 
Nine months ended
 
September 26,
2015
 
September 27,
2014
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
114,176

 
123,223

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,820

 
33,925

Amortization of debt issuance costs and original issue discount
4,432

 
2,987

Loss on debt extinguishment and refinancing transactions
20,554

 
13,735

Deferred income taxes
(17,918
)
 
(13,638
)
Provision for bad debt
2,615

 
2,093

Share-based compensation expense
11,918

 
8,070

Net income of equity method investments
(10,957
)
 
(12,514
)
Dividends received from equity method investments
6,671

 
7,427

Gain on sale of real estate and company-operated restaurants
(921
)
 
(7,446
)
Other, net
1,653

 
205

Change in operating assets and liabilities:
 
 
 
Restricted cash
(65,888
)
 

Accounts, notes, and other receivables, net
11,731

 
16,239

Prepaid income taxes, net
11,859

 
8,218

Other current assets
(4,008
)
 
519

Accounts payable
1,881

 
(497
)
Other current liabilities
(48,508
)
 
(69,113
)
Liabilities of advertising funds, net
(6,111
)
 
(6,320
)
Deferred income
4,175

 
4,349

Other, net
12,063

 
4,389

Net cash provided by operating activities
83,237

 
115,851

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(23,700
)
 
(18,324
)
Proceeds from sale of real estate and company-operated restaurants
1,948

 
14,354

Other, net
(3,270
)
 
(1,734
)
Net cash used in investing activities
(25,022
)
 
(5,704
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
2,500,000

 

Repayment of long-term debt
(1,831,574
)
 
(15,000
)
Payment of debt issuance and other debt-related costs
(41,347
)
 
(8,977
)
Dividends paid on common stock
(76,013
)
 
(72,756
)
Repurchases of common stock, including accelerated share repurchase
(500,037
)

(130,171
)
Change in restricted cash
(6,831
)
 

Exercise of stock options
10,297

 
4,847

Excess tax benefits from share-based compensation
11,534

 
8,938

Other, net
(7,069
)
 
1,923

Net cash provided by (used in) financing activities
58,960

 
(211,196
)
Effect of exchange rates on cash and cash equivalents
(725
)
 
(219
)
Increase (decrease) in cash and cash equivalents
116,450

 
(101,268
)
Cash and cash equivalents, beginning of period
208,080

 
256,933

Cash and cash equivalents, end of period
$
324,530

 
155,665

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
63,885

 
57,507

Cash paid for interest
66,854

 
47,971

Noncash investing activities:
 
 
 
Property and equipment included in accounts payable and other current liabilities
1,185

 
1,241

Purchase of leaseholds in exchange for capital lease obligations

 
434

See accompanying notes to unaudited consolidated financial statements.

6


DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Description of Business and Organization
Dunkin’ Brands Group, Inc. (“DBGI”), together with its consolidated subsidiaries, is one of the world’s leading franchisors of restaurants serving coffee and baked goods, as well as ice cream, within the quick service restaurant segment of the restaurant industry. We develop, franchise, and license a system of both traditional and nontraditional quick service restaurants and, in limited circumstances, own and operate individual locations. Through our Dunkin’ Donuts brand, we develop and franchise restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. Through our Baskin-Robbins brand, we develop and franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, we distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in certain international markets.
Throughout these unaudited consolidated financial statements, “Dunkin’ Brands,” “the Company,” “we,” “us,” “our,” and “management” refer to DBGI and its consolidated subsidiaries taken as a whole.
(2) Summary of Significant Accounting Policies
(a) Unaudited Consolidated Financial Statements
The consolidated balance sheet as of September 26, 2015, the consolidated statements of operations and comprehensive income for the three and nine months ended September 26, 2015 and September 27, 2014, and the consolidated statements of cash flows for the nine months ended September 26, 2015 and September 27, 2014 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 27, 2014, 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 our three- and nine-month periods ended September 26, 2015 and September 27, 2014 reflect the results of operations for the 13-week and 39-week periods ended on those dates, respectively. Operating results for the three- and nine-month periods ended September 26, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2015.
(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 held restricted cash which primarily represented (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.

7

Table of Contents

Financial assets and liabilities measured at fair value on a recurring basis as of September 26, 2015 and December 27, 2014 are summarized as follows (in thousands):
 
September 26, 2015
 
December 27, 2014
 
Significant other observable inputs (Level 2)
 
Total
 
Significant other observable inputs (Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
Company-owned life insurance
$
2,839

 
2,839

 
2,975

 
2,975

Total assets
$
2,839

 
2,839

 
2,975

 
2,975

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
8,627

 
8,627

 
8,488

 
8,488

Total liabilities
$
8,627

 
8,627

 
8,488

 
8,488

The deferred compensation liabilities relate primarily 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 values. As such, the company-owned life insurance policies are classified within Level 2, as defined under U.S. GAAP.
The carrying value and estimated fair value of long-term debt as of September 26, 2015 and December 27, 2014 were as follows (in thousands):
 
September 26, 2015
 
December 27, 2014
 
Carrying value
 
Estimated fair value
 
Carrying value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
2,488,730

 
2,503,285

 
1,810,933

 
1,778,066

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 products. In addition, we have notes 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. At September 26, 2015 and December 27, 2014, one master licensee, including its majority-owned subsidiaries, accounted for approximately 23% and 19%, respectively, of total accounts and notes receivable. For the nine months ended September 27, 2014, one master licensee, including its majority-owned subsidiaries, accounted for approximately 10% of total revenues. No individual franchisee or master licensee accounted for more than 10% of total revenues for the three and nine months ended September 26, 2015 or for the three months ended September 27, 2014.
Additionally, the Company engages various third parties to manufacture and/or distribute certain Dunkin’ Donuts and Baskin-Robbins products under licensing arrangements. As of September 26, 2015, one of these third parties accounted for approximately 22% of total accounts and notes receivable. No individual third party accounted for more than 10% of total accounts and notes receivable as of December 27, 2014.

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Table of Contents

(f) Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued new guidance to simplify the presentation of debt issuance costs, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums, instead of as an asset. This guidance is effective for the Company in fiscal year 2016, and early adoption is permitted. The adoption of this guidance by the Company will result in the reclassification of debt issuance costs, which were approximately $37.2 million and $11.5 million as of September 26, 2015 and December 27, 2014, respectively, from other assets to long-term debt, net in the consolidated balance sheets, resulting in a corresponding reduction in total assets and total long-term liabilities. The adoption of this guidance will not have any impact on the Company’s consolidated statements of operations or cash flows.
In May 2014, the FASB issued new guidance for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new guidance provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued new guidance to defer the mandatory effective date by one year and permit early adoption, but not before the original effective date. As a result, this guidance is now 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 $260 thousand and $606 thousand have been reclassified from other revenues to sales of ice cream and other products for the three and nine months ended September 27, 2014, respectively, and expenses totaling $272 thousand and $641 thousand have been reclassified from general and administrative expenses, net to cost of ice cream and other products for the three and nine months ended September 27, 2014, respectively. 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.
Additionally, the Company has revised the presentation in the consolidated statements of comprehensive income to conform to the current period presentation which separately discloses the effect of the pension plan on other comprehensive income (loss), net. In prior periods, such amounts were included within other, net. There was no impact to total other comprehensive loss, net or comprehensive income attributable to Dunkin’ Brands as a result of this reclassification.
(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
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Royalty income
$
120,068

 
113,614

 
346,946

 
324,945

Initial franchise fees and renewal income
13,845

 
13,145

 
33,435

 
30,793

Total franchise fees and royalty income
$
133,913

 
126,759

 
380,381

 
355,738


9

Table of Contents

The changes in franchised and company-operated points of distribution were as follows:
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Systemwide Points of Distribution:
 
 
 
 
 
 
 
Franchised points of distribution in operation—beginning of period
19,048

 
18,376

 
18,821

 
18,122

Franchised points of distribution—opened
357

 
363

 
1,036

 
944

Franchised points of distribution—closed
(269
)
 
(169
)
 
(719
)
 
(506
)
Net transfers from company-operated points of distribution
4

 
1

 
2

 
11

Franchised points of distribution in operation—end of period
19,140

 
18,571

 
19,140

 
18,571

Company-operated points of distribution—end of period
45

 
31

 
45

 
31

Total systemwide points of distribution—end of period
19,185

 
18,602

 
19,185

 
18,602

(4) Debt
Securitized Financing Facility
On January 26, 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 for the issuance of up to $100.0 million of Variable Funding Notes and certain other credit instruments, including 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, 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 September 26, 2015, approximately $746.3 million and $1.74 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, at September 26, 2015. As of September 26, 2015, $26.3 million

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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 September 26, 2015.
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
In February 2014, the senior credit facility was amended, which resulted in a reduction of interest rates. As a result, during the first quarter of fiscal year 2014, the Company recorded a loss on debt extinguishment and refinancing transactions of $13.7 million, including $10.5 million related to the write-off of original issuance discount and debt issuance costs and $3.2 million of fees paid to third parties. The amended term loans were issued with an original issue discount of 0.25%, or $4.6 million, which was recorded as a reduction to long-term debt. Total debt issuance costs incurred and capitalized in connection with this amendment were $1.2 million. As of December 27, 2014, $1.82 billion of principal was outstanding on the term loans.
The proceeds from the issuance of the Class A-2 Notes were used to repay the remaining principal outstanding on the term loans. During the first quarter of fiscal year 2015, the Company recorded a loss on debt extinguishment of $20.6 million, consisting primarily of the write-off of the remaining original issuance discount and debt issuance costs related to the term loans.
(5) Derivative Instruments and Hedging Transactions
Effective December 23, 2014, the Company terminated all interest rate swap agreements with its counterparties in anticipation of the securitization transaction and related repayment of the outstanding term loans (see note 4). 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. The Company received cash proceeds, net of accrued interest, of $3.6 million in fiscal year 2014 and the remaining $1.7 million in the first quarter of fiscal year 2015. 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 September 26, 2015 and December 27, 2014, a pre-tax gain of $4.6 million and $6.2 million, respectively, was recorded in accumulated other comprehensive loss. During the next twelve months, the Company estimates that $2.1 million will be reclassified from accumulated other comprehensive loss as a reduction of interest expense.

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The tables below summarize the effects of derivative instruments on the consolidated statements of operations and comprehensive income for the three and nine months ended September 26, 2015 and September 27, 2014 (in thousands):
Three months ended September 26, 2015
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$

 
535

 
Interest expense
 
$
(535
)
Income tax effect
 

 
(216
)
 
Provision for income taxes
 
216

Net of income taxes
 
$

 
319

 
 
 
$
(319
)
 
 
 
 
 
 
 
 
 
Three months ended September 27, 2014
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
2,319

 
(1,065
)
 
Interest expense
 
$
3,384

Income tax effect
 
(916
)
 
442

 
Provision for income taxes
 
(1,358
)
Net of income taxes
 
$
1,403

 
(623
)
 
 
 
$
2,026


Nine months ended September 26, 2015
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$

 
1,605

 
Interest expense
 
$
(1,605
)
Income tax effect
 

 
(650
)
 
Provision for income taxes
 
650

Net of income taxes
 
$

 
955

 
 
 
$
(955
)
 
 
 
 
 
 
 
 
 
Nine months ended September 27, 2014
Derivatives designated as cash flow hedging instruments
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
Amount of net gain (loss) reclassified into earnings
 
Consolidated statement of operations classification
 
Total effect on other comprehensive income (loss)
Interest rate swaps
 
$
(4,854
)
 
(3,113
)
 
Interest expense
 
$
(1,741
)
Income tax effect
 
1,977

 
1,268

 
Provision for income taxes
 
709

Net of income taxes
 
$
(2,877
)
 
(1,845
)
 
 
 
$
(1,032
)
(6) Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
September 26,
2015
 
December 27,
2014
Gift card/certificate liability
$
94,244

 
151,127

Gift card breakage liability
28,195

 
25,893

Accrued salary and benefits
29,820

 
21,632

Accrued legal liabilities (see note 10(c))
18,855

 
24,648

Accrued interest
9,810

 
8,351

Accrued professional costs
4,258

 
9,381

Franchisee profit-sharing liability
4,082

 
1,074

Other
17,396

 
16,786

Total other current liabilities
$
206,660

 
258,892

The decrease in the gift card/certificate liability is primarily driven by the seasonality of our gift card program. Additionally, during the three months ended September 26, 2015, the Company determined that sufficient historical redemption patterns existed to record breakage related to unredeemed Baskin-Robbins gift cards. Based on historical redemption rates, breakage is

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estimated and recognized over time in proportion to actual gift card redemptions. The Company recognizes breakage as income only up to the amount of gift card program costs. Any incremental breakage is committed to fund future sales-driving initiatives for the benefit of Baskin-Robbins franchisees, and is recorded as gift card breakage liability within other current liabilities in the consolidated balance sheets. During the three months ended September 26, 2015, the Company recorded a $2.9 million decrease in the gift card/certificate liability and a corresponding increase in the gift card breakage liability related to Baskin-Robbins gift cards.
(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, franchise fees, and rental income. Dunkin’ Donuts U.S. also derives revenue through retail sales at company-operated restaurants. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement. Baskin-Robbins International primarily derives its revenues from the sales of ice cream products, as well as royalty income, franchise fees, and license fees. The operating results of each segment are regularly reviewed and evaluated separately by the Company’s senior management, which includes, but is not limited to, the chief executive officer. Senior management primarily evaluates the performance of its segments and allocates resources to them based on operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, 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.
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, 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
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Dunkin’ Donuts U.S.
$
154,370

 
142,951

 
438,005

 
404,620

Dunkin’ Donuts International
4,626

 
4,372

 
16,625

 
13,178

Baskin-Robbins U.S.
13,102

 
12,616

 
36,493

 
34,689

Baskin-Robbins International
31,085

 
28,903

 
90,857

 
92,545

Total reportable segment revenues
203,183

 
188,842

 
581,980

 
545,032

Other
6,624

 
3,798

 
25,156

 
10,464

Total revenues
$
209,807

 
192,640

 
607,136

 
555,496


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Expenses included in “Corporate” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services. Segment profit by segment was as follows (in thousands):
 
Segment profit
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Dunkin’ Donuts U.S.
$
112,932

 
106,242

 
314,465

 
297,055

Dunkin’ Donuts International
1,618

 
1,885

 
9,136

 
7,757

Baskin-Robbins U.S.
9,643

 
8,828

 
24,993

 
23,011

Baskin-Robbins International
10,276

 
12,485

 
31,044

 
33,708

Total reportable segments
134,469

 
129,440

 
379,638

 
361,531

Corporate
(28,545
)
 
(29,994
)
 
(84,741
)
 
(92,296
)
Interest expense, net
(24,700
)
 
(16,617
)
 
(71,721
)
 
(51,243
)
Amortization of other intangible assets
(6,161
)
 
(6,333
)
 
(18,542
)
 
(19,122
)
Long-lived asset impairment charges

 
(633
)
 
(264
)
 
(1,279
)
Loss on debt extinguishment and refinancing transactions

 

 
(20,554
)
 
(13,735
)
Other losses, net
(449
)
 
(584
)
 
(1,006
)
 
(670
)
Operating income adjustments excluded from reportable segments

 

 

 
300

Income before income taxes
$
74,614

 
75,279

 
182,810

 
183,486

Net income of equity method investments, including amortization of intangibles resulting from recording a step-up in the basis of our investment in B-R 31 Ice Cream Co., Ltd. (“Japan JV”), is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Income included in “Other” in the table below represents the reduction of depreciation and amortization, net of tax, related to BR Korea Co., Ltd. (“Korea JV”) as the result of an impairment charge recorded in fiscal year 2011 related to the underlying long-lived assets of Korea JV. Net income of equity method investments by reportable segment was as follows (in thousands):
 
Net income of equity method investments
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Dunkin’ Donuts International
$
228

 
331

 
1,077

 
1,307

Baskin-Robbins International
3,810

 
4,895

 
9,702

 
10,372

Total reportable segments
4,038

 
5,226

 
10,779

 
11,679

Other
21

 
140

 
178

 
835

Total net income of equity method investments
$
4,059

 
5,366

 
10,957

 
12,514



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(8) Stockholders’ Equity (Deficit) and Redeemable Noncontrolling Interests
The changes in total stockholders’ equity (deficit) and redeemable noncontrolling interests were as follows (in thousands):
 
 
Total stockholders’ equity (deficit)
 
Redeemable noncontrolling interests
Balance at December 27, 2014
 
$
367,959

 
6,991

Net income (loss)
 
114,382

 
(206
)
Other comprehensive loss
 
(5,749
)
 

Dividends paid on common stock
 
(76,013
)
 

Exercise of stock options
 
10,297

 

Repurchases of common stock
 
(500,037
)
 

Share-based compensation expense
 
11,918

 

Excess tax benefits from share-based compensation
 
11,534

 

Purchase of redeemable noncontrolling interests
 
885

 
(6,785
)
Other, net
 
(967
)
 

Balance at September 26, 2015
 
$
(65,791
)
 

(a) Noncontrolling Interests
During the second quarter of fiscal year 2015, the Company purchased the remaining interests in a limited partnership that owns and operates Dunkin’ Donuts restaurants in the Dallas, Texas area for approximately $5.9 million from the noncontrolling owners, which is presented as a component of cash flows from financing activities in the consolidated statements of cash flows. The carrying value of the redeemable noncontrolling interests in excess of the consideration paid to noncontrolling owners was recorded as an increase to additional paid-in capital of $885 thousand.
Noncontrolling interests included within total stockholders’ equity (deficit) in the consolidated balance sheets as of September 26, 2015 represent interests in a franchise entity that has been deemed a variable interest entity and for which the Company is the primary beneficiary.
(b) Treasury Stock
On February 5, 2015, the Company entered into an accelerated share repurchase (“ASR”) agreement with a third-party financial institution. Pursuant to the terms of the ASR agreement, the Company paid the financial institution $400.0 million in cash and received an initial delivery of 6,951,988 of the Company’s common stock in February 2015, representing an estimate of 80% of the total shares expected to be delivered under the agreement. Upon the final settlement of the ASR agreement in June 2015, the Company received an additional delivery of 1,274,309 shares of its common stock based on a weighted average cost per share of $48.62 over the term of the agreement. Additionally, during the nine months ended September 26, 2015, the Company repurchased a total of 2,106,881 shares of common stock in the open market at a weighted average cost per share of $47.47 from existing stockholders.
The Company accounts for treasury stock under the cost method, and as such recorded an increase in common treasury stock of $500.0 million during the nine months ended September 26, 2015 for the shares repurchased under the ASR agreement and in the open market, based on the fair market value of the shares on the dates of repurchase and direct costs incurred. During the nine months ended September 26, 2015, the Company retired 10,333,178 shares of treasury stock, resulting in decreases in treasury stock and additional paid-in capital of $500.0 million and $105.2 million, respectively, and an increase in accumulated deficit of $394.8 million.
On October 22, 2015, the Company entered into an ASR agreement with a third-party financial institution. Pursuant to the terms of the ASR agreement, the Company paid the financial institution $125.0 million from cash on hand and received an initial delivery of 2,527,167 shares of the Company’s common stock in October 2015, representing an estimate of 80% of the total shares expected to be delivered under the agreement. At settlement, the financial institution may be required to deliver additional shares of common stock to the Company or, under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to the financial institution. Final settlement of the ASR agreement is expected to be completed in December 2015, although the settlement may be accelerated at the financial institution’s option.

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(c) Equity Incentive Plans
During the nine months ended September 26, 2015, the Company granted stock options to purchase 1,621,899 shares of common stock and 21,101 restricted stock awards (“RSAs”) to certain employees, and 85,197 restricted stock units (“RSUs”) to certain employees and members of our board of directors. The stock options generally vest in equal annual amounts over a four-year period subsequent to the grant date, and have a maximum contractual term of seven years. The stock options were granted with an exercise price of $47.39 per share and have a weighted average grant-date fair value of $8.66 per share. The RSAs will vest in equal installments in February 2018 and February 2019, and have a grant-date fair value of $47.39 per share. The RSUs granted to employees and members of our board of directors vest over a three-year period and a one-year period, respectively, subsequent to the grant date and have a weighted average grant-date fair value of $46.18 per share.
Total compensation expense related to all share-based awards was $4.2 million and $3.1 million for the three months ended September 26, 2015 and September 27, 2014, respectively, and $11.9 million and $8.1 million for the nine months ended September 26, 2015 and September 27, 2014, respectively, and is included in general and administrative expenses, net in the consolidated statements of operations.
(d) 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 (losses) on interest rate swaps
 
Unrealized loss on pension plan(1)
 
Other        
 
Accumulated other comprehensive loss
Balance at December 27, 2014
$
(13,738
)
 
3,716

 
(2,874
)
 
(1,081
)
 
(13,977
)
Other comprehensive income (loss), net
(6,838
)
 
(955
)
 
2,874

 
(830
)
 
(5,749
)
Balance at September 26, 2015
$
(20,576
)
 
2,761

 

 
(1,911
)
 
(19,726
)
(1) Upon settlement of the pension plan, unrealized losses were reclassified to general and administrative expenses, net, during the second quarter of fiscal year 2015 (see note 12).
(e) Dividends
The Company paid a quarterly dividend of $0.265 per share of common stock on March 18, 2015, June 17, 2015, and September 2, 2015, totaling approximately $25.7 million, $25.1 million, and $25.2 million, respectively. On October 22, 2015, the Company announced that its board of directors approved the next quarterly dividend of $0.265 per share of common stock payable December 2, 2015 to shareholders of record at the close of business on November 23, 2015.
(9) Earnings per Share
The computation of basic and diluted earnings per common share is as follows:
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Net income attributable to Dunkin’ Brands—basic and diluted (in thousands)
$
46,216

 
54,697

 
114,165

 
123,844

Weighted average number of common shares:
 
 
 
 
 
 
 
Common—basic
94,975,241

 
104,742,212

 
96,992,297

 
105,719,491

Common—diluted
96,023,211

 
105,969,110

 
98,134,053

 
107,045,211

Earnings per common share:
 
 
 
 
 
 
 
Common—basic
$
0.49

 
0.52

 
1.18

 
1.17

Common—diluted
0.48

 
0.52

 
1.16

 
1.16

The weighted average number of common shares in the common diluted earnings per share calculation includes the dilutive effect of 1,047,970 and 1,226,898 equity awards for the three months ended September 26, 2015 and September 27, 2014, respectively, and includes the dilutive effect of 1,141,756 and 1,325,720 equity awards for the nine months ended September 26, 2015 and September 27, 2014, respectively, using the treasury stock method. The weighted average number of common shares in the common diluted earnings per share calculation for all periods excludes all contingently issuable equity awards for which the contingent vesting criteria were not yet met as of the fiscal period end. As of September 26, 2015 and September 27, 2014, there were 150,000 restricted shares that were contingently issuable and for which the contingent vesting

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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 2,937,525 and 1,377,831 equity awards for the three months ended September 26, 2015 and September 27, 2014, respectively, and 3,004,575 and 1,439,725 equity awards for the nine months ended September 26, 2015 and September 27, 2014, 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 $2.0 million and $2.2 million at September 26, 2015 and December 27, 2014, respectively. At September 26, 2015 and December 27, 2014, 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 September 26, 2015 and December 27, 2014, the Company recorded an immaterial amount of reserves for such guarantees.
Supply Chain Guarantees
The Company has various supply chain agreements that generally provide for purchase commitments, the majority of which result in the Company being contingently liable upon early termination of the agreement. As of September 26, 2015 and December 27, 2014, the Company was contingently liable under such supply chain agreements for approximately $154.1 million and $55.8 million, respectively. The increase in contingent liabilities from the prior year is primarily due to the Company entering into an amended and restated agreement with a supplier during the three months ended September 26, 2015 upon expiration of the original agreement, under which the Company guarantees franchisees will purchase a certain volume of product each year over the term of the agreement. Similar to certain other 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 all guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and ability to extend contract terms, we accrued $507 thousand related to supply chain commitments as of December 27, 2014, which is included in other current liabilities in the consolidated balance sheets. There was no accrual required as of September 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 the refranchising of certain restaurants and the guarantee of certain other leases. These leases have varying terms, the latest of which expires in 2024. As of September 26, 2015 and December 27, 2014, the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $4.0 million and $6.3 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
At September 26, 2015 and December 27, 2014, the Company had standby letters of credit outstanding for a total of $26.3 million and $2.9 million, respectively. There were no amounts drawn down on these letters of credit as of September 26, 2015 and December 27, 2014.
(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

17

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million, plus costs and interest. Similar claims have also been made against the Company by other former Dunkin’ Donuts franchisees in Canada. As a result of the Bertico litigation appellate ruling and assessment of similar claims, the Company reduced its aggregate legal reserves for the Bertico litigation and similar claims by approximately $2.8 million during the first quarter of fiscal year 2015, which is recorded within general and administrative expenses, net in the consolidated statements of operations, resulting in an estimated liability of $18.6 million as of September 26, 2015. The Company has sought leave to appeal with the Supreme Court of Canada in the Bertico litigation.
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. At September 26, 2015 and December 27, 2014, contingent liabilities, excluding the Bertico litigation and related matters, totaling $215 thousand and $765 thousand, respectively, were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of the probable losses which may be incurred in connection with these matters.
(11) Related-Party Transactions
(a) Advertising Funds
At September 26, 2015 and December 27, 2014, the Company had a net payable of $6.9 million and $13.8 million, respectively, to the various advertising funds.
To cover administrative expenses of the advertising funds, the Company charges each advertising fund a management fee for items such as facilities, accounting services, information technology, data processing, product development, legal, administrative support services, and other operating expenses, as well as share-based compensation expense for employees that provide services directly to the advertising funds. Management fees totaled $2.5 million and $1.9 million for the three months ended September 26, 2015 and September 27, 2014, respectively, and $7.3 million and $5.7 million for the nine months ended September 26, 2015 and September 27, 2014, respectively. Such management fees are included in the consolidated statements of operations as a reduction in general and administrative expenses, net.
The Company made discretionary contributions to certain advertising funds for the purpose of supplementing national and regional advertising in certain markets of $1.6 million and $1.7 million during the three and nine months ended September 27, 2014, respectively. An immaterial amount of such contributions were made during the three and nine months ended September 26, 2015. Additionally, the Company made net contributions to the advertising funds based on retail sales at company-operated restaurants of $350 thousand and $199 thousand during the three months ended September 26, 2015 and September 27, 2014, respectively, and $969 thousand and $650 thousand during the nine months ended September 26, 2015 and September 27, 2014, respectively, which are included in company-operated restaurant expenses in the consolidated statements of operations. The Company also funded advertising fund initiatives of $471 thousand and $644 thousand during the three months ended September 26, 2015 and September 27, 2014, respectively, and $1.9 million and $3.6 million during the nine months ended September 26, 2015 and September 27, 2014, 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
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Japan JV
$
590

 
522

 
1,155

 
1,366

Korea JV
1,101

 
1,280

 
3,240

 
3,505

Coffee Alliance S.L. (“Spain JV”)

 
22

 
68

 
39

 
$
1,691

 
1,824

 
4,463

 
4,910

At September 26, 2015 and December 27, 2014, the Company had $1.1 million and $1.4 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 $621 thousand and $674 thousand during the three months ended September 26, 2015 and September 27, 2014, respectively, and $2.4 million and $1.9 million during the nine months ended September 26, 2015 and September 27, 2014, respectively, primarily for the purchase of ice cream products and incentive payments.

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As of September 26, 2015 and December 27, 2014, the Company had $2.1 million and $2.5 million, respectively, of notes receivable from its Spain JV, of which $2.1 million and $2.3 million, were reserved, respectively. The notes receivable, net of the reserve, are included in other assets in the consolidated balance sheets.
The Company recognized $801 thousand and $1.0 million during the three months ended September 26, 2015 and September 27, 2014, respectively, and $2.2 million and $4.1 million during the nine months ended September 26, 2015 and September 27, 2014, respectively, in the consolidated statements of operations from the sale of ice cream products to Palm Oasis Ventures Pty. Ltd. (“Australia JV”), of which the Company owns a 20% equity interest. As of September 26, 2015 and December 27, 2014, the Company had $2.4 million and $3.1 million, respectively, of net receivables from the Australia JV, consisting of accounts receivable and notes and other receivables, net of other current liabilities.
(12) Canadian Pension Plan
The Company sponsored a contributory defined benefit pension plan in Canada, The Baskin-Robbins Employees’ Pension Plan (“Canadian Pension Plan”), which provided retirement benefits for the majority of its Canadian employees. During the second quarter of fiscal year 2012, the Company’s board of directors approved a plan to close our Peterborough, Ontario, Canada manufacturing plant, where the majority of the Canadian Pension Plan participants were employed. As a result of the closure, the Company terminated the Canadian Pension Plan in fiscal year 2012, and the Financial Services Commission of Ontario approved the termination of the plan in fiscal year 2014. During the second quarter of fiscal year 2015, the Company completed the final settlement of the plan by funding the plan deficit and distributing substantially all plan assets through lump-sum distributions to participants and the purchase of annuities. The settlement of the Canadian Pension Plan resulted in the recognition of a loss of $4.1 million, which was reclassified from accumulated other comprehensive loss to general and administrative expenses, net during the second quarter of fiscal year 2015.

19

Table of Contents

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,” “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 September 26, 2015, Dunkin’ Donuts had 11,568 global points of distribution with restaurants in 41 U.S. states and the District of Columbia and in 39 foreign countries. Baskin-Robbins had 7,617 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 reporting 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 franchise fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream and other products to franchisees in certain international markets, (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, the licensing of the right to manufacture Baskin-Robbins ice cream sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, and online training fees.
Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With only 45 company-operated points of distribution as of September 26, 2015, 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 nine months ended September 26, 2015, franchisee contributions to the U.S. advertising funds were $300.7 million.

20

Table of Contents

We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and nine-month periods ended September 26, 2015 and September 27, 2014 reflect the results of operations for the 13-week and 39-week periods ended on those dates. Operating results for the three- and nine-month periods ended September 26, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2015.
Selected Operating and Financial Highlights
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Franchisee-reported sales (in millions):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
$
1,944.7

 
1,840.5

 
5,643.5

 
5,268.6

Dunkin’ Donuts International
164.2

 
172.8

 
506.0

 
518.2

Baskin-Robbins U.S.
176.6

 
161.0

 
473.5

 
439.9

Baskin-Robbins International
361.0

 
401.9

 
999.4

 
1,061.4

Total franchisee-reported sales(a)
$
2,646.5

 
2,576.3

 
7,622.3

 
7,288.2

Systemwide sales growth
2.8
 %
 
5.7
 %
 
4.6
 %
 
5.3
 %
Comparable store sales growth (decline):
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
1.1
 %
 
2.0
 %
 
2.2
 %
 
1.7
 %
Dunkin’ Donuts International
0.8
 %
 
(2.9
)%
 
0.7
 %
 
(2.8
)%
Baskin-Robbins U.S.
7.5
 %
 
6.0
 %
 
6.5
 %
 
3.9
 %
Baskin-Robbins International
(2.4
)%
 
(1.5
)%
 
(1.7
)%
 
(0.8
)%
Financial data (in thousands):
 
 
 
 
 
 
 
Total revenues
$
209,807

 
192,640

 
607,136

 
555,496

Operating income
99,763

 
92,480

 
276,091

 
249,134

Adjusted operating income
105,960

 
99,446

 
296,536

 
269,235

Net income attributable to Dunkin’ Brands
46,216

 
54,697

 
114,165

 
123,844

Adjusted net income
50,180

 
52,160

 
139,010

 
137,943

(a)  Totals may not recalculate due to rounding.

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. Franchisee-reported sales include sales at franchisee-operated restaurants, including joint ventures. While we do not record sales by franchisees or licensees as revenue and such sales are not included in our consolidated financial statements, we believe that these operating measures are important in obtaining an understanding of our financial performance. We believe systemwide sales growth and franchisee-reported 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. Previously, comparable store sales growth for Dunkin’ Donuts U.S. and Baskin-Robbins U.S. was calculated including only sales from franchisee- and company-operated restaurants that had been open at least 54 weeks and that had reported sales in the current and comparable prior year week. 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. All prior year amounts have been revised to conform to the 78-week calculation. There was no financial statement impact from revising the calculation of this operating measure.
Comparable store sales growth for Dunkin’ Donuts International and Baskin-Robbins International is calculated by including only sales from franchisee- and company-operated restaurants that have been open at least 54 weeks and that have reported sales in the current and comparable prior year week. 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.

21

Table of Contents

Overall growth in systemwide sales of 2.8% and 4.6% for the three and nine months ended September 26, 2015, respectively, over the same periods in the prior fiscal year resulted from the following:

Dunkin’ Donuts U.S. systemwide sales growth of 5.7% and 7.2% for the three and nine months ended September 26, 2015, respectively, as a result of 367 net new restaurants opened since September 27, 2014 and comparable store sales growth of 1.1% and 2.2%, respectively. The increases in comparable store sales were driven by increased average ticket, with growth led by sales of beverages, including iced coffee and frozen beverages, and donuts. In-restaurant K-Cup® and packaged coffee categories had a negative impact on comparable store sales. Traffic declined for the three months ended September 26, 2015, and remained flat for the nine-month period.
Dunkin’ Donuts International systemwide sales declines of 5.0% and 2.4% for the three and nine months ended September 26, 2015, respectively, driven primarily by sales declines in South Korea and South America, offset by sales growth in Asia, Europe, and the Middle East. Sales in Europe, South America, South Korea, and Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for the three and nine months ended September 26, 2015 increased by approximately 7% and 6%, respectively. Dunkin’ Donuts International comparable store sales grew 0.8% and 0.7% for the three and nine months ended September 26, 2015, respectively. The growth for the three- and nine-month periods was due to growth in Asia and South America, offset by declines in Europe and South Korea. Comparable store sales for the three- and nine-month periods were negatively impacted as a result of the MERS outbreak in South Korea.
Baskin-Robbins U.S. systemwide sales growth of 9.8% and 7.7% for the three and nine months ended September 26, 2015, respectively, resulting primarily from comparable store sales growth of 7.5% and 6.5%, respectively, driven by increased sales of cups and cones, beverages, desserts, and sundaes, as well as increased sales of cakes stimulated by strong year-over-year growth of online cake ordering. Comparable store sales growth was driven by increases in traffic and ticket during the periods.
Baskin-Robbins International systemwide sales declines of 10.2% and 5.8% for the three and nine months ended September 26, 2015, respectively, driven by sales declines in Japan, South Korea, and Puerto Rico, offset by sales growth in the Middle East. Sales in Japan and South Korea were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for the three and nine months ended September 26, 2015 increased by approximately 2% and 4%, respectively. Baskin-Robbins International comparable store sales declines of 2.4% and 1.7% for the three and nine months ended September 26, 2015, respectively, were driven primarily by declines in Japan and South Korea, offset by growth in the Middle East. Comparable store sales were negatively impacted as a result of the MERS outbreak in South Korea.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and nine months ended September 26, 2015 and September 27, 2014 were as follows:
 
September 26, 2015
 
September 27, 2014
Points of distribution, at period end:
 
 
 
Dunkin’ Donuts U.S.
8,308

 
7,941

Dunkin’ Donuts International
3,260

 
3,182

Baskin-Robbins U.S.
2,488

 
2,486

Baskin-Robbins International
5,129

 
4,993

Consolidated global points of distribution
19,185

 
18,602


 
Three months ended
 
Nine months ended
 
September 26, 2015
 
September 27, 2014
 
September 26, 2015
 
September 27, 2014
Net openings (closings) during the period:
 
 
 
 
 
 
 
Dunkin’ Donuts U.S.
68

 
120

 
226

 
264

Dunkin’ Donuts International
40

 
10

 
32

 
1

Baskin-Robbins U.S.
(2
)
 
6

 
4

 
19

Baskin-Robbins International
(16
)
 
61

 
61

 
160

Consolidated global net openings
90

 
197

 
323

 
444


22

Table of Contents

Total revenues increased $17.2 million, or 8.9%, and $51.6 million, or 9.3%, for the three and nine months ended September 26, 2015, respectively, driven primarily by increases in franchise fees and royalty income of $7.2 million and $24.6 million, respectively, and other revenues of $5.5 million and $19.8 million, respectively, due primarily to licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement. Also contributing to the increase in revenues for the three- and nine-month periods were increases in sales at company-operated restaurants of $2.0 million and $5.3 million, respectively, driven by a net increase in the number of company-operated restaurants. Additionally, sales of ice cream and other products increased $1.9 million for the three-month period.
Operating income and adjusted operating income for the three months ended September 26, 2015 increased $7.3 million, or 7.9%, and $6.5 million, or 6.6%, respectively, from the prior year period primarily as a result of the increases in franchise fees and royalty income, ice cream margin due primarily to the increase in sales, and licensing fees earned from the sale of Dunkin’ K-Cup® pods. The increases in revenues were offset by an increase in general and administrative expenses, net, driven primarily by increases in personnel costs and bad debt expense.
Operating income and adjusted operating income for the nine months ended September 26, 2015 increased $27.0 million, or 10.8%, and $27.3 million, or 10.1%, respectively, from the prior year period primarily as a result of the increases in franchise fees and royalty income, licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement, and ice cream margin. The increases in revenues and ice cream margin were offset by an increase in general and administrative expenses, net, primarily driven by incremental incentive compensation accruals and share-based compensation, and a decrease in other operating income due to the timing of the sale of real estate and a gain recognized in the prior year period in connection with the sale of company-operated restaurants in the Atlanta market. Additionally, operating income for the nine months ended September 26, 2015 included costs incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012, offset by a reduction in legal reserves for the Bertico litigation and related matters.
Net income attributable to Dunkin’ Brands decreased $8.5 million for the three months ended September 26, 2015 primarily as a result of an $8.1 million increase in interest expense driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed during January 2015, and an increase in income tax expense of $7.5 million as the prior year period was favorably impacted by the settlement of certain tax audits. These decreases were offset by the $7.3 million increase in operating income. Net income attributable to Dunkin’ Brands decreased $9.7 million for the nine months ended September 26, 2015 primarily as a result of a $20.6 million increase in interest expense driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed during January 2015, an increase in tax expense of $8.4 million, and an increase in loss on debt extinguishment and refinancing transactions of $6.8 million, offset by the $27.0 million increase in operating income.
Adjusted net income decreased $2.0 million for the three months ended September 26, 2015, primarily as a result of an increase in interest expense, offset by the increase in adjusted operating income of $6.5 million. Adjusted net income increased $1.1 million for the nine months ended September 26, 2015, primarily as a result of the increase in adjusted operating income of $27.3 million, 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, 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.

23

Table of Contents

Adjusted operating income and adjusted net income are reconciled from operating income and net income, respectively, determined under GAAP as follows:
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In thousands)
Operating income
$
99,763

 
92,480

 
276,091

 
249,134

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,161

 
6,333

 
18,542

 
19,122

Long-lived asset impairment charges

 
633

 
264

 
1,279

Third-party product volume guarantee

 

 

 
(300
)
Transaction-related costs(a)
36

 

 
317

 

Bertico and related litigation(b)

 

 
(2,753
)
 

Settlement of Canadian pension plan(c)

 

 
4,075

 

Adjusted operating income
$
105,960

 
99,446

 
296,536

 
269,235

Net income attributable to Dunkin’ Brands
$
46,216

 
54,697

 
114,165

 
123,844

Adjustments:
 
 
 
 
 
 
 
Amortization of other intangible assets
6,161

 
6,333

 
18,542

 
19,122

Long-lived asset impairment charges

 
633

 
264

 
1,279

Third-party product volume guarantee

 

 

 
(300
)
Transaction-related costs(a)
36

 

 
317

 

Bertico and related litigation(b)

 

 
(2,753
)
 

Settlement of Canadian pension plan(c)

 

 
4,075

 

Loss on debt extinguishment and refinancing transactions

 

 
20,554

 
13,735

Tax impact of adjustments(d)
(2,479
)
 
(2,786
)
 
(16,400
)
 
(13,534
)
Tax impact of legal entity conversion(e)
246

 

 
246

 

Income tax audit settlement(f)

 
(6,717
)
 

 
(6,717
)
State tax apportionment(g)

 

 

 
514

Adjusted net income
$
50,180

 
52,160

 
139,010

 
137,943

(a)
Represents non-capitalizable costs incurred as a result of the new 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)
Represents costs incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012.
(d)
Tax impact of adjustments calculated at a 40% effective tax rate.
(e)
Represents the net tax impact of converting Dunkin Brands Canada Ltd. to Dunkin Brands Canada ULC.
(f)
Represents income tax benefits resulting from the resolution of historical tax positions settled during the period.
(g)
Represents tax expense recognized due to an increase in our overall state tax rate for a shift in the apportionment of income to certain state jurisdictions.

Earnings per share
Earnings per share and diluted adjusted earnings per share were as follows:
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Earnings per share:
 
 
 
 
 
 
 
Common—basic
$
0.49

 
0.52

 
1.18

 
1.17

Common—diluted
0.48

 
0.52

 
1.16

 
1.16

Diluted adjusted earnings per share
0.52

 
0.49

 
1.42

 
1.29


24

Table of Contents

Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding. Diluted adjusted earnings per share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per share should not be considered as an alternative to earnings per share derived in accordance with GAAP. Diluted adjusted earnings per share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.
The following table sets forth the computation of diluted adjusted earnings per share:
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In thousands, except share and per share data)
Adjusted net income
$
50,180

 
52,160

 
139,010

 
137,943

Weighted average number of common shares—diluted
96,023,211

 
105,969,110

 
98,134,053

 
107,045,211

Diluted adjusted earnings per share
$
0.52

 
0.49

 
1.42

 
1.29


Results of operations
Consolidated results of operations
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Franchise fees and royalty income
$
133,913

 
126,759

 
7,154

 
5.6
%
 
$
380,381

 
355,738

 
24,643

 
6.9
 %
Rental income
26,121

 
25,570

 
551

 
2.2
%
 
76,283

 
73,650

 
2,633

 
3.6
 %
Sales of ice cream and other products
29,554

 
27,617

 
1,937

 
7.0
%
 
88,032

 
88,678

 
(646
)
 
(0.7
)%
Sales at company-operated restaurants
7,293

 
5,267

 
2,026

 
38.5
%
 
21,578

 
16,319

 
5,259

 
32.2
 %
Other revenues
12,926

 
7,427

 
5,499

 
74.0
%
 
40,862

 
21,111

 
19,751

 
93.6
 %
Total revenues
$
209,807

 
192,640

 
17,167

 
8.9
%
 
$
607,136

 
555,496

 
51,640

 
9.3
 %
Total revenues for the three months ended September 26, 2015 increased $17.2 million, or 8.9%, due primarily to an increase in franchise fees and royalty income of $7.2 million as a result of Dunkin’ Donuts U.S. systemwide sales growth and an increase in other revenues of $5.5 million driven by licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement. Also contributing to the increase in revenues were increases in sales at company-operated restaurants of $2.0 million driven by a net increase in the number of company-operated restaurants and sales of ice cream and other products of $1.9 million due primarily to sales of ice cream in the Middle East.
Total revenues for the nine months ended September 26, 2015 increased $51.6 million, or 9.3%, due primarily to an increase in franchise fees and royalty income of $24.6 million as a result of Dunkin’ Donuts U.S. systemwide sales growth, as well as an increase in other revenues of $19.8 million. The increase in other revenues was driven by licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement and increased licensing fees earned from ice cream sales by our third-party ice cream manufacturer, as well as a settlement reached with a master licensee, which resulted in the recovery of prior period royalty income and franchise fees. Also contributing to the increase in revenues was an increase in sales at company-operated restaurants of $5.3 million driven by a net increase in the number of company-operated restaurants.

25

Table of Contents

 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
$
 
%
 
$
 
%
 
(In thousands, except percentages)
Occupancy expenses—franchised restaurants
$
13,686

 
13,258

 
428

 
3.2
 %
 
$
40,921

 
39,830

 
1,091

 
2.7
 %
Cost of ice cream and other products
19,788

 
19,802

 
(14
)
 
(0.1
)%
 
58,010

 
62,914

 
(4,904
)
 
(7.8
)%
Company-operated restaurant expenses
7,697

 
5,505

 
2,192

 
39.8
 %
 
22,312

 
16,772

 
5,540

 
33.0
 %
General and administrative expenses, net
61,433

 
56,039

 
5,394

 
9.6
 %
 
187,622

 
171,765

 
15,857

 
9.2
 %
Depreciation and amortization
11,338

 
11,293

 
45

 
0.4
 %
 
33,820

 
33,925

 
(105
)
 
(0.3
)%
Long-lived asset impairment charges

 
633

 
(633
)
 
(100.0
)%
 
264

 
1,279

 
(1,015
)
 
(79.4
)%
Total operating costs and expenses
$
113,942

 
106,530

 
7,412

 
7.0
 %
 
$
342,949

 
326,485

 
16,464

 
5.0
 %
Net income of equity method investments
4,059

 
5,366

 
(1,307
)
 
(24.4
)%
 
10,957

 
12,514

 
(1,557
)
 
(12.4
)%
Other operating income (expense), net
(161
)
 
1,004

 
(1,165
)
 
n/m

 
947

 
7,609

 
(6,662
)
 
(87.6
)%
Operating income
$
99,763

 
92,480

 
7,283

 
7.9
 %
 
$
276,091

 
249,134

 
26,957

 
10.8
 %
Occupancy expenses for franchised restaurants for the three and nine months ended September 26, 2015 increased from the prior fiscal year periods due primarily to an increase in the average rent per lease and an increase in the number of leases, as well as an increase in sales-based rent expense. Also contributing to the increase were reversals of lease reserves as a result of lease terminations included in the prior year fiscal period.
Net margin on ice cream and other products for the three months ended September 26, 2015 increased from the prior fiscal year period to approximately $9.8 million due primarily to the increase in sales volume, as well as a decrease in commodity costs, increase in pricing, and favorable foreign exchange rates. Net margin on ice cream and other products for the nine months ended September 26, 2015 increased from the prior fiscal year period to approximately $30.0 million. A decrease in commodity costs, increase in pricing, and favorable foreign exchange rates more than offset the decrease in sales of ice cream and other products, resulting in an increase in net ice cream margin.
Company-operated restaurant expenses for the three and nine months ended September 26, 2015 increased $2.2 million and $5.5 million, respectively, primarily as a result of a net increase in the number of company-operated restaurants.
General and administrative expenses for the three months ended September 26, 2015 increased $5.4 million from the prior fiscal year period due primarily to an increase in personnel costs and bad debt expense, as well as increased support of our international and consumer packaged goods businesses.
General and administrative expenses for the nine months ended September 26, 2015 increased $15.9 million from the prior fiscal year period due primarily to an increase in personnel costs, driven primarily by incremental incentive compensation accruals, costs incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012, and an increase in share-based compensation. Also contributing to the increase in general and administrative expenses was an increase in costs incurred to support our consumer packaged goods and international businesses, offset by a decrease in legal costs due primarily to a reduction in legal reserves for the Bertico litigation and related matters.
Depreciation and amortization for the three and nine months ended September 26, 2015 remained consistent with the prior fiscal year periods as a result of an increase in depreciation due to the addition of depreciable assets, offset by a decrease in amortization due to intangible assets becoming fully amortized and favorable lease intangible assets being written-off upon termination of the related leases.

26

Table of Contents

Long-lived asset impairment charges for the three and nine months ended September 26, 2015 decreased $0.6 million and $1.0 million, respectively, driven primarily by the timing of lease terminations, which resulted in the write-off of favorable lease intangible assets and leasehold improvements.
Net income of equity method investments for the three and nine months ended September 26, 2015 decreased $1.3 million and $1.6 million, respectively, driven by unfavorable results from our Japan joint venture compared to the prior year period and the impact of unfavorable foreign exchange rates on net income of our South Korea and Japan joint ventures.
Other operating income, net includes gains recognized in connection with the sale of real estate and fluctuates based on the timing of such transactions. Additionally, other operating income, net for the prior fiscal year periods included a gain recognized in connection with the sale of the company-operated restaurants in the Atlanta market.
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
$
 
%
 
 
 
$
 
%
 
(In thousands, except percentages)
Interest expense, net
$
24,700

 
16,617

 
8,083

 
48.6
 %
 
$
71,721

 
51,243

 
20,478

 
40.0
%
Loss on debt extinguishment and refinancing transactions

 

 

 
n/m

 
20,554

 
13,735

 
6,819

 
49.6
%
Other losses, net
449

 
584

 
(135
)
 
(23.1
)%
 
1,006

 
670

 
336

 
50.1
%
Total other expense
$
25,149

 
17,201

 
7,948

 
46.2
 %
 
$
93,281

 
65,648

 
27,633

 
42.1
%
The increase in net interest expense for the three and nine months ended September 26, 2015 was driven primarily by the securitization refinancing transaction that occurred in January 2015, which resulted in additional borrowings, as well as an increase in amortization of capitalized debt issuance costs compared to the prior fiscal year period. As a result of the additional borrowings under the Indenture, as defined and more fully described under “Liquidity and Capital Resources” contained herein, we expect net interest expense to increase materially in fiscal year 2015.
The loss on debt extinguishment and refinancing transactions for the nine months ended September 26, 2015 of $20.6 million resulted from the January 2015 securitization refinancing transaction. The loss on debt extinguishment and refinancing transactions for the nine months ended September 27, 2014 of $13.7 million resulted from the February 2014 refinancing transaction.
The fluctuation in other losses, net, for the three and nine months ended September 26, 2015 resulted primarily from net foreign exchange losses driven primarily by fluctuations in the U.S. dollar against the Australian dollar and pound sterling.
 
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In thousands, except percentages)
Income before income taxes
$
74,614

 
75,279

 
182,810

 
183,486

Provision for income taxes
28,312

 
20,855

 
68,634

 
60,263

Effective tax rate
37.9
%
 
27.7
%
 
37.5
%
 
32.8
%
The increase in the effective tax rate for the three and nine months ended September 26, 2015 was primarily a result of the prior fiscal year being favorably impacted by the recognition of a net tax benefit of $6.7 million primarily related to the reversal of reserves for uncertain tax positions that were effectively settled during the periods.
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 reduction in depreciation and amortization, net of tax, related to our Korea joint venture as a result of an impairment charge recorded in fiscal year 2011.

27

Table of Contents

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
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
105,864

 
99,758

 
6,106

 
6.1
%
 
$
307,214

 
285,645

 
21,569

 
7.6
%
Franchise fees
12,666

 
11,704

 
962

 
8.2
%
 
29,591

 
27,134

 
2,457

 
9.1
%
Rental income
25,290

 
24,610

 
680

 
2.8
%
 
73,584

 
70,667

 
2,917

 
4.1
%
Sales at company-operated restaurants
7,293

 
5,267

 
2,026

 
38.5
%
 
21,578

 
16,319

 
5,259

 
32.2
%
Other revenues
3,257

 
1,612

 
1,645

 
102.0
%
 
6,038

 
4,855

 
1,183

 
24.4
%
Total revenues
$
154,370

 
142,951

 
11,419

 
8.0
%
 
$
438,005

 
404,620

 
33,385

 
8.3
%
Segment profit
$
112,932

 
106,242

 
6,690

 
6.3
%
 
$
314,465

 
297,055

 
17,410

 
5.9
%
The increase in Dunkin’ Donuts U.S. revenues for the three and nine months ended September 26, 2015 was driven primarily by an increase in royalty income of $6.1 million and $21.6 million, respectively, as a result of an increase in systemwide sales, as well as an increase in sales at company-operated restaurants of $2.0 million and $5.3 million, respectively, driven by a net increase in the number of company-operated restaurants. Also contributing to revenue growth for the three- and nine-month periods were increases in other revenues, driven primarily by income recognized in connection with the termination of a lease, rental income due primarily to increases in the number of leases and average rent per lease, and franchise fees driven by favorable development mix.
The increase in Dunkin’ Donuts U.S. segment profit for the three months ended September 26, 2015 of $6.7 million was driven primarily by growth in royalty income, other revenues, and franchise fees. The increases in revenues were offset by an increase in personnel costs and a decrease in other operating income as the prior fiscal year period included a gain recognized in connection with the sale of real estate.
The increase in Dunkin’ Donuts U.S. segment profit for the nine months ended September 26, 2015 of $17.4 million was driven primarily by growth in royalty income, rental margin, and franchise fees, as well as the favorable impact of bad debt expense compared to the prior fiscal year period. These increases in segment profit were offset by an increase in personnel costs driven by incremental incentive compensation accruals and a decrease in other operating income as the prior fiscal year period included higher gains on the sale of real estate and a gain recognized in connection with the sale of company-operated restaurants in the Atlanta market.
Dunkin’ Donuts International
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
3,762

 
3,685

 
77

 
2.1
 %
 
$
11,640

 
11,239

 
401

 
3.6
 %
Franchise fees
850

 
683

 
167

 
24.5
 %
 
2,707

 
1,877

 
830

 
44.2
 %
Rental income

 
18

 
(18
)
 
(100.0
)%
 
13

 
102

 
(89
)
 
(87.3
)%
Other revenues
14

 
(14
)
 
28

 
n/m

 
2,265

 
(40
)
 
2,305

 
n/m

Total revenues
$
4,626

 
4,372

 
254

 
5.8
 %
 
$
16,625

 
13,178

 
3,447

 
26.2
 %
Segment profit
$
1,618

 
1,885

 
(267
)
 
(14.2
)%
 
$
9,136

 
7,757

 
1,379

 
17.8
 %
Dunkin’ Donuts International revenues for the three and nine months ended September 26, 2015 increased by $0.3 million and $3.4 million, respectively. The three- and nine-month periods were positively impacted by increases in franchise fees of $0.2

28

Table of Contents

million and $0.8 million, respectively, driven by additional gross development, as well as increased royalty income, which was negatively impacted by unfavorable foreign exchange rates. The increase in total revenues for the nine-month period was also driven by an increase in other revenues of $2.3 million due primarily to a settlement reached with a master licensee resulting in the recovery of prior period royalty income and franchise fees.
Segment profit for Dunkin’ Donuts International decreased $0.3 million for the three months ended September 26, 2015 primarily as a result of an increase in general and administrative expenses, offset by revenue growth. A portion of the increase in general and administrative expenses can be attributed to increased personnel costs and other investments in international markets.
Segment profit for Dunkin’ Donuts International increased $1.4 million for the nine months ended September 26, 2015 primarily as a result of revenue growth, offset by increases in general and administrative expenses, driven by increased personnel costs and other investments in international markets, as well as a decrease in net income from our South Korea joint venture.
Baskin-Robbins U.S.
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
8,529

 
7,991

 
538

 
6.7
 %
 
$
23,127

 
21,925

 
1,202

 
5.5
 %
Franchise fees
180

 
360

 
(180
)
 
(50.0
)%
 
548

 
757

 
(209
)
 
(27.6
)%
Rental income
667

 
795

 
(128
)
 
(16.1
)%
 
2,244

 
2,435

 
(191
)
 
(7.8
)%
Sales of ice cream and other products
206

 
1,177

 
(971
)
 
(82.5
)%
 
1,748

 
3,217

 
(1,469
)
 
(45.7
)%
Other revenues
3,520

 
2,293

 
1,227

 
53.5
 %
 
8,826

 
6,355

 
2,471

 
38.9
 %
Total revenues
$
13,102

 
12,616

 
486

 
3.9
 %
 
$
36,493

 
34,689

 
1,804

 
5.2
 %
Segment profit
$
9,643

 
8,828

 
815

 
9.2
 %
 
$
24,993

 
23,011

 
1,982

 
8.6
 %
Baskin-Robbins U.S. revenues for the three and nine months ended September 26, 2015 increased $0.5 million and $1.8 million, respectively, due primarily to increases in other revenues driven by licensing income, and increases in royalty income, offset by decreases 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 $0.8 million and $2.0 million for the three and nine months ended September 26, 2015, respectively, primarily as a result of the increases in other revenues and royalty income. These increases in segment profit were offset by increases in general and administrative expenses, due primarily to increased personnel costs and expenses incurred related to brand-building activities, as well as declines in franchise fees and net margin on ice cream.
Baskin-Robbins International
 
Three months ended
 
Nine months ended
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
September 26,
2015
 
September 27,
2014
 
Increase (Decrease)
 
$
 
%
 
 
$
 
%
 
(In thousands, except percentages)
Royalty income
$
1,913

 
2,180

 
(267
)
 
(12.2
)%
 
$
4,965

 
6,136

 
(1,171
)
 
(19.1
)%
Franchise fees
149

 
398

 
(249
)
 
(62.6
)%
 
589

 
1,025

 
(436
)
 
(42.5
)%
Rental income
129

 
126

 
3

 
2.4
 %
 
366

 
383

 
(17
)
 
(4.4
)%
Sales of ice cream and other products
28,790

 
26,166

 
2,624

 
10.0
 %
 
84,544

 
84,746

 
(202
)
 
(0.2
)%
Other revenues
104

 
33

 
71

 
215.2
 %
 
393

 
255

 
138

 
54.1
 %
Total revenues
$
31,085

 
28,903

 
2,182

 
7.5
 %
 
$
90,857

 
92,545

 
(1,688
)
 
(1.8
)%
Segment profit
$
10,276

 
12,485

 
(2,209
)
 
(17.7
)%
 
$
31,044

 
33,708

 
(2,664
)
 
(7.9
)%
Baskin-Robbins International revenues increased $2.2 million for the three months ended September 26, 2015 due primarily to an increase in sales of ice cream and other products in the Middle East, offset by a decrease in royalty income, which was

29

Table of Contents

negatively impacted by unfavorable foreign exchange rates, and a decrease in franchise fees. The decrease in royalty income was driven by declines in systemwide sales in Russia.
Baskin-Robbins International revenues decreased $1.7 million for the nine months ended September 26, 2015 driven primarily by a decrease in royalty income, which was negatively impacted by unfavorable foreign exchange rates, and franchise fees. The decrease in royalty income was driven by declines in systemwide sales in Russia and Japan.
Baskin-Robbins International segment profit decreased $2.2 million for the three months ended September 26, 2015 as a result of an increase in bad debt expense and a decrease in net income of equity method investments driven by unfavorable results from our Japan joint venture compared to the prior year period and the impact of unfavorable foreign exchange rates on net income of our South Korea and Japan joint ventures. Also contributing to the decrease in segment profit were the decreases in royalty income and franchise fees, offset by an increase in net margin on ice cream driven primarily by the increase in sales.
Baskin-Robbins International segment profit decreased $2.7 million for the nine months ended September 26, 2015 due primarily to an increase in general and administrative expenses, driven primarily by increases in bad debt expense and personnel costs, as well as the decrease in royalty income. Also contributing to the decrease in segment profit were unfavorable results from our Japan joint venture compared to the prior year period and the impact of unfavorable foreign exchange rates on net income of our Japan joint venture. These decreases in segment profit were offset by an increase in net margin on ice cream. A decrease in commodity costs, increase in pricing, and favorable foreign exchange rates more than offset the decrease in sales of ice cream and other products, resulting in an increase in net ice cream margin.
Liquidity and Capital Resources
As of September 26, 2015, we held $324.5 million of cash and cash equivalents and $72.1 million of short-term restricted cash that is restricted under our securitized financing facility. Included in cash and cash equivalents is $107.1 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 September 26, 2015, we had a borrowing capacity of $73.7 million under our $100.0 million Variable Funding Notes (as defined below).
Free cash flow
During the nine months ended September 26, 2015, net cash provided by operating activities was $83.2 million, as compared to $115.9 million for the nine months ended September 27, 2014. Net cash provided by operating activities for the nine months ended September 26, 2015 and September 27, 2014 includes decreases of $29.2 million and $37.8 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 provided by operating activities for the nine months ended September 26, 2015 includes the net funding of restricted cash accounts of $65.9 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. Excluding cash held for advertising funds and reserved for gift card/certificate programs and excluding the fluctuation in restricted cash, we generated $153.3 million and $148.0 million of free cash flow during the nine months ended September 26, 2015 and September 27, 2014, respectively.
The increase in free cash flow was due primarily to an increase in pre-tax income, excluding non-cash items, a reduction in incentive compensation payments made, and the payment of a third-party product volume guarantee in the prior fiscal year period. Offsetting these increases in free cash flow were reduced proceeds from the sale of real estate and company-operated restaurants as compared to the prior fiscal year period, the timing of receipts and payments related to the sale of Dunkin’ K-Cup® pods and the related franchisee profit-sharing program, an increase in cash paid for income taxes, and an increase in capital expenditures.
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.

30

Table of Contents

Free cash flow is reconciled from net cash provided by operating activities determined under GAAP as follows (in thousands):
 
Nine months ended
 
September 26, 2015
 
September 27, 2014
Net cash provided by operating activities
$
83,237

 
115,851

Plus: Decrease in cash held for advertising funds and gift card/certificate programs
29,182

 
37,846

Plus: Increase in restricted cash
65,888

 

Less: Net cash used in investing activities
(25,022
)
 
(5,704
)
Free cash flow, excluding the cash flows related to advertising funds, gift card/certificate programs, and restricted cash
$
153,285

 
147,993

Operating, investing, and financing cash flows
Net cash provided by operating activities was $83.2 million for the nine months ended September 26, 2015, as compared to $115.9 million in the prior fiscal year period. The $32.6 million decline in operating cash flows was driven primarily by the funding of restricted cash accounts of $65.9 million in accordance with the requirements of our new securitized debt structure, as well as the timing of receipts and payments related to the sale of Dunkin’ K-Cup® pods and the related franchisee profit-sharing program, and an increase in cash paid for income taxes. Offsetting these declines was an increase in pre-tax income, excluding non-cash items, a reduction in incentive compensation payments made, the payment of a third-party product volume guarantee in the prior fiscal year period, and favorable cash flows related to our gift card program due primarily to the timing of holidays and our fiscal year end.
Net cash used in investing activities was $25.0 million for the nine months ended September 26, 2015, as compared to $5.7 million in the prior fiscal year period. The $19.3 million increase in net cash used in investing activities was driven primarily by reduced proceeds received from the sale of real estate and company-operated restaurants of $12.4 million, as well as incremental additions to property and equipment of $5.4 million.
Net cash provided by financing activities was $59.0 million for the nine months ended September 26, 2015, as compared to net cash used in financing activities in the prior fiscal year period of $211.2 million. The $270.2 million increase in financing cash flows compared to the prior fiscal year period was driven primarily by the favorable impact of debt-related activities of $644.2 million, 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. Offsetting the favorable impact of debt-related activities was incremental cash used for repurchases of common stock of $369.9 million.
Borrowing capacity
Our securitized financing facility includes 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 undrawn Variable Funding Notes (as defined below). As of September 26, 2015, there was approximately $2.49 billion of total principal outstanding on the Class A-2 Notes, while there was $73.7 million in available borrowings under the Variable Funding Notes as $26.3 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 DBGI, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2015-1 3.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $750.0 million and Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of $1.75 billion. In addition, the Master Issuer also issued Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”), which allow for the issuance of up to $100.0 million of Variable Funding Notes and certain other credit instruments, including 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

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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. 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, 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.
We received net proceeds at closing of the securitized financing facility of approximately $615 million, after giving effect to the repayment of the remaining principal outstanding and interest on the term loans, payment of debt issuance costs and other debt-related costs, as well as funding certain restricted cash accounts required under our securitized financing facility. The net proceeds have been used for share repurchases, as further discussed below.
In connection with the January 2015 securitization refinancing, our board of directors authorized a new program to repurchase up to an aggregate of $700.0 million of our outstanding common stock within the next two years. In February 2015, we entered into a $400.0 million accelerated share repurchase ("ASR") agreement with a financial institution, pursuant to which we paid $400.0 million for an initial delivery of 6,951,988 shares, representing an estimate of 80% of the total shares expected to be delivered under the ASR agreement. Final settlement of the ASR agreement occurred in June 2015, at which point we received an additional delivery of 1,274,309 shares based on the final weighted average per share price of $48.62 during the agreement period. Additionally, during the nine months ended September 26, 2015, we used $100.0 million to repurchase shares in the open market.
In October 2015, we entered into a $125.0 million ASR agreement with a financial institution. Pursuant to the terms of the ASR agreement, the Company paid the financial institution $125.0 million from cash on hand and received an initial delivery of 2,527,167 shares of the Company’s common stock, representing an estimate of 80% of the total shares expected to be delivered under the agreement. At settlement, the financial institution may be required to deliver additional shares of common stock to us or, under certain circumstances, we may be required to deliver shares of our common stock or may elect to make a cash payment to the financial institution. Final settlement of the ASR agreement is expected to be completed in December 2015, although the settlement may be accelerated at the financial institution’s option.
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 others in our industry due to the potential inconsistencies in the methods 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 any 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 of long-lived assets, 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 September 26, 2015, we had a Net Debt to Adjusted EBITDA leverage ratio of 5.1 to 1.0. The following is a reconciliation of our Net Debt and Adjusted EBITDA to the corresponding GAAP measures as of and for the twelve months ended September 26, 2015, respectively (in thousands):
 
September 26, 2015
Principal outstanding under Class A-2 Notes
$
2,487,500

Total capital lease obligations
7,711

Less: cash and cash equivalents
(324,530
)
Less: restricted cash, current
(72,131
)
Plus: cash held for gift card/certificate programs
106,210

Net Debt
$
2,204,760



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Twelve months ended
 
September 26, 2015
Net income including noncontrolling interests
$
166,516

Interest expense
88,699

Income tax expense
88,541

Depreciation and amortization
45,434

Impairment charges
469

EBITDA
389,659

Adjustments:
 
Non-cash adjustments(a)
12,508

Loss on debt extinguishment and refinancing transactions(b)
20,554

Other(c) 
7,365

Total adjustments
40,427

Adjusted EBITDA
$
430,086

(a)
Represents non-cash adjustments, including stock compensation expense, legal reserves, and other non-cash gains and losses.
(b)
Represents transaction costs associated with the refinancing and repayment of long-term debt, including fees paid to third parties and the write-off of debt issuance costs and original issue discount.
(c)
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 April 2015, the Financial Accounting Standards Board (the “FASB”) issued new guidance to simplify the presentation of debt issuance costs, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums, instead of as an asset. This guidance is effective for us in fiscal year 2016, and early adoption is permitted. The adoption of this guidance will result in the reclassification of debt issuance costs, which were approximately $37.2 million and $11.5 million as of September 26, 2015 and December 27, 2014, respectively, from other assets to long-term debt, net in the consolidated balance sheets, resulting in a corresponding reduction in total assets and total long-term liabilities. The adoption of this guidance will not have any impact on our consolidated statements of operations or cash flows.
In May 2014, the FASB issued new guidance for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new guidance provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued new guidance to defer the mandatory effective date by one year and permit early adoption but not before the original effective date. As a result, this guidance is now 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 27, 2014.

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Item 4.       Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 26, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 26, 2015, 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 September 26, 2015, 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.

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Part II.        Other Information
Item 1.       Legal Proceedings
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. Similar claims have also been made against the Company by other former Dunkin’ Donuts franchisees in Canada. As a result of the Bertico litigation appellate ruling and assessment of similar claims, the Company reduced its aggregate legal reserves for the Bertico litigation and similar claims by approximately $2.8 million during the first quarter of fiscal year 2015, resulting in an estimated liability of $18.6 million as of September 26, 2015. The Company has sought leave to appeal with the Supreme Court of Canada in the Bertico litigation.
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.
Item 1A.       Risk Factors.
There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information regarding purchases of our common stock made during the quarter ended September 26, 2015 by or on behalf of Dunkin’ Brands Group, Inc. or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934:
 
 
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
06/28/15 - 07/25/15
 

 
 
 

 
$
223,075,776

07/26/15 - 08/29/15
 
12,770

 
48.45

 
12,770

 
222,457,063

08/30/15 - 09/26/15
 
113,664

 
48.82

 
113,664

 
216,908,153

Total
 
126,434

 
$
48.78

 
126,434

 
 
On January 26, 2015, our board of directors approved a share repurchase program of up to $700.0 million of outstanding shares of our common stock. Under the program, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions. This repurchase authorization expires two years from the date of approval.
On October 22, 2015, the Company entered into an ASR agreement with a third-party financial institution. Pursuant to the terms of the ASR agreement, the Company paid the financial institution $125.0 million from cash on hand and received an initial delivery of 2,527,167 shares of the Company’s common stock in October 2015, representing an estimate of 80% of the total shares expected to be delivered under the agreement. At settlement, the financial institution may be required to deliver additional shares of common stock to the Company or, under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to the financial institution. Final settlement of the ASR agreement is expected to be completed in December 2015, although the settlement may be accelerated at the financial institution’s option.

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Item 3.       Defaults Upon Senior Securities
None.
Item 4.       Mine Safety Disclosures
Not Applicable.
Item 5.       Other Information
None.
Item 6.       Exhibits
(a) Exhibits:
 
 
 
10.1
  
Form of Fixed Dollar Accelerated Share Repurchase Confirmation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 001-35258, filed with the SEC on October 23, 2015).
 
 
 
31.1
  
Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
  
Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
  
Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
  
Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Ex. 101.INS* XBRL Instance Document
 
Ex. 101.SCH* XBRL Taxonomy Extension Schema Document
 
Ex. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
 
Ex. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document
 
Ex. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
 
Ex. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
 
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “filed.”

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DUNKIN’ BRANDS GROUP, INC.
 
 
 
 
 
 
 
Date:
November 4, 2015
 
By:
 
/s/ Nigel Travis
 
 
 
 
 
Nigel Travis,
Chairman and Chief Executive Officer

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