Document

Please wait

FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 29, 2019



☐	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.)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	DNKN	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 2, 2019, 82,717,178 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.	Financial Statements and Supplementary Data	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

Part II. – Other Information

Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42
	Signatures	43

Table of Contents

Part I. Financial Information

Item 1. Financial Statements and Supplementary Data

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)



	June 29, 2019			December 29, 2018
Assets
Current assets:
Cash and cash equivalents	$	474,265		517,594
Restricted cash	88,562			79,008
Accounts receivable, net of allowance for doubtful accounts of $4,651 and $3,584 as of June 29, 2019 and December 29, 2018, respectively	87,412			75,963
Notes and other receivables, net of allowance for doubtful accounts of $735 and $884 as of June 29, 2019 and December 29, 2018, respectively	45,594			64,412
Prepaid income taxes	21,378			27,005
Prepaid expenses and other current assets	47,456			49,491
Total current assets	764,667			813,473
Property, equipment, and software, net of accumulated depreciation of $168,987 and $147,550 as of June 29, 2019 and December 29, 2018, respectively	215,248			209,202
Operating lease assets	375,165			—
Equity method investments	145,114			146,395
Goodwill	888,286			888,265
Other intangible assets, net of accumulated amortization of $244,845 and $265,762 as of June 29, 2019 and December 29, 2018, respectively	1,311,923			1,334,767
Other assets	67,544			64,479
Total assets	$	3,767,947		3,456,581
Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of long-term debt	$	31,150		31,650
Operating lease liabilities	33,282			—
Accounts payable	58,308			80,037
Deferred revenue	38,521			38,541
Other current liabilities	315,333			389,353
Total current liabilities	476,594			539,581
Long-term debt, net	3,017,360			3,010,626
Operating lease liabilities	388,081			—
Deferred revenue	321,989			331,980
Deferred income taxes, net	198,689			204,027
Other long-term liabilities	22,035			83,164
Total long-term liabilities	3,948,154			3,629,797
Commitments and contingencies (note 9)
Stockholders’ deficit:
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.001 par value; 475,000,000 shares authorized; 82,817,076 shares issued and 82,755,494 shares outstanding as of June 29, 2019; 82,587,373 shares issued and 82,560,596 shares outstanding as of December 29, 2018	83			82
Additional paid-in capital	603,868			642,017
Treasury stock, at cost; 61,582 shares and 26,777 shares as of June 29, 2019 and December 29, 2018, respectively	(3,291		)	(1,060	)
Accumulated deficit	(1,238,190		)	(1,338,709	)
Accumulated other comprehensive loss	(19,271		)	(15,127	)
Total stockholders’ deficit	(656,801		)	(712,797	)
Total liabilities and stockholders’ deficit	$	3,767,947		3,456,581

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)



	Three months ended					Six months ended
	June 29, 2019			June 30, 2018		June 29, 2019		June 30, 2018
Revenues:
Franchise fees and royalty income	$	158,258		151,242		297,586		283,749
Advertising fees and related income	129,259			131,539		246,457		242,546
Rental income	31,679			27,400		60,707		51,878
Sales of ice cream and other products	27,258			28,140		47,991		49,917
Other revenues	12,883			12,319		25,687		23,892
Total revenues	359,337			350,640		678,428		651,982
Operating costs and expenses:
Occupancy expenses—franchised restaurants	19,697			14,314		39,172		28,294
Cost of ice cream and other products	22,018			22,781		38,658		39,645
Advertising expenses	130,961			132,579		249,052		244,551
General and administrative expenses, net	59,922			59,301		116,125		119,125
Depreciation	4,711			5,125		9,332		10,158
Amortization of other intangible assets	4,626			5,307		9,259		10,682
Long-lived asset impairment charges	2			653		325		1,154
Total operating costs and expenses	241,937			240,060		461,923		453,609
Net income of equity method investments	4,427			3,845		6,657		5,878
Other operating income (loss), net	825			(575	)	862		(570	)
Operating income	122,652			113,850		224,024		203,681
Other income (expense), net:
Interest income	3,079			1,516		4,910		3,158
Interest expense	(32,842		)	(32,538	)	(64,971	)	(65,015	)
Loss on debt extinguishment	(13,076		)	—		(13,076	)	—
Other loss, net	(46		)	(272	)	(50	)	(599	)
Total other expense, net	(42,885		)	(31,294	)	(73,187	)	(62,456	)
Income before income taxes	79,767			82,556		150,837		141,225
Provision for income taxes	20,145			22,058		38,892		30,575
Net income	$	59,622		60,498		111,945		110,650
Earnings per share:
Common—basic	$	0.72		0.73		1.35		1.31
Common—diluted	0.71			0.72		1.34		1.29

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)



	Three months ended					Six months ended
	June 29, 2019			June 30, 2018		June 29, 2019		June 30, 2018
Net income	$	59,622		60,498		111,945		110,650
Other comprehensive income (loss), net:
Effect of foreign currency translation, net of deferred tax expense (benefit) of $(18) and $(66) for the three months ended June 29, 2019 and June 30, 2018, respectively, and $8 and $(46) for the six months ended June 29, 2019 and June 30, 2018, respectively.	(1,660		)	(7,291	)	(4,013	)	(5,744	)
Other, net	42			(58	)	(131	)	570
Total other comprehensive loss, net	(1,618		)	(7,349	)	(4,144	)	(5,174	)
Comprehensive income	$	58,004		53,149		107,801		105,476

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Deficit

For the Three Months Ended June 29, 2019 and June 30, 2018

(In thousands)

(Unaudited)



	Stockholders' Deficit
	Common stock				Additional paid-in capital		Treasury stock, at cost		Accumulated deficit		Accumulated other comprehensive loss		Total
	Shares		Amount		Additional paid-in capital		Treasury stock, at cost		Accumulated deficit		Accumulated other comprehensive loss		Total
Balance at March 30, 2019	82,663		$	83	618,326		(3,291	)	(1,288,758	)	(17,653	)	(691,293	)
Net income	—		—		—		—		59,622		—		59,622
Other comprehensive loss, net	—		—		—		—		—		(1,618	)	(1,618	)
Exercise of stock options	273		—		12,914		—		—		—		12,914
Dividends paid on common stock ($0.3750 per share)	—		—		(31,010	)	—		—		—		(31,010	)
Share-based compensation expense	3		—		3,690		—		—		—		3,690
Repurchases of common stock	—		—		—		(10,000	)	—		—		(10,000	)
Retirement of treasury stock	(133	)	—		(945	)	10,000		(9,055	)	—		—
Other	11		—		893		—		1		—		894
Balance at June 29, 2019	82,817		$	83	603,868		(3,291	)	(1,238,190	)	(19,271	)	(656,801	)


Balance at March 31, 2018	82,598		$	83	522,052		(1,060	)	(1,373,996	)	(7,360	)	(860,281	)
Net income	—		—		—		—		60,498		—		60,498
Other comprehensive loss, net	—		—		—		—		—		(7,349	)	(7,349	)
Exercise of stock options	315		—		12,258		—		—		—		12,258
Dividends paid on common stock ($0.3475 per share)	—		—		(28,800	)	—		—		—		(28,800	)
Share-based compensation expense	4		—		3,745		—		—		—		3,745
Other	3		—		2,124		—		—		—		2,124
Balance at June 30, 2018	82,920		$	83	511,379		(1,060	)	(1,313,498	)	(14,709	)	(817,805	)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Deficit

For the Six Months Ended June 29, 2019 and June 30, 2018

(In thousands)

(Unaudited)



	Stockholders' Deficit
	Common stock					Additional paid-in capital		Treasury stock, at cost		Accumulated deficit		Accumulated other comprehensive loss		Total
	Shares		Amount			Additional paid-in capital		Treasury stock, at cost		Accumulated deficit		Accumulated other comprehensive loss		Total
Balance at December 29, 2018	82,437		$	82		642,017		(1,060	)	(1,338,709	)	(15,127	)	(712,797	)
Net income	—		—			—		—		111,945		—		111,945
Other comprehensive loss, net	—		—			—		—		—		(4,144	)	(4,144	)
Exercise of stock options	357		1			16,744		—		—		—		16,745
Dividends paid on common stock ($0.7500 per share)	—		—			(61,985	)	—		—		—		(61,985	)
Share-based compensation expense	147		—			7,296		—		—		—		7,296
Repurchases of common stock	—		—			—		(10,129	)	—		—		(10,129	)
Retirement of treasury stock	(135	)	—			(959	)	10,129		(9,170	)	—		—
Other	11		—			755		(2,231	)	(2,256	)	—		(3,732	)
Balance at June 29, 2019	82,817		$	83		603,868		(3,291	)	(1,238,190	)	(19,271	)	(656,801	)

Balance at December 30, 2017	90,254		$	90		724,114		(1,060	)	(968,148	)	(9,535	)	(254,539	)
Net income	—		—			—		—		110,650		—		110,650
Other comprehensive loss, net	—		—			—		—		—		(5,174	)	(5,174	)
Exercise of stock options	1,088		1			30,432		—		—		—		30,433
Dividends paid on common stock ($0.6950 per share)	—		—			(57,439	)	—		—		—		(57,439	)
Share-based compensation expense	42		—			6,949		—		—		—		6,949
Accelerated share repurchases of common stock	—		—			(130,000	)	(520,368	)	—		—		(650,368	)
Retirement of treasury stock	(8,479	)	(8		)	(65,246	)	520,368		(455,114	)	—		—
Other	15		—			2,569		—		(886	)	—		1,683
Balance at June 30, 2018	82,920		$	83		511,379		(1,060	)	(1,313,498	)	(14,709	)	(817,805	)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Six months ended
	June 29, 2019			June 30, 2018
Cash flows from operating activities:
Net income	$	111,945		110,650
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	21,084			22,621
Amortization of debt issuance costs	2,545			2,511
Loss on debt extinguishment	13,076			—
Deferred income taxes	(5,310		)	(8,425	)
Provision for bad debt	704			333
Share-based compensation expense	7,296			6,949
Net income of equity method investments	(6,657		)	(5,878	)
Dividends received from equity method investments	3,777			3,947
Other, net	(749		)	1,369
Change in operating assets and liabilities:
Accounts, notes, and other receivables, net	6,764			(7,459	)
Prepaid income taxes, net	6,792			4,208
Prepaid expenses and other current assets	(2,568		)	(8,866	)
Accounts payable	(21,437		)	15,940
Other current liabilities	(74,073		)	(71,323	)
Deferred revenue	(10,039		)	3,902
Other, net	(73		)	(2,740	)
Net cash provided by operating activities	53,077			67,739
Cash flows from investing activities:
Additions to property, equipment, and software	(19,000		)	(32,902	)
Other, net	1,168			—
Net cash used in investing activities	(17,832		)	(32,902	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	1,700,000			—
Repayment of long-term debt	(1,691,450		)	(15,750	)
Payment of debt issuance and other debt-related costs	(17,937		)	—
Dividends paid on common stock	(61,985		)	(57,439	)
Repurchases of common stock, including accelerated share repurchases	(10,129		)	(650,368	)
Exercise of stock options	16,745			30,433
Other, net	(4,443		)	(901	)
Net cash used in financing activities	(69,199		)	(694,025	)
Effect of exchange rates on cash, cash equivalents, and restricted cash	49			(228	)
Decrease in cash, cash equivalents, and restricted cash	(33,905		)	(659,416	)
Cash, cash equivalents, and restricted cash, beginning of period	598,321			1,114,099
Cash, cash equivalents, and restricted cash, end of period	$	564,416		454,683
Supplemental cash flow information:
Cash paid for income taxes	$	37,667		35,044
Cash paid for interest	58,231			65,633
Noncash investing activities:
Property, equipment, and software included in accounts payable and other current liabilities	2,673			3,219
Purchase of property, equipment, and software in exchange for note payable	—			1,486
Noncash operating activities:
Leased assets obtained in exchange for operating lease liabilities, net	5,279			—

See accompanying notes to unaudited consolidated financial statements.

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Description of business and organization

Dunkin’ Brands Group, Inc. (“DBGI”), together with its consolidated subsidiaries, is one of the world’s leading franchisors of restaurants serving coffee and baked goods, as well as ice cream, within the quick service restaurant segment of the restaurant industry. We franchise and license a system of both traditional and nontraditional quick service restaurants. Through our Dunkin’ brand, we franchise restaurants featuring coffee, espresso, donuts, bagels, breakfast sandwiches, and related products. Additionally, we license Dunkin’ brand products sold in certain retail outlets such as retail packaged coffee, Dunkin’ K-Cup® pods, and ready-to-drink bottled iced coffee. Through our Baskin-Robbins brand, we franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, we distribute Baskin-Robbins ice cream products to certain international markets for sale in Baskin-Robbins restaurants and certain retail outlets.

Throughout these unaudited consolidated financial statements, “Dunkin’ Brands,” “the Company,” “we,” “us,” “our,” and “management” refer to DBGI and its consolidated subsidiaries taken as a whole.

(2) Summary of significant accounting policies

(a) Unaudited consolidated financial statements

The consolidated balance sheet as of June 29, 2019, the consolidated statements of operations, comprehensive income, and stockholders' deficit for the three and six months ended June 29, 2019 and June 30, 2018, and the consolidated statements of cash flows for the six months ended June 29, 2019 and June 30, 2018 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 29, 2018, included in the Company's Annual Report on Form 10-K.

(b) Fiscal year

The Company operates and reports financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and six-month periods ended June 29, 2019 and June 30, 2018 reflect the results of operations for the 13-week and 26-week periods ended on those dates. Operating results for the three- and six-month periods ended June 29, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2019.

In accordance with the Company’s securitized financing facility, certain cash accounts have been established in the name of Citibank, N.A. (the “Trustee”) for the benefit of the Trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents (i) cash collections held by the Trustee, (ii) interest, principal, and commitment fee reserves held by the Trustee related to the Company’s notes (see note 4), and (iii) real estate reserves used to pay real estate obligations.

Table of Contents

Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of June 29, 2019 and December 29, 2018 were as follows (in thousands):



	June 29, 2019		December 29, 2018
Cash and cash equivalents	$	474,265	517,594
Restricted cash	88,562		79,008
Restricted cash, included in Other assets	1,589		1,719
Total cash, cash equivalents, and restricted cash	$	564,416	598,321

(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 the lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Financial assets and liabilities measured at fair value on a recurring basis as of June 29, 2019 and December 29, 2018 are summarized as follows (in thousands):



	June 29, 2019			December 29, 2018
	Significant other observable inputs (Level 2)		Total	Significant other observable inputs (Level 2)	Total
Assets:
Company-owned life insurance	$	11,661	11,661	9,906	9,906
Total assets	$	11,661	11,661	9,906	9,906
Liabilities:
Deferred compensation liabilities	$	10,777	10,777	9,759	9,759
Total liabilities	$	10,777	10,777	9,759	9,759

The deferred compensation liabilities relate to the Dunkin’ Brands, Inc. non-qualified deferred compensation plans (“NQDC Plans”), which allow for pre-tax deferral of compensation for certain qualifying employees and directors. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, as defined under U.S. GAAP, because their inputs are derived principally from observable market data by correlation to hypothetical investments. The Company holds company-owned life insurance policies to partially offset the Company’s liabilities under the NQDC Plans. The changes in the fair value of any company-owned life insurance policies are derived using determinable cash surrender value. As such, the company-owned life insurance policies are classified within Level 2, as defined under U.S. GAAP.

The carrying value and estimated fair value of total long-term debt as of June 29, 2019 and December 29, 2018 were as follows (in thousands):

June 29, 2019

December 29, 2018

Carrying value

Estimated fair value

Carrying value

Estimated fair value

Financial liabilities

Total long-term debt

3,048,510

3,164,732

3,042,276

3,011,843

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 midpoint prices for our long-term debt. Judgment is required to develop these estimates. As such, the estimated fair value of long-term debt is classified within Level 2, as defined under U.S. GAAP.

(e) Concentration of credit risk

The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees, royalty income, advertising fees, and sales of ice cream and other products. In addition, we have

Table of Contents

note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. As of June 29, 2019 and December 29, 2018, one master licensee, including its majority-owned subsidiaries, accounted for approximately 17% and 11%, respectively, of total accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for any of the three- and six-month periods ended June 29, 2019 and June 30, 2018.

(f) Recent accounting pronouncements

Recently adopted accounting pronouncements

In fiscal year 2019, the Company adopted new guidance for lease accounting, which replaces existing lease accounting guidance. The Company adopted this new guidance in fiscal year 2019 using the modified retrospective transition method and elected the option to not restate comparative periods in the year of adoption, including amounts as of December 29, 2018 and for the three and six months ended June 30, 2018 included herein.

As a result of adopting this new guidance on the first day of fiscal year 2019, substantially all of the Company's operating lease commitments were subject to the new guidance and were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date. The Company recognized operating lease assets and liabilities of $388.8 million and $435.1 million, respectively, as of the first day of fiscal year 2019. The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets. Finance leases, previously known as capital leases, were not impacted by the adoption of the new guidance, as finance lease liabilities and the corresponding assets were recorded on the consolidated balance sheet under the previous guidance. The accounting guidance for lessors remained largely unchanged from previous guidance, with the exception of the presentation of certain lease costs that the Company passes through to lessees, including but not limited to, property taxes, insurance, and maintenance. These costs are generally paid by the Company and reimbursed by the lessee. Historically, these costs have been recorded on a net basis in the consolidated statements of operations, but are now presented on a gross basis upon adoption of the new guidance. The adoption of the new guidance resulted in the recognition of additional rental income and occupancy expenses—franchised restaurants of $4.7 million and $9.4 million related to these lease costs during the three and six months ended June 29, 2019, respectively.

The effects of the changes made to the Company's condensed consolidated balance sheet as of December 30, 2018 for the adoption of the new lease guidance were as follows (in thousands):



	Balance at December 29, 2018		Adjustments due to adoption of the new lease guidance		Balance at December 30, 2018
Assets
Current assets:
Prepaid expenses and other current assets	$	49,491	(4,720	)	44,771
Operating lease assets	—		388,811		388,811
Other intangible assets, net	1,334,767		(13,598	)	1,321,169
Other assets	64,479		(961	)	63,518
Liabilities and Stockholders' Deficit
Current liabilities:
Operating lease liabilities	—		33,822		33,822
Operating lease liabilities	—		401,249		401,249
Other long-term liabilities^(a)	83,164		(65,539	)	17,625


(a)	Other long-term liabilities at December 29, 2018 reflects certain reclassifications to conform to current period presentation as discussed below.

The adoption of the new guidance had no impact on net cash flows from operating, investing, or financing activities and had no impact on compliance with debt agreements.

Table of Contents

The Company elected the package of practical expedients permitted under the new guidance, which among other things, allowed the Company to continue utilizing historical classification of leases. However, the Company did not adopt the hindsight practical expedient, and therefore continued to utilize lease terms determined under previous lease guidance. See note 12 for additional information regarding our lease arrangements and the Company's updated lease accounting policies.

In conjunction with the adoption of this new lease guidance and to conform to the current period presentation, the Company revised the presentation of certain lease liabilities within the consolidated balance sheets. Other current liabilities and other long-term liabilities totaling $0.5 million and $4.6 million as of December 29, 2018 were reclassified to current and long-term deferred revenue, respectively. Amounts separately presented as unfavorable operating leases acquired of $8.2 million as of December 29, 2018 were reclassified to other long-term liabilities. Additionally, amounts separately presented as current capital lease obligations and long-term capital lease obligations of $0.5 million and $7.0 million as of December 29, 2018 were reclassified to other current liabilities and other long-term liabilities, respectively. There was no impact to total current liabilities and total long-term liabilities as a result of these reclassifications.

(g) Subsequent events

Subsequent events have been evaluated through the date these consolidated financial statements were filed.

Table of Contents

(3) Revenue recognition

(a) Disaggregation of revenue

Revenues are disaggregated by timing of revenue recognition related to contracts with customers (“ASC 606”) and reconciled to reportable segment revenues as follows (in thousands):



	Three months ended June 29, 2019
	Dunkin' U.S.		Baskin-Robbins U.S.	Dunkin' International	Baskin-Robbins International		U.S. Advertising Funds	Total reportable segment revenues	Other^(a)		Total revenues
Revenues recognized under ASC 606
Revenues recognized over time:
Royalty income	$	131,682	8,828	5,396	1,953		—	147,859	4,087		151,946
Franchise fees	3,418		344	2,030	520		—	6,312	—		6,312
Advertising fees and related income	—		—	—	—		123,588	123,588	1,396		124,984
Other revenues	584		3,000	—	—		—	3,584	8,559		12,143
Total revenues recognized over time	135,684		12,172	7,426	2,473		123,588	281,343	14,042		295,385

Revenues recognized at a point in time:
Sales of ice cream and other products	—		1,080	—	29,997		—	31,077	(3,819	)	27,258
Other revenues	402		63	44	(8	)	—	501	239		740
Total revenues recognized at a point in time	402		1,143	44	29,989		—	31,578	(3,580	)	27,998

Total revenues recognized under ASC 606	136,086		13,315	7,470	32,462		123,588	312,921	10,462		323,383

Revenues not subject to ASC 606
Advertising fees and related income	—		—	—	—		—	—	4,275		4,275
Rental income	30,491		973	—	215		—	31,679	—		31,679
Total revenues not subject to ASC 606	30,491		973	—	215		—	31,679	4,275		35,954

Total revenues	$	166,577	14,288	7,470	32,677		123,588	344,600	14,737		359,337

(a)

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

Table of Contents



	Three months ended June 30, 2018
	Dunkin' U.S.		Baskin-Robbins U.S.	Dunkin' International		Baskin-Robbins International	U.S. Advertising Funds	Total reportable segment revenues	Other^(a)		Total revenues
Revenues recognized under ASC 606
Revenues recognized over time:
Royalty income	$	125,221	9,005	4,732		2,154	—	141,112	4,276		145,388
Franchise fees	4,765		303	535		251	—	5,854	—		5,854
Advertising fees and related income	—		—	—		—	119,174	119,174	8,491		127,665
Other revenues	588		3,129	—		1	—	3,718	7,969		11,687
Total revenues recognized over time	130,574		12,437	5,267		2,406	119,174	269,858	20,736		290,594

Revenues recognized at a point in time:
Sales of ice cream and other products	—		842	—		31,409	—	32,251	(4,111	)	28,140
Other revenues	310		57	(9	)	72	—	430	202		632
Total revenues recognized at a point in time	310		899	(9	)	31,481	—	32,681	(3,909	)	28,772

Total revenues recognized under ASC 606	130,884		13,336	5,258		33,887	119,174	302,539	16,827		319,366

Revenues not subject to ASC 606
Advertising fees and related income	—		—	—		—	—	—	3,874		3,874
Rental income	26,506		763	—		131	—	27,400	—		27,400
Total revenues not subject to ASC 606	26,506		763	—		131	—	27,400	3,874		31,274

Total revenues	$	157,390	14,099	5,258		34,018	119,174	329,939	20,701		350,640

(a)

Table of Contents



	Six months ended June 29, 2019
	Dunkin' U.S.		Baskin-Robbins U.S.	Dunkin' International	Baskin-Robbins International	U.S. Advertising Funds	Total reportable segment revenues	Other^(a)		Total revenues
Revenues recognized under ASC 606
Revenues recognized over time:
Royalty income	$	248,779	14,931	11,309	3,858	—	278,877	7,236		286,113
Franchise fees	7,044		656	2,895	878	—	11,473	—		11,473
Advertising fees and related income	—		—	—	—	232,230	232,230	2,572		234,802
Other revenues	1,294		5,163	4	—	—	6,461	17,617		24,078
Total revenues recognized over time	257,117		20,750	14,208	4,736	232,230	529,041	27,425		556,466

Revenues recognized at a point in time:
Sales of ice cream and other products	—		1,751	—	53,072	—	54,823	(6,832	)	47,991
Other revenues	866		131	113	13	—	1,123	486		1,609
Total revenues recognized at a point in time	866		1,882	113	53,085	—	55,946	(6,346	)	49,600

Total revenues recognized under ASC 606	257,983		22,632	14,321	57,821	232,230	584,987	21,079		606,066

Revenues not subject to ASC 606
Advertising fees and related income	—		—	—	—	—	—	11,655		11,655
Rental income	58,339		1,933	—	435	—	60,707	—		60,707
Total revenues not subject to ASC 606	58,339		1,933	—	435	—	60,707	11,655		72,362

Total revenues	$	316,322	24,565	14,321	58,256	232,230	645,694	32,734		678,428

(a)

Table of Contents



	Six months ended June 30, 2018
	Dunkin' U.S.		Baskin-Robbins U.S.	Dunkin' International		Baskin-Robbins International	U.S. Advertising Funds	Total reportable segment revenues	Other^(a)		Total revenues
Revenues recognized under ASC 606
Revenues recognized over time:
Royalty income	$	236,054	15,414	9,670		3,697	—	264,835	7,410		272,245
Franchise fees	9,472		592	983		457	—	11,504	—		11,504
Advertising fees and related income	—		—	—		—	223,341	223,341	8,750		232,091
Other revenues	1,123		5,406	2		1	—	6,532	16,123		22,655
Total revenues recognized over time	246,649		21,412	10,655		4,155	223,341	506,212	32,283		538,495

Revenues recognized at a point in time:
Sales of ice cream and other products	—		1,520	—		55,381	—	56,901	(6,984	)	49,917
Other revenues	555		150	(32	)	119	—	792	445		1,237
Total revenues recognized at a point in time	555		1,670	(32	)	55,500	—	57,693	(6,539	)	51,154

Total revenues recognized under ASC 606	247,204		23,082	10,623		59,655	223,341	563,905	25,744		589,649

Revenues not subject to ASC 606
Advertising fees and related income	—		—	—		—	—	—	10,455		10,455
Rental income	50,097		1,530	—		251	—	51,878	—		51,878
Total revenues not subject to ASC 606	50,097		1,530	—		251	—	51,878	10,455		62,333

Total revenues	$	297,301	24,612	10,623		59,906	223,341	615,783	36,199		651,982

(a)

Table of Contents

(b) Contract balances

Information about receivables and deferred revenue subject to ASC 606 is as follows (in thousands):



	June 29, 2019		December 29, 2018	Balance Sheet Classification
Receivables	$	101,074	81,609	Accounts receivable, net and Notes and other receivables, net

Deferred revenue:
Current	$	25,956	24,002	Deferred revenue—current
Long-term	317,351		327,333	Deferred revenue—long term
Total	$	343,307	351,335

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, sales of ice cream and other products, and licensing fees. Deferred revenue primarily represents the Company’s remaining performance obligations under its franchise and license agreements for which consideration has been received or is receivable, and is generally recognized on a straight-line basis over the remaining term of the related agreement.

The decrease in the deferred revenue balance as of June 29, 2019 was primarily driven by $16.4 million of revenues recognized that were included in the deferred revenue balance as of December 29, 2018, as well as franchisee incentives provided during fiscal year 2019, offset by cash payments received or due in advance of satisfying our performance obligations.

As of June 29, 2019 and December 29, 2018, there were no contract assets from contracts with customers.

Estimated revenue expected to be recognized in the future related to performance obligations that are either unsatisfied or partially satisfied at June 29, 2019 is as follows (in thousands):



Fiscal year:
2019^(a)	$	13,396
2020	19,804
2021	18,844
2022	18,810
2023	18,774
Thereafter	218,856
Total	$	308,484

^(a) Represents the estimate for remainder of fiscal year 2019 which excludes the six months ended June 29, 2019.

The estimated revenue in the table above does not contemplate future franchise renewals or new franchise agreements for restaurants for which a franchise agreement or store development agreement does not exist at June 29, 2019. Additionally, the table above excludes $59.0 million of consideration allocated to restaurants that were not yet open at June 29, 2019. The Company has applied the sales-based royalty exemption which permits exclusion of variable consideration in the form of sales-based royalties from the disclosure of remaining performance obligations in the table above.

Table of Contents

(4) Debt

Debt at June 29, 2019 and December 29, 2018 consisted of the following (in thousands):



	June 29, 2019			December 29, 2018
2015 Class A-2-II Notes	$	—		1,684,375
2017 Class A-2-I Notes	591,000			594,000
2017 Class A-2-II Notes	788,000			792,000
2019 Class A-2-I Notes	600,000			—
2019 Class A-2-II Notes	400,000			—
2019 Class A-2-III Notes	700,000			—
Other	1,325			1,400
Debt issuance costs, net of amortization	(31,815		)	(29,499	)
Total long-term debt, net	3,048,510			3,042,276
Less current portion of long-term debt	31,150			31,650
Long-term debt, net	$	3,017,360		3,010,626

In April 2019, DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of DBGI, issued Series 2019-1 3.787% Fixed Rate Senior Secured Notes, Class A-2-I (the “2019 Class A-2-I Notes”) with an initial principal amount of $600.0 million, Series 2019-1 4.021% Fixed Rate Senior Secured Notes, Class A-2-II (the “2019 Class A-2-II Notes”) with an initial principal amount of $400.0 million, and Series 2019-1 4.352% Fixed Rate Senior Secured Notes, Class A-2-III (the “2019 Class A-2-III Notes” and together with the 2019 Class A-2-I Notes and 2019 Class A-2-II Notes, the “2019 Class A-2 Notes”) with an initial principal amount of $700.0 million. In addition, the Master Issuer issued Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019 Variable Funding Notes” and, together with the 2019 Class A-2 Notes, the “2019 Notes”), which allow for the issuance of up to $150.0 million of 2019 Variable Funding Notes and certain other credit instruments, including letters of credit. The proceeds received from the issuance of the 2019 Class A-2 Notes were used to repay the remaining $1.68 billion outstanding on the Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Class A-2-II Notes”) and to pay related transaction fees and expenses. In connection with the issuance of the 2019 Variable Funding Notes, the Master Issuer terminated the commitments with respect to its existing Series 2017-1 Variable Funding Senior Secured Notes, Class A-1 (the “2017 Variable Funding Notes”).

The Company's outstanding debt as of June 29, 2019 also consisted of Series 2017-1 3.629% Fixed Rate Senior Secured Notes, Class A-2-I (the “2017 Class A-2-I Notes”), and Series 2017-1 4.030% Fixed Rate Senior Secured Notes, Class A-2-II (the “2017 Class A-2-II Notes” and, together with the 2017 Class A-2-I Notes, the “2017 Class A-2 Notes”) issued by the Master Issuer.

The 2017 Class A-2 Notes and 2019 Notes were each issued in a securitization transaction pursuant to which most of the Company’s domestic and certain of its foreign revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the 2017 Class A-2 Notes and 2019 Notes and that have pledged substantially all of their assets to secure the 2017 Class A-2 Notes and 2019 Notes.

The 2017 Class A-2 Notes and 2019 Notes were issued pursuant to a base indenture and related supplemental indentures (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. The legal final maturity date of the 2017 Class A-2 Notes and 2019 Class A-2 Notes is November 2047 and May 2049, respectively, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2017 Class A-2-I Notes will be repaid by November 2024, the 2017 Class A-2-II Notes will be repaid by November 2027, the 2019 Class A-2-I Notes will be repaid by February 2024, the 2019 Class A-2-II Notes will be repaid by May 2026, and the 2019 Class A-2-III Notes will be repaid by May 2029 (the “Anticipated Repayment Dates”). If the 2017 Class A-2 Notes or the 2019 Class A-2 Notes have not been repaid or refinanced by their respective Anticipated Repayment Dates, a rapid amortization event will occur in which residual net cash flows of the Master Issuer, after making certain required payments, will be applied to the outstanding principal of the 2017 Class A-2 Notes and the 2019 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 2017 Class A-2-I Notes, 2017 Class A-2-II Notes, 2019 Class A-2-I Notes, 2019 Class A-2-II Notes, and 2019 Class A-2-III Notes bear interest at fixed

Table of Contents

rates equal to 3.629%, 4.030%, 3.787%, 4.021%, and 4.352%, respectively. If the 2017 Class A-2 Notes or the 2019 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 2017 Class A-2-I Notes, 2017 Class A-2-II Notes, 2019 Class A-2-I Notes, 2019 Class A-2-II Notes, and 2019 Class A-2-III Notes equal to $6.0 million, $8.0 million, $6.0 million, $4.0 million, and $7.0 million, respectively, per calendar year, payable in quarterly installments. No principal payments are required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the Indenture), is less than or equal to 5.0 to 1.0. 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 2019 Variable Funding Notes will be repaid in full on or prior to August 2024, subject to two additional one-year extensions. Borrowings under the 2019 Variable Funding Notes bear interest at a rate equal to a LIBOR rate plus 1.50%, or the lenders' commercial paper funding rate plus 1.50%. If the 2019 Variable Funding Notes are not repaid prior to August 2024 or prior to the end of the extension period, if applicable, incremental interest will accrue. In addition, the Company is required to pay a 1.50% fee for letters of credit amounts outstanding and a commitment fee on the unused portion of the 2019 Variable Funding Notes which ranges from 0.50% to 1.00% based on utilization.

During the second quarter of fiscal year 2019, as a result of the repayment of the remaining $1.68 billion of principal outstanding on the 2015 Class A-2-II Notes, the Company recorded a loss on debt extinguishment of $13.1 million, consisting of a write-off of the remaining debt issuance costs related to the 2015 Class A-2-II Notes.

Total debt issuance costs incurred and capitalized in connection with the issuance of the 2019 Notes were $17.9 million. The effective interest rate, including the amortization of debt issuance costs, was 3.8%, 4.2%, 3.9%, 4.2%, and 4.5% for the 2017 Class A-2-I Notes, 2017 Class A-2-II Notes, 2019 Class A-2-I Notes, 2019 Class A-2-II Notes, and 2019 Class A-2-III Notes, respectively, as of June 29, 2019.

As of June 29, 2019, $33.1 million of letters of credit were outstanding against the 2019 Variable Funding Notes and as of December 29, 2018, $32.4 million of letters of credit were outstanding against the 2017 Variable Funding Notes, which related primarily to interest reserves required under the base indenture and related supplemental indentures. There were no amounts drawn down on these letters of credit as of June 29, 2019 or December 29, 2018.

The 2017 Class A-2 Notes and 2019 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 2017 Class A-2 Notes and 2019 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 2017 Class A-2 Notes and 2019 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the 2017 Class A-2 Notes and 2019 Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information, and similar matters. As noted above, the 2017 Class A-2 Notes and 2019 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’ U.S. retail sales on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the 2017 Class A-2 Notes or the 2019 Notes on the applicable Anticipated Repayment Dates. The 2017 Class A-2 Notes and 2019 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 2017 Class A-2 Notes and 2019 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.

Table of Contents

(5) Other current liabilities

Other current liabilities consisted of the following (in thousands):



	June 29, 2019		December 29, 2018
Gift card/certificate liability	$	185,835	239,531
Accrued payroll and benefits	22,958		26,544
Accrued interest	17,688		13,274
Accrued advertising expenses	48,425		52,536
Franchisee profit-sharing liability	12,227		13,764
Other	28,200		43,704
Total other current liabilities	$	315,333	389,353

The franchisee profit-sharing liability represents amounts owed to franchisees from the net profits primarily on the sale of Dunkin’ K-Cup® pods, retail packaged coffee, and ready-to-drink bottled iced coffee in certain retail outlets.

(6) Segment information

The Company is strategically aligned into two global brands, Dunkin’ and Baskin-Robbins, which are further segregated between U.S. operations and international operations. Additionally, the Company administers and directs the development of all advertising and promotional programs in the U.S. As such, the Company has determined that it has five reportable segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. Dunkin’ U.S., Baskin-Robbins U.S., and Dunkin’ International primarily derive their revenues through royalty income and franchise fees. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement and rental income. Dunkin’ U.S. also derives revenue through rental income. Baskin-Robbins International primarily derives its revenues from sales of ice cream products, as well as royalty income, franchise fees, and license fees. U.S. Advertising Funds primarily derive revenues through continuing advertising fees from Dunkin’ and Baskin-Robbins franchisees. The operating results of each segment are regularly reviewed and evaluated separately by the Company’s senior management, which includes, but is not limited to, the chief executive officer. Senior management primarily evaluates the performance of its segments and allocates resources to them based on operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, and certain non-recurring, infrequent or unusual charges, which does not reflect the allocation of any corporate charges. This profitability measure is referred to as segment profit. When senior management reviews a balance sheet, it is at a consolidated level. The accounting policies applicable to each segment are generally consistent with those used in the consolidated financial statements.

Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenues earned through certain licensing arrangements with third parties in which our brand names are used, including the licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement and sales of Dunkin’ branded ready-to-drink bottled iced coffee and retail packaged coffee, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Revenues by segment were as follows (in thousands):



	Revenues
	Three months ended			Six months ended
	June 29, 2019		June 30, 2018	June 29, 2019	June 30, 2018
Dunkin’ U.S.	$	166,577	157,390	316,322	297,301
Dunkin’ International	7,470		5,258	14,321	10,623
Baskin-Robbins U.S.	14,288		14,099	24,565	24,612
Baskin-Robbins International	32,677		34,018	58,256	59,906
U.S. Advertising Funds	123,588		119,174	232,230	223,341
Total reportable segment revenues	344,600		329,939	645,694	615,783
Other	14,737		20,701	32,734	36,199
Total revenues	$	359,337	350,640	678,428	651,982

Table of Contents

Amounts included in “Corporate and other” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services, net of “Other” revenues reported above. Segment profit by segment was as follows (in thousands):



	Segment profit
	Three months ended					Six months ended
	June 29, 2019			June 30, 2018		June 29, 2019		June 30, 2018
Dunkin’ U.S.	$	127,099		119,562		238,133		224,625
Dunkin’ International	5,484			3,503		10,315		6,709
Baskin-Robbins U.S.	10,076			10,622		16,399		17,857
Baskin-Robbins International	12,089			11,526		19,891		18,967
U.S. Advertising Funds	—			—		—		—
Total reportable segments	154,748			145,213		284,738		268,158
Corporate and other	(27,468		)	(25,403	)	(51,130	)	(52,641	)
Interest expense, net	(29,763		)	(31,022	)	(60,061	)	(61,857	)
Amortization of other intangible assets	(4,626		)	(5,307	)	(9,259	)	(10,682	)
Long-lived asset impairment charges	(2		)	(653	)	(325	)	(1,154	)
Loss on debt extinguishment	(13,076		)	—		(13,076	)	—
Other loss, net	(46		)	(272	)	(50	)	(599	)
Income before income taxes	$	79,767		82,556		150,837		141,225

Net income of equity method investments is included in segment profit for the Dunkin’ International and Baskin-Robbins International reportable segments. Amounts reported as “Other” in the segment profit table below include the reduction in depreciation and amortization, net of tax, reported by our equity method investees as a result of previously recorded impairment charges. Net income of equity method investments by reportable segment was as follows (in thousands):



	Net income (loss) of equity method investments
	Three months ended			Six months ended
	June 29, 2019		June 30, 2018	June 29, 2019	June 30, 2018
Dunkin’ International	$	161	60	21	(384	)
Baskin-Robbins International	3,617		2,926	5,334	4,653
Total reportable segments	3,778		2,986	5,355	4,269
Other	649		859	1,302	1,609
Total net income of equity method investments	$	4,427	3,845	6,657	5,878

(7) Stockholders’ deficit

(a) Treasury stock

During the six months ended June 29, 2019, the Company repurchased a total of 134,737 shares of common stock in the open market at a weighted-average cost per share of $75.18 from existing stockholders.

The Company accounts for treasury stock under the cost method based on the cost of the shares on the dates of repurchase plus any direct costs incurred. During the six months ended June 29, 2019, the Company retired 134,737 shares of treasury stock repurchased in the open market. The repurchase and retirement of these shares of treasury stock resulted in a decrease in additional paid-in capital of $1.0 million and an increase in accumulated deficit of $9.2 million.

(b) Equity incentive plans

During the six months ended June 29, 2019, the Company granted stock options to purchase 619,306 shares of common stock and 65,092 restricted stock units (“RSUs”) to certain employees and members of our board of directors. The stock options vest in equal annual amounts over a four-year period subsequent to the grant date, and have a maximum contractual term of seven years. The stock options were granted with a weighted-average exercise price of $72.28 per share and had a weighted-average grant-date fair value of $12.54 per share. The RSUs granted to employees and members of our board of directors vest in equal

Table of Contents

annual amounts over a three-year period and a one-year period, respectively, subsequent to the grant date and had a weighted-average grant-date fair value of $70.01 per unit.

In addition, the Company granted 47,431 performance stock units (“PSUs”) to certain employees during the six months ended June 29, 2019. These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 20,681 PSUs are subject to a service condition and a market vesting condition linked to the level of total shareholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 500 Composite Index (“TSR PSUs”). The remaining 26,750 PSUs granted are subject to a service condition and a performance vesting condition based on the level of adjusted operating income growth achieved over the performance period (“AOI PSUs”). The maximum vesting percentage that could be realized for each of the TSR PSUs and the AOI PSUs is 200% based on the level of performance achieved for the respective awards. All of the PSUs are also subject to a one-year post-vesting holding period. The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total shareholder return market condition, resulting in a weighted-average grant-date fair value of $86.97 per unit. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The AOI PSUs had a weighted-average grant-date fair value of $69.19 per unit. Total compensation cost for the AOI PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome.

During the six months ended June 29, 2019, contingently issuable restricted shares granted in fiscal year 2014 realized a 52.2% vesting percentage based upon level of performance achieved against the market vesting condition, and 78,300 restricted shares vested.

Total compensation expense related to all share-based awards was $3.7 million for each of the three-month periods ended June 29, 2019 and June 30, 2018, and $7.3 million and $6.9 million for the six months ended June 29, 2019 and June 30, 2018, respectively, and was included in general and administrative expenses, net in the consolidated statements of operations.

The changes in the components of accumulated other comprehensive loss were as follows (in thousands):



	Effect of foreign currency translation			Other		Accumulated other comprehensive loss
Balance as of December 29, 2018	$	(14,307	)	(820	)	(15,127	)
Other comprehensive loss, net	(4,013		)	(131	)	(4,144	)
Balance as of June 29, 2019	$	(18,320	)	(951	)	(19,271	)

(d) Dividends

The Company paid a quarterly dividend of $0.3750 per share of common stock on March 20, 2019 and June 12, 2019, each totaling approximately $31.0 million. On August 1, 2019, the Company announced that its board of directors approved the next quarterly dividend of $0.3750 per share of common stock payable September 12, 2019 to stockholders of record as of the close of business on September 3, 2019.

(8) Earnings per share

The computation of basic and diluted earnings per share of common stock is as follows (in thousands, except for share and per share data):



	Three months ended			Six months ended
	June 29, 2019		June 30, 2018	June 29, 2019	June 30, 2018
Net income—basic and diluted	$	59,622	60,498	111,945	110,650
Weighted-average number of shares of common stock:
Common—basic	82,778,329		82,869,232	82,699,550	84,660,208
Common—diluted	83,696,721		84,113,681	83,564,388	85,995,475
Earnings per share of common stock:
Common—basic	$	0.72	0.73	1.35	1.31
Common—diluted	0.71		0.72	1.34	1.29

Table of Contents

The weighted-average number of shares of common stock in the common diluted earnings per share calculation includes the dilutive effect of 918,392 and 1,244,449 equity awards for the three months ended June 29, 2019 and June 30, 2018, respectively, and includes the dilutive effect of 864,838 and 1,335,267 equity awards for the six months ended June 29, 2019 and June 30, 2018, respectively, using the treasury stock method. The weighted-average number of shares of common stock in the common diluted earnings per share calculation for all periods excludes all contingently issuable equity awards for which the contingent vesting criteria were not yet met as of the fiscal period end. As of June 29, 2019 and June 30, 2018, there were 40,340 and 256,350 shares, respectively, related to equity awards that were contingently issuable and for which the contingent vesting criteria were not yet met as of the fiscal period end. Additionally, the weighted-average number of shares of common stock in the common diluted earnings per share calculation excludes 656,958 and 982,054 equity awards for the three months ended June 29, 2019 and June 30, 2018, respectively, and 663,951 and 1,432,676 equity awards for the six months ended June 29, 2019 and June 30, 2018, respectively, as they would be antidilutive.

(9) Commitments and contingencies

(a) Supply chain guarantees

The Company has various supply chain agreements that provide for purchase commitments, the majority of which result in the Company being contingently liable upon early termination of the agreement. As of June 29, 2019 and December 29, 2018, the Company was contingently liable under such supply chain agreements for approximately $99.0 million and $119.4 million, respectively. For certain supply chain commitments, as product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. The Company assesses the risk of performing under each of these guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and ability to extend contract terms, we accrued an inconsequential amount of reserves related to supply chain commitments as of June 29, 2019 and December 29, 2018.

(b) Letters of credit

As of June 29, 2019 and December 29, 2018, the Company had standby letters of credit outstanding for a total of $33.1 million and $32.4 million, respectively. There were no amounts drawn down on these letters of credit.

The Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. As of June 29, 2019 and December 29, 2018, an inconsequential amount was accrued related to outstanding litigation.

(10) Related-party transactions

The Company recognized revenues from its equity method investees, consisting of royalty income and sales of ice cream and other products, as follows (in thousands):



	Three months ended			Six months ended
	June 29, 2019		June 30, 2018	June 29, 2019	June 30, 2018
B-R 31 Ice Cream Company., Ltd.	$	523	626	863	971
BR-Korea Co., Ltd.	1,191		1,181	2,374	2,127
Palm Oasis Ventures Pty. Ltd.	1,078		768	1,513	1,473
	$	2,792	2,575	4,750	4,571

As of June 29, 2019 and December 29, 2018, the Company had $3.8 million and $5.5 million, respectively, of receivables from its equity method investees, which were recorded in accounts receivable, net of allowance for doubtful accounts, in the consolidated balance sheets.

The Company made net payments to its equity method investees totaling approximately $0.7 million and $0.8 million during the three months ended June 29, 2019 and June 30, 2018, respectively, and $1.8 million and $1.9 million for the six months ended June 29, 2019 and June 30, 2018, respectively, primarily for the purchase of ice cream products.

Table of Contents

(11) Advertising funds

Assets and liabilities of the advertising funds, which are restricted in their use, included in the consolidated balance sheets were as follows (in thousands):



	June 29, 2019			December 29, 2018
Accounts receivable, net	$	21,860		19,501
Notes and other receivables, net	10,295			16,050
Prepaid income taxes	74			11
Prepaid expenses and other current assets	15,730			14,978
Total current assets	47,959			50,540
Property, equipment, and software, net	15,599			15,187
Other assets	1,153			1,255
Total assets	$	64,711		66,982

Accounts payable	$	39,371		60,302
Deferred revenue—current^(a)	(743		)	(743	)
Other current liabilities	41,016			43,198
Total current liabilities	79,644			102,757
Deferred revenue—long-term^(a)	(6,403		)	(6,775	)
Other long-term liabilities	—			15
Total liabilities	$	73,241		95,997


(a)	Amounts represent franchisee incentives that have been deferred and are being recognized over the terms of the respective franchise agreements.

(12) Leases

The Company is party as a lessor and/or lessee to various leases for property, including land and buildings, as well as leases for office equipment and automobiles.

We determine if an arrangement is a lease at inception or modification of a contract, and classify each lease as either an operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. Finance and operating lease assets represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. Generally, the Company's lease contracts do not provide a readily determinable implicit rate and, therefore, the Company uses an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments. The lease asset also reflects any prepaid rent, initial direct costs incurred, and lease incentives received. The Company’s lease terms, as both lessee and lessor, include option periods to extend or terminate the lease when it is reasonably certain that those options will be exercised, which are generally through the end of the related franchise agreement term.

We record lease expense and lease income as lessee and lessor, respectively, on a straight-line basis over the lease term as noted above. In certain cases, the Company also has variable lease payments and receipts that are based on sales levels of our franchisees, in excess of stipulated amounts. The Company is generally obligated for the cost of property taxes, insurance, and maintenance relating to its leases, which are often variable lease payments. Such costs are typically charged to the sublessee based on the terms of the sublease agreements. These costs are presented on a gross basis in the consolidated statements of operations in rental income and occupancy expenses—franchised restaurants. Variable lease receipts and payments are included in rental income and rent expense as they are earned and accrued, respectively. The Company accounts for the lease components and non-lease components, primarily maintenance, as a single lease component for new and modified leases under the new lease accounting guidance. Leases with an initial expected term of 12 months or less are not recorded in the consolidated balance sheets and the related lease expense is recognized on a straight-line basis over the lease term.

Table of Contents

Included in the Company’s consolidated balance sheets were the following amounts related to operating and finance lease assets and liabilities (in thousands):



	June 29, 2019		December 29, 2018	Consolidated balance sheet classification
Assets:
Operating lease assets	$	375,165	—	Operating lease assets
Finance lease assets^(a)	4,948		5,264	Property, equipment, and software, net
Total lease assets	$	380,113	5,264
Liabilities:
Current:
Operating lease liabilities	$	33,282	—	Operating lease liabilities
Finance lease liabilities	199		476	Other current liabilities
Long-term:
Operating lease liabilities	388,081		—	Operating lease liabilities
Finance lease liabilities	6,811		6,998	Other long-term liabilities
Total lease liabilities	$	428,373	7,474


(a)	Finance lease assets were recorded net of accumulated amortization of $5.0 million as of each of June 29, 2019 and December 29, 2018.

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases as of June 29, 2019 were as follows:



	June 29, 2019
Weighted-average remaining lease term:
Operating leases	12.1
Finance leases	11.7
Weighted-average discount rate:
Operating leases	4.6	%
Finance leases	20.4	%

Lease costs and rental income for the three and six months ended June 29, 2019 were as follows (in thousands):



	Three months ended		Six months ended
	June 29, 2019		June 29, 2019
Finance lease cost:
Amortization of lease assets^(a)	$	147	297
Interest on lease liabilities^(b)	264		531
Total finance lease cost	$	411	828

Operating lease cost^(c)	$	14,199	28,353
Variable lease cost^(c)	6,235		12,329
Short-term lease cost^(c)	2,501		5,196
Rental income^(d)	31,679		60,707


(a)	Amortization of finance lease assets is included in depreciation in the consolidated statements of operations.


(b)	Interest recognized on finance lease liabilities is included in interest expense in the consolidated statements of operations.

(c)

Operating and variable lease costs associated with franchised locations are included in occupancy expenses—franchised restaurants in the consolidated statements of operations. Operating, variable, and short-term lease costs for all other leases, including corporate facilities, vehicles, and other non-franchised assets are included in general and administrative expenses, net, and advertising expenses in the consolidated statements of operations.

Table of Contents


(d)	Rental income in the consolidated statements of operations primarily consists of sublease income. Lease income relating to variable lease payments was $13.0 million and $23.3 million for the three and six months ended June 29, 2019, respectively.

Cash paid for amounts included in the measurement of lease liabilities were as follows (in thousands):



	Three months ended		Six months ended
	June 29, 2019		June 29, 2019
Operating cash flows from operating leases	$	14,050	28,190
Operating cash flows from finance leases	264		531
Financing cash flows from finance leases	167		330

Future lease commitments to be paid and received by the Company as of June 29, 2019 were as follows (in thousands):



	Payments			Receipts		Net leases
	Finance leases		Operating leases	Subleases		Net leases
Fiscal year:
2019^(a)	$	541	23,560	(31,751	)	(7,650	)
2020	1,327		55,775	(70,998	)	(13,896	)
2021	1,361		54,791	(67,614	)	(11,462	)
2022	1,398		52,079	(61,953	)	(8,476	)
2023	1,427		47,035	(53,279	)	(4,817	)
Thereafter	11,771		335,889	(315,634	)	32,026
Total lease commitments	17,825		569,129	(601,229	)	(14,275	)
Less amount representing interest	10,815		147,766
Present value of lease liabilities	$	7,010	421,363


(a)	Represents the remainder of fiscal year 2019 which excludes the six months ended June 29, 2019.

As of June 29, 2019, the Company had certain executed real estate leases that had not yet commenced of $12.6 million which are not reflected in the tables above. These leases are expected to commence between fiscal year 2019 and fiscal year 2025 with lease terms of 10 years to 20 years.

Future lease commitments to be paid and received by the Company as of December 29, 2018 were as follows (in thousands):



	Payments			Receipts		Net leases
	Finance leases		Operating leases	Subleases		Net leases
Fiscal year:
2019	$	1,535	60,166	(72,751	)	(11,050	)
2020	1,327		58,389	(69,704	)	(9,988	)
2021	1,361		56,107	(66,154	)	(8,686	)
2022	1,398		51,968	(60,282	)	(6,916	)
2023	1,427		46,340	(51,532	)	(3,765	)
Thereafter	11,770		329,641	(304,954	)	36,457
Total lease commitments	18,818		602,611	(625,377	)	(3,948	)
Less amount representing interest	11,344
Present value of lease liabilities	$	7,474

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,” or “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These risks and uncertainties include, but are not limited to: the ongoing level of profitability of franchisees and licensees; our franchisees’ and licensees’ ability to sustain same store sales growth; successful westward expansion; changes in working relationships with our franchisees and licensees and the actions of our franchisees and licensees; our master franchisees’ relationships with sub-franchisees; the success of our investments in the Dunkin' U.S. Blueprint for Growth; the strength of our brand in the markets in which we compete; changes in competition within the quick service restaurant segment of the food industry; changes in consumer behavior resulting from changes in technologies or alternative methods of delivery; economic and political conditions in the countries where we operate; our substantial indebtedness; our ability to protect our intellectual property rights; consumer preferences, spending patterns and demographic trends; the impact of seasonal changes, including weather effects, on our business; the success of our growth strategy and international development; changes in commodity and food prices, particularly coffee, dairy products and sugar, and other operating costs; shortages of coffee; failure of our network and information technology systems; interruptions or shortages in the supply of products to our franchisees and licensees; the impact of food borne-illness or food safety issues or adverse public or media opinions regarding the health effects of consuming our products; our ability to collect royalty payments from our franchisees and licensees; uncertainties relating to litigation; the ability of our franchisees and licensees to open new restaurants and keep existing restaurants in operation; our ability to retain key personnel; any inability to protect consumer credit card data and catastrophic events.

Forward-looking statements reflect management’s analysis as of the date of this quarterly report. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our most recent annual report on Form 10-K. Except as required by applicable law, we do not undertake to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

Introduction and overview

We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin’ and Baskin-Robbins brands. With more than 21,000 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 June 29, 2019, Dunkin’ had 12,957 global points of distribution with restaurants in 43 U.S. states, the District of Columbia, and 41 foreign countries. Baskin-Robbins had 8,072 global points of distribution as of the same date, with restaurants in 44 U.S. states, the District of Columbia, Puerto Rico, and 52 foreign countries.

We are organized into five reporting segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. We generate revenue from five primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) continuing advertising fees from Dunkin’ and Baskin-Robbins franchisees and breakage and other revenue related to the gift card program, (iii) rental income from restaurant properties that we lease or sublease to franchisees, (iv) sales of ice cream and other products to franchisees in certain international markets, and (v) other income including fees for the licensing of our brands for products sold in certain retail outlets, the licensing of the rights to manufacture Baskin-Robbins ice cream products sold to U.S. franchisees, refranchising gains, and online training fees.

Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With no company-operated points of distribution as of June 29, 2019, we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators.

We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and six-month periods ended June 29, 2019 and June 30, 2018 reflect the results of operations for the 13-week and 26-week periods ended on those dates.

Table of Contents

Operating results for the three- and six-month periods ended June 29, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2019.

The Company adopted new lease guidance in the first quarter of fiscal year 2019 using the modified retrospective transition method, and elected the option to not restate comparative periods in the year of adoption, including amounts as of December 29, 2018 and for the three and six months ended June 30, 2018 included herein. See note 2(f) to the unaudited consolidated financial statements included in Item 1 of Part I of this Form 10-Q.

Selected operating and financial highlights



Amounts and percentages may not recalculate due to rounding	Three months ended					Six months ended
	June 29, 2019			June 30, 2018		June 29, 2019		June 30, 2018
Financial data (in thousands):
Total revenues	$	359,337		350,640		678,428		651,982
Operating income	122,652			113,850		224,024		203,681
Adjusted operating income	127,280			119,810		233,608		215,517
Net income	59,622			60,498		111,945		110,650
Adjusted net income	72,369			64,789		128,260		119,172
Systemwide sales (in millions):
Dunkin’ U.S.	$	2,382.6		2,275.6		4,508.9		4,291.5
Dunkin’ International	199.5			183.5		398.4		373.7
Baskin-Robbins U.S.	184.8			187.7		313.3		320.4
Baskin-Robbins International	377.7			383.3		692.2		704.4
Total systemwide sales	$	3,144.6		3,030.0		5,912.8		5,690.0
Systemwide sales growth	3.8		%	4.4	%	3.9	%	4.7	%
Comparable store sales growth (decline):
Dunkin’ U.S.	1.7		%	1.4	%	2.0	%	0.5	%
Dunkin’ International	5.6		%	4.0	%	4.3	%	2.8	%
Baskin-Robbins U.S.	(1.4		)%	(0.4	)%	(1.9	)%	(0.8	)%
Baskin-Robbins International	3.2		%	(2.5	)%	0.7	%	3.0	%

Our financial results are largely driven by changes in systemwide sales, which include sales by all points of distribution, whether owned by our franchisees or joint ventures. While we do not record sales by franchisees or joint ventures as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue and in evaluating our performance relative to competitors.

Comparable store sales growth (decline) for Dunkin’ U.S. and Baskin-Robbins U.S. is calculated by including only sales from franchisee-operated restaurants that have been open at least 78 weeks and that have reported sales in the current and comparable prior year week. Comparable store sales growth (decline) for Dunkin’ International and Baskin-Robbins International generally represents the growth (decline) in local currency average monthly sales for franchisee-operated restaurants, including joint ventures, that have been open at least 13 months and that have reported sales in the current and comparable prior year month.

Overall growth in systemwide sales of 3.8% and 3.9% for the three- and six-month periods ended June 29, 2019 over the same periods in the prior fiscal year resulted from the following:

•

Dunkin’ U.S. systemwide sales growth of 4.7% and 5.1% for the three and six months ended June 29, 2019, respectively, was primarily a result of 238 net new restaurants opened since June 30, 2018 and comparable store sales growth of 1.7% and 2.0%, respectively. The comparable store sales growth for the three and six months ended June 29, 2019 was driven by increased average ticket, offset by a decline in traffic. The increase in average ticket was driven primarily by strategic pricing increases and favorable mix shift to premium priced espresso, as well as our value breakfast sandwich platform.

•

Dunkin’ International systemwide sales growth of 8.7% and 6.6% for the three and six months ended June 29, 2019, respectively, was driven by sales growth in the Middle East, Asia, Europe, and South Korea. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 14% and 11% for the three and six months ended June 29, 2019, respectively. Dunkin’

Table of Contents

International comparable store sales growth of 5.6% and 4.3% for the three and six months ended June 29, 2019, respectively, was due primarily to growth in the Middle East, South Korea, Europe, and Latin America, offset by a decline in Asia.

•

Baskin-Robbins U.S. systemwide sales declines of 1.6% and 2.2% for the three and six months ended June 29, 2019, respectively, were primarily a result of comparable store sales declines of 1.4% and 1.9%, respectively. The comparable store sales decline was driven by a decrease in traffic, offset by an increase in average ticket. The increase in average ticket was driven primarily by strategic pricing increases.

•

Baskin-Robbins International systemwide sales declines of 1.5% and 1.7% for the three and six months ended June 29, 2019, respectively, were driven by sales declines in Japan, the Middle East, and Asia, offset by sales growth in South Korea. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 2% for each of the the three- and six-month periods ended June 29, 2019. Baskin-Robbins International comparable store sales growth of 3.2% and 0.7% for the three and six months ended June 29, 2019, respectively, was driven primarily by growth in South Korea, offset by a decline in Japan. Also contributing to the comparable store sales growth for the three-month period was comparable store sales growth in the Middle East.

Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the three and six months ended June 29, 2019 and June 30, 2018 were as follows:



	June 29, 2019	June 30, 2018
Points of distribution, at period end:
Dunkin’ U.S.	9,499	9,261
Dunkin’ International	3,458	3,415
Baskin-Robbins U.S.	2,556	2,561
Baskin-Robbins International	5,516	5,450
Consolidated global points of distribution	21,029	20,687



	Three months ended			Six months ended
	June 29, 2019	June 30, 2018		June 29, 2019	June 30, 2018
Net openings (closings) during the period:
Dunkin’ U.S.	46	64		80	120
Dunkin’ International	11	14		6	18
Baskin-Robbins U.S.	9	(5	)	6	1
Baskin-Robbins International	43	23		25	28
Consolidated global net openings	109	96		117	167

Total revenues for the three months ended June 29, 2019 increased $8.7 million, or 2.5%, due primarily to an increase in franchise fees and royalty income as a result of Dunkin' U.S. systemwide sales growth, as well as an increase in rental income, offset by a decrease in advertising fees and related income. The decrease in advertising fees and related income was due primarily to a decrease in gift card program service fees as a result of additional fees in the prior year period to cover certain gift card program costs, offset by an increase in advertising fees as a result of systemwide sales growth.

Total revenues for the six months ended June 29, 2019 increased $26.4 million, or 4.1%, due primarily to increases in franchise fees and royalty income as a result of systemwide sales growth, rental income, and advertising fees and related income. The increase in advertising fees and related income was due primarily to an increase in advertising fees as a result of systemwide sales growth, offset by a decrease in gift card program service fees.

The increases in rental income for three and six months ended June 29, 2019 were due primarily to the adoption of a new lease accounting standard in the first quarter of fiscal year 2019, which requires gross presentation of certain lease costs that the Company passes through to franchisees. See note 2(f) to the unaudited consolidated financial statements included herein for further disclosure of the impact of the new guidance.

Operating income and adjusted operating income for the three months ended June 29, 2019 increased $8.8 million, or 7.7%, and $7.5 million, or 6.2%, respectively, from the prior year period primarily as a result of the increases in royalty income.

Table of Contents

Operating income and adjusted operating income for the six months ended June 29, 2019 increased $20.3 million, or 10.0%, and $18.1 million, or 8.4%, respectively, from the prior year period primarily a result of the increases in royalty income, as well as decreases in general and administrative expenses, offset by decreases in rental margin. The decreases in rental margin were due primarily to amortization of certain lease intangible assets, previously recorded within amortization, now included within occupancy expenses—franchised restaurants in conjunction with the adoption of the new lease accounting standard in the first quarter of fiscal year 2019.

Net income decreased $0.9 million, or 1.4%, for the three months ended June 29, 2019 compared to the prior year period primarily as a result of a $13.1 million loss on debt extinguishment recorded in the current period, offset by the increase in operating income, an increase in interest income earned on our cash balances, and a decrease in income tax expense as a result of the decrease in income in the current period. The loss on debt extinguishment was due to the write-off of debt issuance costs in conjunction with a refinancing transaction completed during the second quarter.

Net income increased $1.3 million, or 1.2%, for the six months ended June 29, 2019 compared to the prior year period primarily as a result of the increase in operating income and an increase in interest income earned on our cash balances, offset by the $13.1 million loss on debt extinguishment recorded in the current period and an increase in income tax expense. The increase in income tax expense is driven primarily by excess tax benefits from share-based compensation of $2.6 million for the six months ended June 29, 2019 compared to $9.0 million in the prior year period.

Adjusted net income increased $7.6 million, or 11.7%, and $9.1 million, or 7.6%, for the three and six months ended June 29, 2019, respectively, compared to the prior year period primarily as a result of the increases in adjusted operating income and the increases in interest income, offset by increases in 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 impairment charges, and certain non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. We use adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies.

Adjusted operating income and adjusted net income are reconciled from operating income and net income, respectively, determined under GAAP as follows:



	Three months ended					Six months ended
	June 29, 2019			June 30, 2018		June 29, 2019		June 30, 2018
	(In thousands)
Operating income	$	122,652		113,850		224,024		203,681
Adjustments:
Amortization of other intangible assets	4,626			5,307		9,259		10,682
Long-lived asset impairment charges	2			653		325		1,154
Adjusted operating income	$	127,280		119,810		233,608		215,517

Net income	$	59,622		60,498		111,945		110,650
Adjustments:
Amortization of other intangible assets	4,626			5,307		9,259		10,682
Long-lived asset impairment charges	2			653		325		1,154
Loss on debt extinguishment	13,076			—		13,076		—
Tax impact of adjustments^(a)	(4,957		)	(1,669	)	(6,345	)	(3,314	)
Adjusted net income	$	72,369		64,789		128,260		119,172


(a)	Tax impact of adjustments calculated at effective tax rate of 28%.

Earnings per share

Earnings per share and diluted adjusted earnings per share were as follows:

Table of Contents



	Three months ended			Six months ended
	June 29, 2019		June 30, 2018	June 29, 2019	June 30, 2018
Earnings per share:
Common—basic	$	0.72	0.73	1.35	1.31
Common—diluted	0.71		0.72	1.34	1.29
Diluted adjusted earnings per share	0.86		0.77	1.53	1.39

Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted-average shares outstanding. Diluted adjusted earnings per share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per share should not be considered as an alternative to earnings per share derived in accordance with GAAP. Diluted adjusted earnings per share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.

The following table sets forth the computation of diluted adjusted earnings per share:



	Three months ended			Six months ended
	June 29, 2019		June 30, 2018	June 29, 2019	June 30, 2018
	(In thousands, except share and per share data)
Adjusted net income	$	72,369	64,789	128,260	119,172
Weighted-average number of common shares—diluted	83,696,721		84,113,681	83,564,388	85,995,475
Diluted adjusted earnings per share	$	0.86	0.77	1.53	1.39

Table of Contents

Results of operations

Consolidated results of operations



	Three months ended							Six months ended
	June 29, 2019		June 30, 2018	Increase (Decrease)				June 29, 2019		June 30, 2018	Increase (Decrease)
	June 29, 2019		June 30, 2018	$		%		June 29, 2019		June 30, 2018	$		%
	(In thousands, except percentages)
Franchise fees and royalty income	$	158,258	151,242	7,016		4.6	%	$	297,586	283,749	13,837		4.9	%
Advertising fees and related income	129,259		131,539	(2,280	)	(1.7	)%	246,457		242,546	3,911		1.6	%
Rental income	31,679		27,400	4,279		15.6	%	60,707		51,878	8,829		17.0	%
Sales of ice cream and other products	27,258		28,140	(882	)	(3.1	)%	47,991		49,917	(1,926	)	(3.9	)%
Other revenues	12,883		12,319	564		4.6	%	25,687		23,892	1,795		7.5	%
Total revenues	$	359,337	350,640	8,697		2.5	%	$	678,428	651,982	26,446		4.1	%

Total revenues for the six months ended June 29, 2019 increased $26.4 million, or 4.1%, due primarily to increases in franchise fees and royalty income as a result of systemwide sales growth, rental income, and advertising and related income. The increase in advertising fees and related income was due primarily to an increase in advertising fees as a result of systemwide sales growth, offset by a decrease in gift card program service fees.

The increases in rental income for the three and six months ended June 29, 2019 were due primarily to the adoption of the new lease accounting standard in the first quarter of fiscal year 2019. See note 2(f) of the unaudited consolidated financial statements included herein for further disclosure of the impact of the new guidance.



	Three months ended								Six months ended
	June 29, 2019		June 30, 2018		Increase (Decrease)				June 29, 2019		June 30, 2018		Increase (Decrease)
	June 29, 2019		June 30, 2018		$		%		June 29, 2019		June 30, 2018		$		%
	(In thousands, except percentages)
Occupancy expenses—franchised restaurants	$	19,697	14,314		5,383		37.6	%	$	39,172	28,294		10,878		38.4	%
Cost of ice cream and other products	22,018		22,781		(763	)	(3.3	)%	38,658		39,645		(987	)	(2.5	)%
Advertising expenses	130,961		132,579		(1,618	)	(1.2	)%	249,052		244,551		4,501		1.8	%
General and administrative expenses, net	59,922		59,301		621		1.0	%	116,125		119,125		(3,000	)	(2.5	)%
Depreciation and amortization	9,337		10,432		(1,095	)	(10.5	)%	18,591		20,840		(2,249	)	(10.8	)%
Long-lived asset impairment charges	2		653		(651	)	(99.7	)%	325		1,154		(829	)	(71.8	)%
Total operating costs and expenses	$	241,937	240,060		1,877		0.8	%	$	461,923	453,609		8,314		1.8	%
Net income of equity method investments	4,427		3,845		582		15.1	%	6,657		5,878		779		13.3	%
Other operating income (loss), net	825		(575	)	1,400		n/m		862		(570	)	1,432		n/m
Operating income	$	122,652	113,850		8,802		7.7	%	$	224,024	203,681		20,343		10.0	%

Occupancy expenses for franchised restaurants for the three and six months ended June 29, 2019 increased $5.4 million and $10.9 million, respectively, resulting primarily from the adoption of the new lease accounting standard in the first quarter of

Table of Contents

fiscal year 2019. The new standard requires gross presentation of certain lease costs that the Company passes through to franchisees and also resulted in amortization of certain lease intangible assets, which was previously recorded within amortization of other intangible assets in the consolidated statements of operations, and is now being recorded within occupancy expenses—franchised restaurants in the consolidated statements of operations.

Net margin on ice cream and other products for the three and six months ended June 29, 2019 decreased $0.1 million, or 2.2%, and $0.9 million, or 9.1%, respectively, due primarily to decreases in sales volume and increases in commodity costs.

Advertising expenses for the three months ended June 29, 2019 decreased $1.6 million while advertising expenses for the six months ended June 29, 2019 increased $4.5 million. The fluctuations in advertising expenses were driven primarily by fluctuations in advertising fees and related income.

General and administrative expenses for the three months ended June 29, 2019 increased $0.6 million due primarily to increases in professional fees and personnel costs, offset by expenses incurred in the second quarter of fiscal year 2018 to support the Dunkin' U.S. Blueprint for Growth investments, as well as a decrease in other general expenses.

General and administrative expenses for the six months ended June 29, 2019 decreased $3.0 million due primarily to decreases in personnel costs and other general expenses, as well as expenses incurred in the second quarter of fiscal year 2018 to support the Dunkin' U.S. Blueprint for Growth investments, offset by an increase in professional fees.

Depreciation and amortization for the three and six months ended June 29, 2019 decreased $1.1 million and $2.2 million, respectively, resulting primarily from the adoption of the new lease accounting standard in the first quarter of fiscal year 2019, which resulted in amortization of certain lease intangible assets, which was previously recorded within amortization of other intangible assets in the consolidated statements of operations, and is now being recorded within occupancy expenses—franchised restaurants in the consolidated statements of operations. Also contributing to the decreases in depreciation and amortization were decreases in depreciation as assets become fully depreciated.

Long-lived asset impairment charges for the three and six months ended June 29, 2019 decreased $0.7 million and $0.8 million, respectively. Long-lived asset impairment charges generally fluctuate based on the timing of lease terminations and the related write-off of favorable lease intangible assets and leasehold improvements.

Net income of equity method investments for the three and six months ended June 29, 2019 increased $0.6 million and $0.8 million, respectively, primarily as a result of an increase in net income from our South Korea joint venture. Offsetting this increase in net income of equity method investments for the six-month period was a decrease in net income from our Japan joint venture compared to the prior year period.

Other operating income (loss), net, which includes net gains and losses recognized in connection with the sale or disposal of property, equipment, and software, fluctuates based on the timing of such transactions.



	Three months ended							Six months ended
	June 29, 2019		June 30, 2018	Increase (Decrease)				June 29, 2019		June 30, 2018	Increase (Decrease)
	June 29, 2019		June 30, 2018	$		%		June 29, 2019		June 30, 2018	$		%
	(In thousands, except percentages)
Interest expense, net	$	29,763	31,022	(1,259	)	(4.1	)%	$	60,061	61,857	(1,796	)	(2.9	)%
Loss on debt extinguishment	13,076		—	13,076		n/m		13,076		—	13,076		n/m
Other loss, net	46		272	(226	)	(83.1	)%	50		599	(549	)	(91.7	)%
Total other expense, net	$	42,885	31,294	11,591		37.0	%	$	73,187	62,456	10,731		17.2	%

Net interest expense for the three and six months ended June 29, 2019 decreased $1.3 million and $1.8 million, respectively, driven primarily by increases in interest income earned on our cash balances, offset by the impact of a securitization refinancing transaction completed during the second quarter of fiscal year 2019, resulting in increased interest expense due to an increase in the weighted-average interest rate.

The loss on debt extinguishment of $13.1 million for each of the three- and six-month periods ended June 29, 2019 was due to to the write-off of debt issuance costs in conjunction with the securitization refinancing transaction completed during the second quarter of fiscal year 2019.

The fluctuation in other loss, net, for the three and six months ended June 29, 2019 resulted primarily from net foreign exchange gains and losses driven primarily by fluctuations in the U.S. dollar against foreign currencies.

Table of Contents



	Three months ended					Six months ended
	June 29, 2019			June 30, 2018		June 29, 2019		June 30, 2018
	(In thousands, except percentages)
Income before income taxes	$	79,767		82,556		150,837		141,225
Provision for income taxes	20,145			22,058		38,892		30,575
Effective tax rate	25.3		%	26.7	%	25.8	%	21.6	%

The decrease in the effective tax rate for the three months ended June 29, 2019 was driven primarily by fluctuations in the mix of income between domestic and foreign jurisdictions.

The increase in the effective tax rate for the six months ended June 29, 2019 was driven primarily by excess tax benefits from share-based compensation of $2.6 million for the six months ended June 29, 2019 compared to $9.0 million in the prior year period.

Operating segments

We operate five reportable operating segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. We evaluate the performance of our segments and allocate resources to them based on operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, and certain non-recurring, infrequent or unusual charges, which does not reflect the allocation of any corporate charges. This profitability measure is referred to as segment profit. Segment profit for the Dunkin’ International and Baskin-Robbins International segments includes net income of equity method investments, except for other-than-temporary impairment charges and the related reduction in depreciation, net of tax, on the underlying long-lived assets.

For reconciliations to total revenues and income before income taxes, see note 6 to the unaudited consolidated financial statements included herein. Revenues for all segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues not included in segment revenues include revenue earned through certain licensing arrangements with third parties in which our brand names are used, revenue generated from online training programs for franchisees, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Additionally, allocation of the consideration from sales of ice cream and other products to royalty income as consideration for the use of the franchise license is not reflected within segment revenues, but has no impact to total revenues for any segment.

Dunkin’ U.S.



	Three months ended							Six months ended
	June 29, 2019		June 30, 2018	Increase (Decrease)				June 29, 2019		June 30, 2018	Increase (Decrease)
	June 29, 2019		June 30, 2018	$		%		June 29, 2019		June 30, 2018	$		%
	(In thousands, except percentages)
Royalty income	$	131,682	125,221	6,461		5.2	%	$	248,779	236,054	12,725		5.4	%
Franchise fees	3,418		4,765	(1,347	)	(28.3	)%	7,044		9,472	(2,428	)	(25.6	)%
Rental income	30,491		26,506	3,985		15.0	%	58,339		50,097	8,242		16.5	%
Other revenues	986		898	88		9.8	%	2,160		1,678	482		28.7	%
Total revenues	$	166,577	157,390	9,187		5.8	%	$	316,322	297,301	19,021		6.4	%
Segment profit	$	127,099	119,562	7,537		6.3	%	$	238,133	224,625	13,508		6.0	%

Dunkin’ U.S. revenues for the three and six months ended June 29, 2019 increased $9.2 million and $19.0 million, respectively, due primarily to increases in royalty income driven by systemwide sales growth, as well as increases in rental income. These increases in revenues were offset by decreases in franchise fees due primarily to franchisee incentives provided as part of the investments to support the Dunkin' U.S. Blueprint for Growth that are being recognized over the remaining term of each respective franchise agreement. The increases in rental income primarily resulted from the adoption of the new lease accounting standard in the first quarter of fiscal year 2019. See note 2(f) to the unaudited consolidated financial statements included herein for further disclosure of the impact of the new guidance.

Dunkin’ U.S. segment profit for the three and six months ended June 29, 2019 increased $7.5 million and $13.5 million, respectively, driven primarily by the increases in royalty income and decreases in general and administrative expenses due primarily to expenses incurred in the second quarter of fiscal year 2018 to support the Dunkin' U.S. Blueprint for Growth

Table of Contents

investments, offset by the decreases in franchise fees and decreases in rental margin. Also contributing to the decrease in general and administrative expenses for the six-month period was a decrease in personnel costs. The decreases in rental margin were due primarily to amortization of certain lease intangible assets, previously recorded within amortization, now included within occupancy expenses—franchised restaurants in conjunction with the adoption of the new lease accounting standard in the first quarter of fiscal year 2019.

Dunkin’ International



	Three months ended							Six months ended
	June 29, 2019		June 30, 2018		Increase (Decrease)			June 29, 2019		June 30, 2018		Increase (Decrease)
	June 29, 2019		June 30, 2018		$	%		June 29, 2019		June 30, 2018		$	%
	(In thousands, except percentages)
Royalty income	$	5,396	4,732		664	14.0	%	$	11,309	9,670		1,639	16.9	%
Franchise fees	2,030		535		1,495	279.4	%	2,895		983		1,912	194.5	%
Other revenues	44		(9	)	53	n/m		117		(30	)	147	n/m
Total revenues	$	7,470	5,258		2,212	42.1	%	$	14,321	10,623		3,698	34.8	%
Segment profit	$	5,484	3,503		1,981	56.6	%	$	10,315	6,709		3,606	53.7	%

Dunkin’ International revenues for the three and six months ended June 29, 2019 increased $2.2 million and $3.7 million, respectively, primarily as a result of increases in franchise fees due primarily to additional deferred revenue recognized in the current period upon closure of certain international markets, as well as increases in royalty income driven primarily by systemwide sales growth. Also contributing to the increase in royalty income for the six-month period was a recovery of prior period royalties.

Segment profit for Dunkin’ International for the three and six months ended June 29, 2019 increased $2.0 million and $3.6 million, respectively, primarily as a result of the increases in revenues, offset by an increase in general and administrative expenses. Also contributing to the increase in segment profit for the six-month period was favorable results from our South Korea joint venture compared to the prior year period.

Baskin-Robbins U.S.



	Three months ended							Six months ended
	June 29, 2019		June 30, 2018	Increase (Decrease)				June 29, 2019		June 30, 2018	Increase (Decrease)
	June 29, 2019		June 30, 2018	$		%		June 29, 2019		June 30, 2018	$		%
	(In thousands, except percentages)
Royalty income	$	8,828	9,005	(177	)	(2.0	)%	$	14,931	15,414	(483	)	(3.1	)%
Franchise fees	344		303	41		13.5	%	656		592	64		10.8	%
Rental income	973		763	210		27.5	%	1,933		1,530	403		26.3	%
Sales of ice cream and other products	1,080		842	238		28.3	%	1,751		1,520	231		15.2	%
Other revenues	3,063		3,186	(123	)	(3.9	)%	5,294		5,556	(262	)	(4.7	)%
Total revenues	$	14,288	14,099	189		1.3	%	$	24,565	24,612	(47	)	(0.2	)%
Segment profit	$	10,076	10,622	(546	)	(5.1	)%	$	16,399	17,857	(1,458	)	(8.2	)%

Baskin-Robbins U.S. revenues for the three months ended June 29, 2019 increased $0.2 million due primarily to increases in sales of ice cream and other products and rental income, offset by a decrease in royalty income driven by a systemwide sales decline, as well as a decrease in other revenues.

Baskin-Robbins U.S. revenues for the six months ended June 29, 2019 decreased slightly due primarily to a decrease in royalty income driven by a systemwide sales decline, as well as a decrease in other revenues, offset by increases in rental income and sales of ice cream.

The increases in rental income for the three and six months ended June 29, 2019 resulted primarily from the adoption of the new lease accounting standard in the first quarter of fiscal year 2019. See note 2(f) to the unaudited consolidated financial statements included herein for further disclosure of the impact of the new guidance.

Table of Contents

Baskin-Robbins U.S. segment profit for the three and six months ended June 29, 2019 decreased $0.5 million and $1.5 million, respectively, primarily as a result of the decreases in royalty income and other revenues, as well as increases in general and administrative expenses.

Baskin-Robbins International



	Three months ended								Six months ended
	June 29, 2019			June 30, 2018	Increase (Decrease)				June 29, 2019		June 30, 2018	Increase (Decrease)
	June 29, 2019			June 30, 2018	$		%		June 29, 2019		June 30, 2018	$		%
	(In thousands, except percentages)
Royalty income	$	1,953		2,154	(201	)	(9.3	)%	$	3,858	3,697	161		4.4	%
Franchise fees	520			251	269		107.2	%	878		457	421		92.1	%
Rental income	215			131	84		64.1	%	435		251	184		73.3	%
Sales of ice cream and other products	29,997			31,409	(1,412	)	(4.5	)%	53,072		55,381	(2,309	)	(4.2	)%
Other revenues	(8		)	73	(81	)	(111.0	)%	13		120	(107	)	(89.2	)%
Total revenues	$	32,677		34,018	(1,341	)	(3.9	)%	$	58,256	59,906	(1,650	)	(2.8	)%
Segment profit	$	12,089		11,526	563		4.9	%	$	19,891	18,967	924		4.9	%

Baskin-Robbins International revenues for the three and six months ended June 29, 2019 decreased $1.3 million and $1.7 million, respectively, due primarily to decreases in sales of ice cream and other products, offset by increases in franchise fees. Also contributing to the decrease in revenue for the three-month period was a decrease in royalty income. The increases in franchise fees were due primarily to additional deferred revenue recognized in the current period upon closure of certain international markets.

Baskin-Robbins International segment profit for the three months ended June 29, 2019 increased $0.6 million primarily as a result of increases in net income from our South Korea and Japan joint ventures, as well as the increase in franchise fees, offset by the decrease in royalty income.

Baskin-Robbins International segment profit for the six months ended June 29, 2019 increased $0.9 million primarily as a result of an increase in net income from our South Korea joint venture and an increase in franchise fees.

U.S. Advertising Funds



	Three months ended						Six months ended
	June 29, 2019		June 30, 2018	Increase (Decrease)			June 29, 2019		June 30, 2018	Increase (Decrease)
	June 29, 2019		June 30, 2018	$	%		June 29, 2019		June 30, 2018	$	%
	(In thousands, except percentages)
Advertising fees and related income	$	123,588	119,174	4,414	3.7	%	$	232,230	223,341	8,889	4.0	%
Total revenues	$	123,588	119,174	4,414	3.7	%	$	232,230	223,341	8,889	4.0	%
Segment profit	$	—	—	—	—	%	$	—	—	—	—	%

U.S. Advertising Funds revenues for the three and six months ended June 29, 2019 increased $4.4 million, or 3.7%, and $8.9 million, or 4.0%, respectively, compared to the prior year periods driven primarily by Dunkin' U.S. systemwide sales growth. Expenses for the U.S. Advertising Funds were equivalent to revenues in each period, resulting in no segment profit.

Liquidity and capital resources

As of June 29, 2019, we held $474.3 million of cash and cash equivalents and $88.6 million of short-term restricted cash that was restricted under our securitized financing facility. Included in cash and cash equivalents is $157.1 million of cash held for advertising funds and reserved for gift card/certificate programs. In addition, as of June 29, 2019, we had a borrowing capacity of $116.9 million under our $150.0 million 2019 Variable Funding Notes (as defined below).

Operating, investing, and financing cash flows

Net cash provided by operating activities was $53.1 million for the six months ended June 29, 2019, as compared to $67.7 million in the prior year period. The $14.7 million decrease in operating cash inflows was driven primarily by various changes

Table of Contents

in working capital, offset by an increase in pre-tax net income related to operating activities, excluding non-cash items, as well as decreases in cash paid for interest on our long-term debt and incentive compensation payments.

Net cash used in investing activities was $17.8 million for the six months ended June 29, 2019, as compared to $32.9 million in the prior year period. The $15.1 million decrease in investing cash outflows was driven primarily by a decrease in capital expenditures of $13.9 million, due primarily to higher investments in technology infrastructure to support the Dunkin' U.S. Blueprint for Growth in the prior year period.

Net cash used in financing activities was $69.2 million for the six months ended June 29, 2019, as compared to $694.0 million in the prior year period. The $624.8 million decrease in financing cash outflows was driven primarily by incremental cash used in the prior year period for repurchases of common stock of $640.2 million, as well as the favorable impact of debt-related activities of $6.4 million compared to the prior year period. Offsetting these decreases in financing cash outflows was incremental cash generated from the exercise of stock options in the prior year period of $13.7 million, as well as increases in quarterly dividends of $4.5 million and cash used to settle tax withholding obligations upon vesting of certain equity awards of $3.5 million. The favorable impact of debt-related activities was driven by proceeds from the issuance of long-term debt, net of debt repayment and payment of debt issuance and other debt-related costs.

Adjusted operating and investing cash flow

Net cash flows from operating and investing activities for the six months ended June 29, 2019 and June 30, 2018 included net cash outflows of $50.2 million and $37.3 million, respectively, in cash held for advertising funds and reserved for gift card/certificate programs. Excluding cash held for advertising funds and reserved for gift card/certificate programs, we generated $85.4 million and $72.2 million of adjusted operating and investing cash flow during the six months ended June 29, 2019 and June 30, 2018, respectively. The increase in adjusted operating and investing cash flow was driven primarily by the decrease in capital expenditures, an increase in pre-tax net income related to operating activities, excluding non-cash items, and the decreases in cash paid for interest on our long-term debt and incentive compensation payments, offset by other changes in working capital.

Adjusted operating and investing cash flow is a non-GAAP measure reflecting net cash provided by operating and investing activities, excluding the cash flows related to advertising funds and gift card/certificate programs. We use adjusted operating and investing cash flow as a key liquidity measure for the purpose of evaluating our ability to generate cash. We also believe adjusted operating and investing cash flow provides our investors with useful information regarding our historical cash flow results. This non-GAAP measurement is not intended to replace the presentation of our financial results in accordance with GAAP, and adjusted operating and investing cash flow does not represent residual cash flows available for discretionary expenditures. Use of the term adjusted operating and investing cash flow may differ from similar measures reported by other companies.

Adjusted operating and investing cash flow is reconciled from net cash provided by operating activities determined under GAAP as follows (in thousands):



	Six months ended
	June 29, 2019			June 30, 2018
Net cash provided by operating activities	$	53,077		67,739
Plus: Decrease in cash held for advertising funds and gift card/certificate programs	50,168			37,324
Plus: Net cash used in investing activities	(17,832		)	(32,902	)
Adjusted operating and investing cash flow	$	85,413		72,161

Borrowing capacity

As of June 29, 2019, our securitized financing facility included original borrowings of approximately $1.40 billion, $1.70 billion, and $150.0 million related to the 2017 Class A-2 Notes (as defined below), 2019 Class A-2 Notes (as defined below), and the 2019 Variable Funding Notes (as defined below), respectively. As of June 29, 2019, there was approximately $3.08 billion of total principal outstanding on the 2017 Class A-2 Notes and 2019 Class A-2 Notes, while there was $116.9 million in available commitments under the Series 2017-1 Variable Funding Senior Secured Notes, Class A-1 (the “2017 Variable Funding Notes”) as $33.1 million of letters of credit were outstanding.

In April 2019, DB Master Finance LLC (the "Master Issuer"), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of Dunkin’ Brands Group, Inc., issued Series 2019-1 3.787% Fixed Rate Senior Secured Notes, Class A-2-I (the “2019 Class A-2-I Notes”) with an initial principal amount of $600.0 million, Series 2019-1 4.021% Fixed Rate Senior Secured Notes, Class A-2-II (the “2019 Class A-2-II Notes”) with an initial principal amount of $400.0 million, and Series 2019-1

Table of Contents

4.352% Fixed Rate Senior Secured Notes, Class A-2-III (the “2019 Class A-2-III Notes”, and together with the 2019 Class A-2-I Notes and 2019 Class A-2-II Notes, the “2019 Class A-2 Notes”) with an initial principal amount of $700.0 million. In addition, the Master Issuer issued Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019 Variable Funding Notes” and, together with the 2019 Class A-2 Notes, the “2019 Notes”), which allow for the issuance of up to $150.0 million of 2019 Variable Funding Notes and certain other credit instruments, including letters of credit.

The proceeds received from the issuance of the 2019 Notes were used to repay the remaining $1.68 billion outstanding on the Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Class A-2-II Notes”), and to pay related transaction fees and expenses. In connection with the issuance of the 2019 Variable Funding Notes, the Master Issuer terminated the commitments with respect to its existing Series 2017-1 Variable Funding Senior Secured Notes, Class A-1 (the “2017 Variable Funding Notes”).

The 2017 Class A-2 Notes and 2019 Notes were issued pursuant to a base indenture and related supplemental indentures (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. The legal final maturity date of the 2017 Class A-2 Notes and 2019 Class A-2 Notes is in November 2047 and May 2049, respectively, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Series 2017-1 3.629% Fixed Rate Senior Secured Notes, Class A-2-I (the “2017 Class A-2-I Notes”) will be repaid by November 2024, the Series 2017-1 4.030% Fixed Rate Senior Secured Notes, Class A-2-II (the “2017 Class A-2-II Notes” and, together with the 2017 Class A-2-I Notes, the “2017 Class A-2 Notes”) will be repaid by November 2027, the 2019 Class A-2-I Notes will be repaid by February 2024, the 2019 Class A-2-II Notes will be repaid by May 2026, and the 2019 Class A-2-III Notes will be repaid by May 2029 (the “Anticipated Repayment Dates”). Principal amortization payments equal to $31 million per calendar year, payable quarterly, are collectively required to be made on the 2017 Class A-2 and 2019 Class A-2 through the Anticipated Repayment Dates. No principal payments are required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as specified in the Indenture), is less than or equal to 5.0 to 1.0. If the 2017 Class A-2 Notes or the 2019 Class A-2 Notes have not been repaid or refinanced by their respective Anticipated Repayment Dates, a rapid amortization event will occur in which residual net cash flows of the Master Issuer, after making certain required payments, will be applied to the outstanding principal of the 2017 Class A-2 Notes and the 2019 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.

In order to assess our current debt levels, including servicing our long-term debt, and our ability to take on additional borrowings, we monitor a leverage ratio of our long-term debt, net of cash (“Net Debt”), to adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”). This leverage ratio, and the related Net Debt and Adjusted EBITDA measures used to compute it, are non-GAAP measures, and our use of the terms Net Debt and Adjusted EBITDA may vary from other companies, including those in our industry, due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Net Debt reflects the gross principal amount outstanding under our securitized financing facility, notes payable, and finance lease obligations, less short-term cash, cash equivalents, and restricted cash, excluding cash reserved for gift card/certificate programs. Adjusted EBITDA is defined in our securitized financing facility as net income before interest, taxes, depreciation and amortization, and impairment charges, as adjusted for certain items that are summarized in the table below. Net Debt should not be considered as an alternative to debt, total liabilities, or any other obligations derived in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income, operating income, or any other performance measures derived in accordance with GAAP, as a measure of operating performance, or as an alternative to cash flows as a measure of liquidity. Net Debt, Adjusted EBITDA, and the related leverage ratio have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. However, we believe that presenting Net Debt, Adjusted EBITDA, and the related leverage ratio are appropriate to provide additional information to investors to demonstrate our current debt levels and ability to take on additional borrowings.

Table of Contents

As of June 29, 2019, we had a Net Debt to Adjusted EBITDA ratio of 5.2 to 1.0. The following is a reconciliation of our Net Debt and Adjusted EBITDA to the corresponding GAAP measures as of and for the twelve months ended June 29, 2019, respectively (in thousands):



	June 29, 2019
Principal outstanding under 2017 Class A-2 Notes	$	1,379,000
Principal outstanding under 2019 Class A-2 Notes	1,700,000
Other notes payable	1,325
Total finance lease obligations	7,010
Less: cash and cash equivalents	(474,265		)
Less: restricted cash, current	(88,562		)
Plus: cash held for gift card/certificate programs	149,286
Net Debt	$	2,673,794



	Twelve months ended
	June 29, 2019
Net income	$	231,201
Interest expense	128,704
Income tax expense	67,612
Depreciation and amortization^(a)	38,796
Impairment charges	819
EBITDA	467,132
Adjustments:
Share-based compensation expense^(a)	13,826
Loss on debt extinguishment	13,076
Increase in deferred revenue related to franchise and licensing agreements^(b)	(16		)
Other^(c)	16,450
Total adjustments	43,336
Adjusted EBITDA	$	510,468


(a)	Amounts exclude depreciation and share-based compensation of $4.7 million and $1.4 million, respectively, related to U.S. Advertising Funds.


(b)	Amount excludes incentives paid to franchisees, primarily related to the Dunkin' U.S. Blueprint for Growth.


(c)	Represents costs and fees associated with various franchisee-related investments, including investments in the Dunkin' U.S. Blueprint for Growth, bank fees, legal reserves, and other non-cash gains and losses.

Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and amounts available under our 2019 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 2019 Variable Funding Notes or otherwise to enable us to service our indebtedness, including our securitized financing facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend, or refinance the securitized financing facility will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond our control.

Recently Issued Accounting Standards

See note 2(f) and note 12 to the unaudited consolidated financial statements included in Item 1 of Part I of this Form 10-Q, for a detailed description of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the foreign exchange or interest rate risks discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.

Table of Contents

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 June 29, 2019. 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 June 29, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

During the six-month period ended June 29, 2019, we adopted new guidance for lease accounting. We implemented internal controls to ensure we adequately evaluated leasing arrangements and properly assessed the impact of the new guidance to facilitate the adoption. Additionally, we implemented new business processes, internal controls, and modified information technology systems to assist in the ongoing application of the new guidance.

Table of Contents

Part II. Other Information

Item 1. Legal Proceedings

We are engaged in several matters of litigation arising in the ordinary course of our business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by us.

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 29, 2018.

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 June 29, 2019 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⁽¹⁾
03/31/19 - 04/27/19	—	$	—	—	$	219,869,500
04/28/19 - 06/01/19	132,899	75.25		132,899	209,868,900
06/02/19 - 06/29/19	—	—		—	209,868,900
Total	132,899	$	75.25	132,899



(1)	On May 16, 2018, our board of directors authorized a new share repurchase program for up to an aggregate of $250.0 million of our outstanding common stock. This repurchase authorization is valid for a period of two years. Under the program, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market conditions.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits

(a) Exhibits:



4.1		Series 2019-1 Supplement to Base Indenture dated April 30, 2019 between DB Master Finance LLC, as Master Issuer of the Series 2019-1 fixed rate senior secured notes, Class A-2, and Series 2019-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2019-1 Securities Intermediary (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, File No. 001-35258, filed with the SEC on May 1, 2019).

4.2		Second Supplement to the Base Indenture dated April 30, 2019 between DB Master Finance LLC, as Master Issuer, and Citibank, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, File No. 001-35258, filed with the SEC on May 1, 2019).

10.1		Class A-1 Note Purchase Agreement dated April 30, 2019 among DB Master Finance LLC, as Master Issuer, DB Master Finance Parent LLC, DB Franchising Holding Company LLC, DB Mexican Franchising LLC, DD IP Holder LLC, BR IP Holder, BR UK Franchising LLC, Dunkin’ Donuts Franchising LLC, Baskin-Robbins Franchising LLC, DB Real Estate Assets I LLC, DB Real Estate Assets II LLC, each as Guarantor, Dunkin’ Brands, Inc., as manager, certain conduit investors, financial institutions and funding agents, and Coöperatieve Rabobank, U.A., New York Branch, as provider of letters of credit, as swingline lender and as administrative agent (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 May 1, 2019).

10.2		Management Agreement Amendment dated April 30, 2019 among DB Master Finance, DB Master Finance Parent LLC, certain subsidiaries of DB Master Finance LLC party thereto, Dunkin’ Brands, Inc., as manager, and Citibank, N.A., as Trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, File No. 001-35258, filed with the SEC on May 1, 2019).

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 - the instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Ex. 101.SCH Inline XBRL Taxonomy Extension Schema Document

Ex. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

Ex. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

Ex. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

Ex. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

Table of Contents

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:	August 7, 2019	By:	/s/ Katherine Jaspon
			Katherine Jaspon Chief Financial Officer Principal Financial and Accounting Officer