DUNKIN' BRANDS GROUP, INC. Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q, including statements about our expected financial results, the impact of the COVID-19 pandemic, our ability to meet cash needs, our expected compliance with the covenants under the securitization documentation, and liquidity 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 continuing and uncertain impact of the current COVID-19 global pandemic on our business; the ongoing level of profitability of franchisees and licensees; our franchisees' and licensees' ability to sustain same store sales growth; 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 failure to protect consumer payment card data or other personally identifiable information; 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 theSecurities and Exchange Commission , including under the section headed "Risk Factors" in our most recent annual report on Form 10-K and within Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period endedMarch 28, 2020 . Except as required by applicable law, we do not undertake to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise. Introduction and overview We are one of the world's leading franchisors of quick service restaurants ("QSRs") serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin' and Baskin-Robbins brands. With more than 20,000 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 limited or no table service. As ofSeptember 26, 2020 , Dunkin' had 12,658 global points of distribution with restaurants in 43 U.S. states, theDistrict of Columbia , and 39 foreign countries.Baskin-Robbins had 7,895 global points of distribution as of the same date, with restaurants in 44 U.S. states, theDistrict of Columbia ,Puerto Rico , and 51 foreign countries. We are organized into five reporting segments: Dunkin'U.S. ,Baskin-Robbins U.S. ,Dunkin' International ,Baskin-Robbins International , andU.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' andBaskin-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 manufactureBaskin-Robbins ice cream products sold toU.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 ofSeptember 26, 2020 , we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators. 26 -------------------------------------------------------------------------------- Table of Contents We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and nine-month periods endedSeptember 26, 2020 andSeptember 28, 2019 reflect the results of operations for the 13-week and 39-week periods ended on those dates. Operating results for the three- and nine-month periods endedSeptember 26, 2020 are not necessarily indicative of the results that may be expected for the fiscal year endingDecember 26, 2020 . OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. While it is not possible at this time to estimate the full impact that the pandemic could have on our business due to numerous uncertainties, the continued spread of COVID-19 and the measures taken by local and national governments have disrupted and are expected to continue to disrupt our operations and may also impact the supply chain, resulting in an adverse impact on our business, financial condition, and results of operations. Pending Merger with Inspire Brands OnOctober 30, 2020 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withInspire Brands, Inc. ("Inspire") and Inspire's indirect wholly-owned subsidiary,Vale Merger Sub, Inc. ("Merger Sub"). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Merger Sub will commence a tender offer (the "Offer") to purchase all of the issued and outstanding shares (the "Shares") of the Company's common stock at a price of$106.50 per Share, net to the holder of such share, in cash, without interest, but subject to any applicable withholding of taxes (the "Offer Price"). If certain conditions are satisfied and the Offer closes, Inspire has agreed to acquire any remaining shares that are not tendered in the Offer by a merger of Merger Sub with and into the Company (the "Merger"). The parties currently expect the Offer and the Merger to be completed in the fourth quarter of 2020. For additional information related to the Merger Agreement, please refer to our Current Report on Form 8-K filed with the SEC on November 2, 2020 and note 15 to the accompanying unaudited consolidated financial statements. Selected operating and financial highlights Amounts and percentages may not recalculate due to rounding Three months ended Nine months ended September 26, September 28, September 26, September 28, 2020 2019 2020 2019 Financial data (in thousands): Total revenues$ 361,543 355,882 972,063 1,034,310 Operating income 128,915 121,343 311,843 345,367 Adjusted operating income 133,497 125,978 326,165 359,586 Net income 73,968 72,365 162,531 184,310 Adjusted net income 77,267 75,702 172,843 203,962 Systemwide sales (in millions): Dunkin' U.S.$ 2,373.8 2,365.9 6,387.0 6,874.8 Baskin-Robbins U.S. 187.4 186.3 488.8 499.6 Dunkin' International 179.4 210.9 470.3 609.4 Baskin-Robbins International 430.8 449.7 1,079.4 1,141.9 Total systemwide sales$ 3,171.5 3,212.9 8,425.4 9,125.7 Systemwide sales growth (decline) (1.3) % 4.7 % (7.7) % 4.2 % Comparable store sales growth (decline): Dunkin' U.S. 0.9 % 1.5 % (6.8) % 1.9 % Baskin-Robbins U.S. 6.5 % 3.6 % 0.7 % 0.0 % Dunkin' International (15.9) % 7.3 % (19.0) % 5.2 % Baskin-Robbins International (0.5) % 3.0 % (1.0) % 1.6 % 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. 27 -------------------------------------------------------------------------------- Table of Contents Comparable store sales growth (decline) for Dunkin'U.S. and Baskin-RobbinsU.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) forDunkin' 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. The COVID-19 pandemic had an unfavorable impact on systemwide sales for each of our segments for the three and nine months endedSeptember 26, 2020 . Global declines in systemwide sales of 1.3% and 7.7% for the three and nine months endedSeptember 26, 2020 , respectively, over the same periods in the prior fiscal year resulted from the following: •Dunkin'U.S. systemwide sales growth of 0.3% for the three months endedSeptember 26, 2020 was primarily a result of comparable store sales growth of 0.9%, offset by 423 net restaurant closures sinceSeptember 28, 2019 . The comparable store sales growth was driven by an increase in average ticket, offset by a decline in traffic due to the COVID-19 pandemic. Dunkin'U.S. systemwide sales decline of 7.1% for the nine months endedSeptember 26, 2020 was primarily a result of a comparable store sales decline of 6.8%, as well as the 423 net restaurant closures sinceSeptember 28, 2019 . Comparable store sales declined for the nine months endedSeptember 26, 2020 as a decline in traffic driven by the COVID-19 pandemic was offset by an increase in average ticket. The increase in average ticket for the three and nine months endedSeptember 26, 2020 was driven primarily by favorable mix shift to family-size bulk orders and snacking attachment, as well as premium priced cold beverages, espresso, and other specialty beverages, and partially offset by increased discounting driven by both national and local value platforms. Comparable store sales improved sequentially in each month of the third quarter. •Baskin-RobbinsU.S. systemwide sales growth of 0.6% for the three months endedSeptember 26, 2020 was primarily a result of comparable store sales growth of 6.5%, offset by 42 net restaurant closures sinceSeptember 28, 2019 . Baskin-RobbinsU.S. systemwide sales decline of 2.2% for the nine months endedSeptember 26, 2020 was primarily a result of the 42 net restaurant closures sinceSeptember 28, 2019 , offset by comparable store sales growth of 0.7%. The comparable store sales growth for the three and nine months endedSeptember 26, 2020 was driven by an increase in average ticket, offset by a decline in traffic driven by the COVID-19 pandemic. The increase in average ticket was driven by ice cream cakes and take home products, specifically quarts. Comparable store sales improved sequentially in each month of the third quarter. •Dunkin' International systemwide sales decline of 14.9% for the three months endedSeptember 26, 2020 was driven by sales declines inLatin America ,Asia , andSouth Korea , offset by sales growth in theMiddle East . Foreign exchange rates did not have a significant impact on systemwide sales as the negative impact of unfavorable foreign exchange rates on sales inLatin America was offset by the favorable impact of foreign exchange rates on sales in all other regions.Dunkin' International comparable store sales decline of 15.9% for the three months endedSeptember 26, 2020 was due primarily to declines inAsia ,Latin America ,South Korea , andEurope , offset by an increase in theMiddle East .Dunkin' International systemwide sales decline of 22.8% for the nine months endedSeptember 26, 2020 was driven by sales declines inAsia ,Latin America ,South Korea ,Europe , and theMiddle East . Sales inAsia were positively impacted by favorable foreign exchange rates, while sales across all other regions were negatively impacted by unfavorable foreign exchange rates for the nine months endedSeptember 26, 2020 . On a constant currency basis, systemwide sales decreased by approximately 21% for the nine months endedSeptember 26, 2020 .Dunkin' International comparable store sales decline of 19.0% for the nine months endedSeptember 26, 2020 was due primarily to declines inAsia ,Latin America ,Europe , theMiddle East , andSouth Korea . •Baskin-Robbins International systemwide sales decline of 4.2% for the three months endedSeptember 26, 2020 was driven by sales declines inJapan , theMiddle East ,Asia ,Europe , andAustralia , offset by sales growth inSouth Korea . Foreign exchange rates did not have a significant impact on systemwide sales as the positive impact of favorable foreign exchange rates on sales inJapan ,Australia , andSouth Korea was offset by the unfavorable impact of foreign exchange rates on sales in all other regions.Baskin-Robbins International comparable store sales decline of 0.5% was due primarily to declines inJapan ,Asia ,Europe , andLatin America , offset by increases inSouth Korea and theMiddle East .Baskin-Robbins International systemwide sales decline of 5.5% for the nine months endedSeptember 26, 2020 was driven by sales declines in theMiddle East ,Japan ,Asia ,Europe ,Australia , andLatin America , offset by sales growth inSouth Korea . Sales inJapan were positively impacted by favorable foreign exchange rates, while sales across all other regions were negatively impacted by unfavorable foreign exchange rates for the nine months endedSeptember 26, 2020 . On a constant currency basis, systemwide sales decreased by approximately 4% for the nine months endedSeptember 26, 2020 .Baskin-Robbins International comparable store sales decline of 1.0% for the nine months ended 28 -------------------------------------------------------------------------------- Table of ContentsSeptember 26, 2020 was driven primarily by declines in theMiddle East ,Japan ,Asia ,Europe , andLatin America , offset by growth inSouth Korea andAustralia . Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings (closings) as of and for the three and nine months endedSeptember 26, 2020 andSeptember 28, 2019 were as follows: September 26, September 28, 2020 2019 Points of distribution, at period end(a): Dunkin' U.S. 9,131 9,554 Baskin-Robbins U.S. 2,500 2,542 Dunkin' International 3,527 3,481 Baskin-Robbins International 5,395
5,574
Consolidated global points of distribution 20,553 21,151
Three months ended Nine months ended
September 26, September 28, September 26, September 28,
2020 2019 2020 2019
Net openings (closings) during the period:
Dunkin' U.S. (466) 55 (499) 135
Baskin-Robbins U.S. (11) (14) (24) (8)
Dunkin' International (1) 23 20 29
Baskin-Robbins International (75) 58 (241) 83
Consolidated global net openings (closings) (553) 122 (744) 239
(a) Temporary restaurant closures due to COVID-19 are not treated as
restaurant closures and affected restaurants are included in points of
distribution.
As of the week ended October 24, 2020 , quarter-to-date comparable store sales
growth for Dunkin' U.S. and Baskin-Robbins U.S. was in the low-single digits and
high-single digits, respectively, for open stores. However, there can be no
assurance that further declines in systemwide sales or comparable store sales
will not occur for the remainder of the fourth quarter or beyond as a result of
the continuing impact of the COVID-19 pandemic or otherwise.
As of October 24, 2020 , approximately 98% of Dunkin' U.S. locations were open.
The majority of the Dunkin' U.S. locations that remain temporarily closed are in
transportation hubs, on college campuses, in sports venues, and other
alternative points of distribution. As of October 24, 2020 , approximately 99% of
Baskin-Robbins U.S. locations were open. As of October 24, 2020 , approximately
93% of each of Dunkin' and Baskin-Robbins International locations were open. We
have worked with our franchisees to permit them to temporarily close restaurants
where market conditions warrant. Our restaurants have been deemed an essential
business in many jurisdictions allowing them to remain open in some capacity
throughout the course of the pandemic. Dunkin' U.S. has a flexible operating
model where it can often continue to offer drive-thru, delivery, and curbside
service where in-restaurant dining is not permitted. The Company is unable to
predict the reopening schedule for restaurants that are temporarily closed due
to the pandemic, or whether and when additional closures may occur.
Summary of operating results
Total revenues for the three months ended September 26, 2020 increased $5.7
million , or 1.6%, compared to the prior year period due primarily to an increase
in franchise fees as a result of additional deferred revenue recognized in
connection with the closure of restaurants, including Speedway locations, and an
increase in advertising fees and related income. These increases were offset by
a decrease in rental income due to a reduction in variable rental income as a
result of a decline in sales at leased locations.
Total revenues for the nine months ended September 26, 2020 decreased $62.2
million , or 6.0%, compared to the prior year period due primarily to decreases
in royalty income and advertising fees driven by a decline in systemwide sales,
primarily for the Dunkin' U.S. and Dunkin' International segments. Royalty
income also reflects a reduction of revenue of approximately $7 million related
to corporate financial relief provided to franchisees most significantly
impacted by the COVID-19 pandemic. Also contributing to the decrease in revenues
was a decrease in rental income due to a reduction in variable rental income as
a result of a decline in sales at leased locations and rent waivers being
provided to our franchisees of approximately $3 million .
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Operating income and adjusted operating income for the three months ended
September 26, 2020 increased $7.6 million and $7.5 million , respectively,
compared to the prior year period. These increases were primarily a result of
the increase in franchise fees, as well as an increase in ice cream margin
driven by a decrease in commodity costs and favorable product mix, and a
decrease in general and administrative expenses due primarily to reduced
non-essential spending in the current year period to preserve financial
flexibility as a result of the COVID-19 pandemic and a decrease in benefits and
personnel costs.
Operating income and adjusted operating income for the nine months ended
September 26, 2020 decreased $33.5 million and $33.4 million , respectively,
compared to the prior year period. These decreases were primarily a result of
decreases in royalty income and rental margin, which includes approximately $2
million of unfavorable impact from rent waivers being provided to our
franchisees, net of waivers received from landlords. These decreases in
operating income and adjusted operating income were offset by a decrease in
general and administrative expenses primarily as a result of decreases in
personnel and benefits costs and reduced non-essential spending in the current
year period to preserve financial flexibility as a result of the COVID-19
pandemic, offset by increases in reserves for uncollectible receivables and
costs incurred to support brand-building activities.
Net income and adjusted net income each increased $1.6 million for the three
months ended September 26, 2020 compared to the prior year period primarily as a
result of the increases in operating income and adjusted operating income,
respectively, offset by an increase in income tax expense and a decrease in
interest income earned on our cash balances as a result of lower interest rates.
The increase in income tax expense was driven primarily by the increase in
income in the current year period, as well as a decrease in excess tax benefits
from share-based compensation.
Net income and adjusted net income for the nine months ended September 26, 2020
decreased $21.8 million and $31.1 million , respectively, compared to the prior
year period. These decreases were primarily a result of the decreases in
operating income and adjusted operating income, respectively, as well as a
decrease in interest income earned on our cash balances as a result of lower
interest rates, offset by a decrease in income tax expense. The decrease in
income tax expense was driven primarily by the decrease in income in the current
year period, offset by a decrease in excess tax benefits from share-based
compensation. Also offsetting the decrease in operating income was a $13.1
million loss on debt extinguishment recorded during the second quarter of fiscal
year 2019 due to the write-off of debt issuance costs in conjunction with a
refinancing transaction completed during the second quarter of fiscal year 2019.
Adjusted operating income and adjusted net income are non-GAAP measures
reflecting operating income and net income adjusted for amortization of
intangible assets, long-lived asset impairments, and other non-recurring,
infrequent, or unusual charges, net of the tax impact of such adjustments in the
case of adjusted net income. We use adjusted operating income and adjusted net
income as key performance measures for the purpose of evaluating performance
internally. We also believe adjusted operating income and adjusted net income
provide our investors with useful information regarding our historical operating
results. These non-GAAP measurements are not intended to replace the
presentation of our financial results in accordance with GAAP. Use of the terms
adjusted operating income and adjusted net income may differ from similar
measures reported by other companies.
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Adjusted operating income and adjusted net income are reconciled from operating
income and net income, respectively, determined under GAAP as follows:
Three months ended Nine months ended
September 26, September 28, September 26, September 28,
2020 2019 2020 2019
(In thousands)
Operating income $ 128,915 121,343 311,843 345,367
Adjustments:
Amortization of other intangible assets 4,582 4,599 13,762 13,858
Long-lived asset impairment charges - 36 560 361
Adjusted operating income $ 133,497 125,978 326,165 359,586
Net income $ 73,968 72,365 162,531 184,310
Adjustments:
Amortization of other intangible assets 4,582 4,599 13,762 13,858
Long-lived asset impairment charges - 36 560 361
Loss on debt extinguishment - - - 13,076
Tax impact of adjustments(a) (1,283) (1,298) (4,010) (7,643)
Adjusted net income $ 77,267 75,702 172,843 203,962
(a)Tax impact of adjustments calculated at effective tax rate of 28%.
Earnings per share
Earnings per share of common stock and diluted adjusted earnings per share of
common stock were as follows:
Three months ended Nine months ended
September 26, September 28, September 26, September 28,
2020 2019 2020 2019
Earnings per share of common stock:
Common-basic $ 0.90 0.87 1.97 2.23
Common-diluted 0.89 0.86 1.96 2.20
Diluted adjusted earnings per share of common stock 0.93 0.90 2.08 2.44
Diluted adjusted earnings per share of common stock is calculated using adjusted
net income, as defined above, and diluted weighted-average shares outstanding.
Diluted adjusted earnings per share of common stock is not a presentation made
in accordance with GAAP, and our use of the term diluted adjusted earnings per
share of common stock 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 of common stock should not be considered as an
alternative to earnings per share of common stock derived in accordance with
GAAP. Diluted adjusted earnings per share of common stock 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 of common stock 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 of common stock:
Three months ended Nine months ended
September 26, September 28, September 26, September 28,
2020 2019 2020 2019
(In thousands, except share and per share
data)
Adjusted net income $ 77,267 75,702 172,843 203,962
Weighted-average number of shares of common
stock-diluted 82,975,900 83,867,413 82,929,043 83,665,397
Diluted adjusted earnings per share of common stock $ 0.93
0.90 2.08 2.44
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Results of operations
Consolidated results of operations
Three months ended Nine months ended
September 26, September 28, Increase (Decrease) September 26, September 28, Increase (Decrease)
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Franchise fees and
royalty income $ 160,065 157,224 2,841 1.8 % $ 415,506 454,810 (39,304) (8.6) %
Advertising fees and
related income 132,280 128,675 3,605 2.8 % 358,881 375,132 (16,251) (4.3) %
Rental income 30,639 31,984 (1,345) (4.2) % 85,588 92,691 (7,103) (7.7) %
Sales of ice cream and
other products 24,514 24,409 105 0.4 % 71,164 72,400 (1,236) (1.7) %
Other revenues 14,045 13,590 455 3.3 % 40,924 39,277 1,647 4.2 %
Total revenues $ 361,543 355,882 5,661 1.6 % $ 972,063 1,034,310 (62,247) (6.0) %
Total revenues for the three months ended September 26, 2020 increased $5.7
million , or 1.6%, due primarily to an increase in franchise fees as a result of
additional deferred revenue recognized in connection with the closure of
restaurants, including Speedway locations, an increase in advertising fees and
related income due to an increase in gift card breakage, and an increase in
other revenues driven primarily by license fees related to Dunkin' K-Cup® pods.
These increases were offset by a decrease in rental income due to a reduction in
variable rental income as a result of a decline in sales at leased locations, as
well as a decrease in royalty income driven by a decline in systemwide sales,
primarily for the Dunkin' International segment.
Total revenues for the nine months ended September 26, 2020 decreased $62.2
million , or 6.0%, due primarily to a decrease in royalty income driven by a
decline in systemwide sales, primarily for the Dunkin' U.S. and Dunkin'
International segments, and a decrease in advertising fees and related income
due primarily to the decline in Dunkin' U.S. systemwide sales offset by an
increase in gift card breakage. Royalty income also reflects a reduction of
revenue of approximately $7 million related to corporate financial relief
provided to franchisees most significantly impacted by the COVID-19 pandemic.
Also contributing to the decrease in revenues was a decrease in rental income
due to a reduction in variable rental income as a result of a decline in sales
at leased locations and rent waivers being provided to our franchisees of
approximately $3 million , as well as a decrease in sales of ice cream and other
products. Offsetting these decreases in revenues was an increase in franchise
fees as a result of additional deferred revenue recognized in connection with
the closure of restaurants, including Speedway locations, as well as an increase
in other revenues driven primarily by license fees related to Dunkin' K-Cup®
pods.
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Three months ended Nine months ended
September 26, September 28, Increase (Decrease) September 26, September 28, Increase (Decrease)
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Occupancy expenses-franchised
restaurants $ 18,908 19,823 (915) (4.6) % $ 56,540 58,995 (2,455) (4.2) %
Cost of ice
cream and other products 19,276 21,066 (1,790) (8.5) % 55,410 59,724 (4,314) (7.2) %
Advertising expenses 133,352 130,846 2,506 1.9 % 362,702 379,898 (17,196) (4.5) %
General and administrative
expenses 58,705 60,333 (1,628) (2.7) % 171,399 176,458 (5,059) (2.9) %
Depreciation and amortization 10,245 9,183 1,062 11.6 % 30,245 27,774 2,471 8.9 %
Long-lived asset impairment
charges - 36 (36) (100.0) % 560 361 199 55.1 %
Total operating costs and
expenses $ 240,486 241,287 (801) (0.3) % 676,856 703,210 (26,354) (3.7) %
Net income of equity method
investments 7,159 6,667 492 7.4 % 15,108 13,324 1,784 13.4 %
Other operating income, net 699 81 618 763.0 % 1,528 943 585 62.0 %
Operating income $ 128,915 121,343 7,572 6.2 % $ 311,843 345,367 (33,524) (9.7) %
Occupancy expenses for franchised restaurants for the three and nine months
ended September 26, 2020 decreased $0.9 million and $2.5 million , respectively,
due primarily to declines in variable rental expense as a result of the declines
in sales at leased locations and rent waivers received from our landlords.
Net margin on ice cream and other products for the three and nine months ended
September 26, 2020 increased $1.9 million , or 56.7%, and $3.1 million , or 24.3%,
respectively, due primarily to decreases in commodity costs and favorable
product mix.
Advertising expenses for the three and nine months ended September 26, 2020
increased $2.5 million and decreased $17.2 million , respectively. The
fluctuations in advertising expenses were driven primarily by fluctuations in
advertising fees and related income.
General and administrative expenses for the three and nine months ended
September 26, 2020 decreased $1.6 million and $5.1 million , respectively, due
primarily to decreases in personnel and benefit costs and reduced non-essential
spending in the current year period to preserve financial flexibility as a
result of the COVID-19 pandemic, offset by increases in costs incurred to
support brand-building activities in the current year period and a recovery of
legal fees in the prior year period. Also offsetting the decreases in general
and administrative expenses for the nine-month period were increases in reserves
for uncollectible receivables and expenses incurred to support health and safety
measures at our restaurants as a result of the COVID-19 pandemic.
Depreciation and amortization for the three and nine months ended September 26,
2020 increased $1.1 million and $2.5 million , respectively, due primarily to
increases in depreciable assets, primarily comprised of technology
infrastructure to support the Dunkin' mobile ordering and payment platform.
Long-lived asset impairment charges increased $0.2 million for the nine months
ended September 26, 2020 . Long-lived asset impairment charges generally
fluctuate based on the timing of lease terminations and the related write-off of
leasehold improvements.
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Net income of equity method investments for the three and nine months ended
September 26, 2020 increased $0.5 million and $1.8 million , respectively,
primarily as a result of increases in net income from our South Korea joint
venture. Also contributing to the increase for the three-month period was an
increase in net income from our Japan joint venture.
Other operating income, net, which includes net gains and losses recognized in
connection with the sale or disposal of property, equipment, and software as
well as other miscellaneous income, increased $0.6 million for each of the three
and nine months ended September 26, 2020 due primarily to income from
administrative services performed that are not part of our core operations.
Three months ended Nine months ended
September Increase (Decrease) September Increase (Decrease)
26, September 28, 26, September 28,
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Interest expense, net $ 31,730 28,791 2,939 10.2 % $ 94,050 88,852
5,198 5.9 %
Loss on debt extinguishment - - - n/m - 13,076 (13,076) (100.0) %
Other loss (income), net (154) 258
(412) (159.7) % 302 308
(6) (1.9) %
Total other expense $ 31,576 29,049 2,527 8.7 % $ 94,352 102,236 (7,884) (7.7) %
Net interest expense for the three and nine months ended September 26, 2020
increased $2.9 million and $5.2 million , respectively, driven primarily by
decreases in interest income earned on our cash balances as a result of lower
interest rates.
The loss on debt extinguishment of $13.1 million for the nine months ended
September 28, 2019 was due 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 (income), net, for the three and nine months ended
September 26, 2020 resulted primarily from net foreign exchange gains and losses
driven primarily by fluctuations in the U.S. dollar against foreign currencies.
Three months ended Nine months ended
September 26, September 28, September 26, September 28,
2020 2019 2020 2019
(In thousands, except percentages)
Income before income taxes $ 97,339 92,294 217,491 243,131
Provision for income taxes 23,371 19,929 54,960 58,821
Effective tax rate 24.0 % 21.6 % 25.3 % 24.2 %
The increases in the effective tax rates for the three and nine months ended
September 26, 2020 compared to the prior year periods were driven primarily by
excess tax benefits from share-based compensation of $0.5 million and $1.8
million for the three months ended September 26, 2020 and September 28, 2019 ,
respectively, and $1.6 million and $4.4 million for the nine months ended
September 26, 2020 and September 28, 2019 , respectively.
Also contributing to the increase in the effective tax rate for the three- and
nine-month periods was the release of a valuation allowance recorded on foreign
tax credit carryforwards of $2.0 million in the prior year period, offset by a
benefit of $1.3 million in the current year period related to foreign income and
foreign tax credits upon finalizing and filing our 2019 tax return.
Operating segments
We operate five reportable operating segments: Dunkin' U.S. , Baskin-Robbins
U.S. , Dunkin' International , 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.
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For reconciliations to total revenues and income before income taxes, see note
6 to the unaudited consolidated financial statements. 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, 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, allocation of the
consideration from sales of ice cream and other products to royalty income as
consideration for the use of the franchise license, certain franchisee
incentives, and certain corporate financial relief provided to franchisees are
not reflected within segment revenues, but have no impact to total revenues for
any segment.
Dunkin' U.S.
Three months ended Nine months ended
September 26, September 28, Increase (Decrease) September 26, September 28, Increase (Decrease)
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)
Royalty income $ 130,866 130,993 (127) (0.1) % $ 351,740 379,772 (28,032) (7.4) %
Franchise fees 6,485 3,675 2,810 76.5 % 16,503 10,719 5,784 54.0 %
Rental income 29,822 30,824 (1,002) (3.3) % 82,962 89,163 (6,201) (7.0) %
Other revenues 780 912 (132) (14.5) % 2,686 3,072 (386) (12.6) %
Total revenues $ 167,953 166,404 1,549 0.9 % $ 453,891 482,726 (28,835) (6.0) %
Segment profit $ 129,081 127,755 1,326 1.0 % $ 334,545 365,888 (31,343) (8.6) %
Dunkin' U.S. revenues for the three months ended September 26, 2020 increased
$1.5 million due primarily to an increase in franchise fees as a result of
additional deferred revenue recognized in connection with the closure of
restaurants, including Speedway locations, offset by a decrease in rental income
due to a reduction in variable rental income as a result of a decline in sales
at leased locations.
Dunkin' U.S. revenues for the nine months ended September 26, 2020 decreased
$28.8 million due primarily to a decrease in royalty income driven by a decline
in systemwide sales, as well as a decrease in rental income due to a reduction
in variable rental income as a result of a decline in sales at leased locations
and rent waivers being provided to our franchisees. Offsetting these decreases
in revenues was an increase in franchise fees as a result of additional deferred
revenue recognized in connection with the closure of restaurants, including
Speedway locations.
Dunkin' U.S. segment profit for the three months ended September 26, 2020
increased $1.3 million driven primarily by the increase in franchise fees.
Offsetting the increase in franchise fees was an increase general and
administrative expenses due primarily to an increase in costs incurred to
support brand-building activities offset by reduced non-essential spending, as
well as a decrease in rental margin.
Dunkin' U.S. segment profit for the nine months ended September 26, 2020
decreased $31.3 million due primarily to decreases in royalty income and rental
margin, as well as an increase in general and administrative expenses driven
primarily by an increase in reserves for uncollectible receivables and an
increase in costs incurred to support brand-building activities offset by
decreases in personnel and benefit costs and reduced non-essential spending.
These decreases in segment profit were offset by the increase in franchise fees.
Baskin-Robbins U.S.
Three months ended Nine months ended
September Increase (Decrease) September
Increase (Decrease)
26, September 28, 26, September 28,
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)Royalty income$ 9,016 8,973 43 0.5 %$ 23,423 23,904 (481) (2.0) % Franchise fees 380 374 6 1.6 % 980 1,030 (50) (4.9) % Rental income 740 942 (202) (21.4) % 2,146 2,875 (729) (25.4) % Sales of ice cream and other products 1,524 1,021 503 49.3 % 3,803 2,772 1,031 37.2 % Other revenues 3,117 3,014 103 3.4 % 7,676 8,308 (632) (7.6) % Total revenues$ 14,777 14,324 453 3.2 %$ 38,028 38,889 (861) (2.2) % Segment profit$ 9,373 9,711 (338) (3.5) %$ 25,281 26,110 (829) (3.2) % 35
-------------------------------------------------------------------------------- Table of Contents Baskin-RobbinsU.S. revenues for the three months endedSeptember 26, 2020 increased$0.5 million due primarily to increases in sales of ice cream and other products and other revenues, offset by a decrease in rental income due primarily to a decrease in the number of leased locations. Baskin-RobbinsU.S. revenues for the nine months endedSeptember 26, 2020 decreased$0.9 million due primarily to decreases in rental income as a result of rent waivers being provided to our franchisees and a decrease in the number of leased locations, other revenues driven by a decrease in licensing income, and royalty income due to a decline in systemwide sales. These decreases in revenues were offset by an increase in sales of ice cream and other products. Baskin-RobbinsU.S. segment profit for the three months endedSeptember 26, 2020 decreased$0.3 million primarily as a result of an increase in general and administrative expenses driven by an increase in costs incurred to support brand-building activities offset by reduced non-essential spending. Offsetting these factors was an increase in ice cream margin. Baskin-RobbinsU.S. segment profit for the nine months endedSeptember 26, 2020 decreased$0.8 million due primarily to the decreases in other revenues and royalty income, offset by an increase in ice cream margin.Dunkin' International Three months ended Nine months ended Increase (Decrease) September Increase (Decrease) September 26, September 28, 26, September 28, 2020 2019 $ % 2020 2019 $ % (In thousands, except percentages) Royalty income$ 4,744 5,769 (1,025) (17.8) %$ 12,086 17,078 (4,992) (29.2) % Franchise fees 335 792 (457) (57.7) % 1,095 3,687 (2,592) (70.3) % Other revenues 109 188 (79) (42.0) % 283 305 (22) (7.2) % Total revenues$ 5,188 6,749 (1,561) (23.1) %$ 13,464 21,070 (7,606) (36.1) % Segment profit$ 3,544 4,898 (1,354) (27.6) %$ 8,880 15,213 (6,333) (41.6) %Dunkin' International revenues for the three and nine months endedSeptember 26, 2020 decreased$1.6 million and$7.6 million , respectively, primarily as a result of decreases in royalty income driven by declines in systemwide sales and franchise fees due primarily to additional deferred revenue recognized in the prior year periods upon closure of certain international markets. Segment profit forDunkin' International for the three and nine months endedSeptember 26, 2020 decreased$1.4 million and$6.3 million , respectively, primarily as a result of the decreases in revenues, offset by decreases in general and administrative expenses due to reduced non-essential spending.Baskin-Robbins International Three months ended Nine months ended September Increase (Decrease) September
Increase (Decrease)
26, September 28, 26, September 28,
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)Royalty income$ 2,278 2,197 81 3.7 %$ 5,662 6,055 (393) (6.5) % Franchise fees 229 165 64 38.8 % 534 1,043 (509) (48.8) % Rental income 77 218 (141) (64.7) % 480 653 (173) (26.5) % Sales of ice cream and other products 27,495 28,459 (964) (3.4) % 77,281 81,531 (4,250) (5.2) % Other revenues (15) (28) 13 (46.4) % (34) (15) (19) 126.7 % Total revenues$ 30,064 31,011 (947) (3.1) %$ 83,923 89,267 (5,344) (6.0) % Segment profit$ 14,985 13,028 1,957 15.0 %$ 34,363 32,919 1,444 4.4 %Baskin-Robbins International revenues for the three months endedSeptember 26, 2020 decreased$0.9 million due primarily to decreases in sales of ice cream and other products and rental income due to rent waivers received from landlords and passed through to our franchisees, offset by an increase in royalty income.Baskin-Robbins International revenues for the nine months endedSeptember 26, 2020 decreased$5.3 million due primarily to decreases in sales of ice cream and other products, franchise fees, and royalty income. The decrease in franchise fees was due primarily to additional deferred revenue recognized in the prior year period upon closure of certain international markets. 36 -------------------------------------------------------------------------------- Table of ContentsBaskin-Robbins International segment profit for the three and nine months endedSeptember 26, 2020 increased$2.0 million and$1.4 million , respectively, primarily as a result of increases in net income from ourSouth Korea andJapan joint ventures and decreases in general and administrative expenses due to reduced non-essential spending offset by increases in reserves for uncollectible receivables. Offsetting these factors for the nine-month period was a decrease in ice cream margin due primarily to a decrease in sales volume offset by favorable product mix, as well as the decreases in franchise fees and royalty income.U.S. Advertising Funds Three months ended Nine months ended September 26, September 28, Increase (Decrease) September 26, September 28,
Increase (Decrease)
2020 2019 $ % 2020 2019 $ %
(In thousands, except percentages)Advertising fees and related income$ 123,025 122,819 206 0.2 %$ 331,139 355,049 (23,910) (6.7) % Total revenues$ 123,025 122,819 206 0.2 %$ 331,139 355,049 (23,910) (6.7) % Segment profit $ - - - - % $ - - - - %U.S. Advertising Funds revenues for the three months endedSeptember 26, 2020 increased$0.2 million , or 0.2%, driven primarily by the increase in Dunkin'U.S. systemwide sales.U.S. Advertising Funds revenues for the nine months endedSeptember 26, 2020 decreased$23.9 million , or 6.7%, driven primarily by the decrease in Dunkin'U.S. systemwide sales. Expenses for theU.S. Advertising Funds were equivalent to revenues in each period, resulting in no segment profit. Liquidity and capital resources As ofSeptember 26, 2020 , we held$613.6 million of cash and cash equivalents and$89.6 million of short-term restricted cash that was restricted under our securitized financing facility. Included in cash and cash equivalents is$239.3 million of cash held for advertising funds and reserved for gift card/certificate programs. Operating, investing, and financing cash flows Net cash provided by operating activities was$142.7 million for the nine months endedSeptember 26, 2020 , as compared to$157.8 million in the prior year period. The$15.1 million decrease in operating cash inflows was driven primarily by a decrease in pre-tax net income related to operating activities, excluding non-cash items, timing of receipts related to the sale of Dunkin' K-Cup® pods, and an increase in incentive compensation payments, offset by favorable cash flows related to our gift card program due primarily to the timing of receipts and payments, a decrease in cash paid for income taxes, and favorable cash flows due to working capital fluctuations of our advertising funds, as well as various other changes in working capital. Net cash used in investing activities was$15.5 million for the nine months endedSeptember 26, 2020 , as compared to$25.4 million in the prior year period. The$9.9 million decrease in investing cash outflows was driven primarily by a decrease in capital expenditures of$10.7 million . Net cash used in financing activities was$131.5 million for the nine months endedSeptember 26, 2020 , as compared to$111.9 million in the prior year period. The$19.6 million increase in financing cash outflows was driven primarily by incremental cash used in the current year period for repurchases of common stock of$39.5 million and a decrease in cash generated from the exercise of stock options in the current year period of$10.7 million , offset by a decrease in quarterly dividends paid on common stock of$26.8 million . OnOctober 30, 2020 , we entered into the Merger Agreement with Inspire and Merger Sub. The Merger Agreement contains limitations on actions that the Company may take between signing and closing without the consent of Inspire, including the declaration or payment of dividends and the repurchase of shares in the open market. See note 15 to the unaudited consolidated financial statements for more information regarding the merger agreement. Adjusted operating and investing cash flow Net cash flows from operating and investing activities for the nine months endedSeptember 26, 2020 andSeptember 28, 2019 included net cash outflows of$2.8 million and$28.0 million , respectively, related to advertising funds and gift card/certificate programs. Excluding cash held for advertising funds and reserved for gift card/certificate programs, we generated$130.1 million and$160.4 million of adjusted operating and investing cash flow during the nine months endedSeptember 26, 2020 andSeptember 28, 2019 , respectively. The decrease in adjusted operating and investing cash flow was driven primarily the decrease 37 -------------------------------------------------------------------------------- Table of Contents in pre-tax net income related to operating activities, excluding non-cash items, timing of receipts related to the sale of Dunkin' K-Cup® pods, and the increase in incentive compensation payments, offset by the decreases in cash paid for income taxes and capital expenditures, as well as various 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): Nine months ended
2020 2019
Net cash provided by operating activities $ 142,723 157,779
Plus: Decrease in cash held for advertising funds and gift card/certificate programs
2,828 27,985
Less: Net cash used in investing activities (15,452) (25,397)
Adjusted operating and investing cash flow $ 130,099 160,367
Borrowing capacity
As of September 26, 2020 , there was approximately $3.05 billion of total
principal outstanding on the 2017 Class A-2 Notes (as defined below) and 2019
Class A-2 Notes (as defined below). In March 2020 , the Company borrowed $116.0
million under our $150.0 million 2019 Variable Funding Notes (as defined below)
as a precautionary measure given the market uncertainty arising from COVID-19
and to further strengthen financial flexibility. The Company repaid all
borrowings under the 2019 Variable Funding Notes during the second fiscal
quarter of 2020. As of September 26, 2020 , there was $116.9 million in available
commitments under the 2019 Variable Funding Notes as $33.1 million of letters of
credit were outstanding. The Merger Agreement contains restrictions, however,
limiting the Company's ability to borrow additional amounts under the 2019
Variable Funding Notes in excess of $3.0 million .
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 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 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 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
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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") of 1.20 to 1.0, measured for the four immediately preceding fiscal
quarters, may also cause a rapid amortization event. Failure to maintain a
minimum DSCR of 1.75 to 1.0 would also cause certain excess cash flows to be
segregated in a separate restricted cash account. As of September 26, 2020 , we
had a DSCR of 3.61 to 1.0.
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. Other events and transactions,
such as certain asset sales and receipt of various insurance or indemnification
proceeds, may trigger additional mandatory prepayments.
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 differs from the leverage ratios specified in the Indenture. 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.
As of September 26, 2020 , we had a Net Debt to Adjusted EBITDA ratio of 5.1 to
1.0. The following is a reconciliation of our Net Debt and Adjusted EBITDA to
the corresponding GAAP measures as of and for the twelve months ended
September 26, 2020 , respectively (in thousands):
September 26, 2020
Principal outstanding under 2017 Class A-2 Notes $ 1,365,000 Principal outstanding under 2019 Class A-2 Notes
1,683,000
Other notes payable 1,138
Total finance lease obligations 8,412
Less: cash and cash equivalents (613,641)
Less: restricted cash, current (89,626)
Plus: cash held for gift card/certificate programs 154,780
Net Debt $ 2,509,063
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Twelve months
ended
September 26,
2020
Net income $ 220,245
Interest expense 128,194
Income tax expense 73,377
Depreciation and amortization(a) 39,354
Impairment charges 750
EBITDA 461,920
Adjustments:
Share-based compensation expense(a) 11,314
Decrease in deferred revenue related to franchise and licensing agreements(b)
(19,911)
COVID-19 related adjustments(c) 11,090
Other(d) 31,173
Total adjustments 33,666
Adjusted EBITDA $ 495,586
(a)Amounts exclude depreciation and share-based compensation of $7.0 million and
$0.8 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)Amount includes approximately $7 million of corporate financial relief and $2
million of rent waivers being provided to the Company's franchisees, net of
waivers received from landlords, as well as additional general and
administrative expenses incurred as a result of the COVID-19 pandemic.
(d)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.
In response to the ongoing COVID-19 pandemic, the Company has taken a series of
actions to preserve financial flexibility and support franchisees during this
time of uncertainty. These actions include temporarily extending payment terms
for royalties and advertising fees for franchisees in the U.S. and Canada from
12 to 45 days through mid-May, as well as providing payment plan options for
these deferred fees, to provide franchisees with more financial flexibility to
better support their employees and guests. Additionally, the Company provided
extended payment terms and payment plan options to franchisees and licensees in
certain international markets. The Company also provided approximately $7
million of corporate financial relief primarily to franchisees in the U.S. that
were most significantly impacted by the pandemic. In addition, the Company is
waiving up to one month of rental payments and allowed franchisees to defer two
months of rental payments on the approximately 900 properties leased by the
Company to franchisees. While we do not expect these actions to adversely affect
our ability to meet our cash needs, we have also implemented plans to preserve
our strong balance sheet by reducing operating expenses and preserving cash,
including suspension of our share repurchase program. We expect to remain in
compliance with all of our debt covenants under the securitization facility.
Based upon our current level of operations and anticipated growth, we believe
that our cash on hand and the cash generated from our operations 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 from current levels. There can be no assurance,
however, that our business will generate sufficient cash flows from operations
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.
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Recently Issued Accounting Standards
See note 2 (f) and note 13 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 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 28, 2019 .
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 26, 2020 . 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.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended September 26, 2020 , that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Based on the evaluation of our disclosure controls and
procedures as of September 26, 2020 , our Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective.
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