Item 1. Financial Statements and Supplementary Data
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
613,641
|
|
|
621,152
|
|
Restricted cash
|
89,626
|
|
|
85,644
|
|
Accounts receivable, net of allowances of $12,155 and $6,533 as of September 26, 2020 and December 28, 2019, respectively
|
87,227
|
|
|
76,019
|
|
Notes and other receivables, net of allowances of $870 and $778 as of September 26, 2020 and December 28, 2019, respectively
|
55,617
|
|
|
57,174
|
|
Prepaid income taxes
|
8,799
|
|
|
16,701
|
|
Prepaid expenses and other current assets
|
57,622
|
|
|
50,611
|
|
Total current assets
|
912,532
|
|
|
907,301
|
|
Property, equipment, and software, net of accumulated depreciation of $186,599 and $172,001 as of September 26, 2020 and December 28, 2019, respectively
|
217,419
|
|
|
223,120
|
|
Operating lease assets
|
348,045
|
|
|
371,264
|
|
Equity method investments
|
163,443
|
|
|
154,812
|
|
Goodwill
|
888,274
|
|
|
888,286
|
|
Other intangible assets, net of accumulated amortization of $266,590 and $253,641 as of September 26, 2020 and December 28, 2019, respectively
|
1,288,952
|
|
|
1,302,721
|
|
Other assets
|
70,339
|
|
|
72,520
|
|
Total assets
|
$
|
3,889,004
|
|
|
3,920,024
|
|
Liabilities and Stockholders’ Deficit
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
31,150
|
|
|
31,150
|
|
Operating lease liabilities
|
39,563
|
|
|
35,863
|
|
Accounts payable
|
76,017
|
|
|
89,413
|
|
Deferred revenue
|
38,144
|
|
|
39,950
|
|
Other current liabilities
|
379,504
|
|
|
386,050
|
|
Total current liabilities
|
564,378
|
|
|
582,426
|
|
Long-term debt, net
|
2,992,330
|
|
|
3,004,216
|
|
Operating lease liabilities
|
357,229
|
|
|
380,647
|
|
Deferred revenue
|
287,973
|
|
|
324,854
|
|
Deferred income taxes, net
|
197,669
|
|
|
197,673
|
|
Other long-term liabilities
|
22,770
|
|
|
18,218
|
|
Total long-term liabilities
|
3,857,971
|
|
|
3,925,608
|
|
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; 82,407,709 shares issued and 82,406,709 shares outstanding as of September 26, 2020; 82,835,830 shares issued and 82,834,830 shares outstanding as of December 28, 2019
|
82
|
|
|
83
|
|
Additional paid-in capital
|
516,590
|
|
|
561,345
|
|
Treasury stock, at cost; 1,000 shares as of September 26, 2020 and December 28, 2019
|
(64)
|
|
|
(64)
|
|
Accumulated deficit
|
(1,028,546)
|
|
|
(1,129,565)
|
|
Accumulated other comprehensive loss
|
(21,407)
|
|
|
(19,809)
|
|
Total stockholders’ deficit
|
(533,345)
|
|
|
(588,010)
|
|
Total liabilities and stockholders’ deficit
|
$
|
3,889,004
|
|
|
3,920,024
|
|
See accompanying notes to unaudited consolidated financial statements.
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Revenues:
|
|
|
|
|
|
|
|
Franchise fees and royalty income
|
$
|
160,065
|
|
|
157,224
|
|
|
415,506
|
|
|
454,810
|
|
Advertising fees and related income
|
132,280
|
|
|
128,675
|
|
|
358,881
|
|
|
375,132
|
|
Rental income
|
30,639
|
|
|
31,984
|
|
|
85,588
|
|
|
92,691
|
|
Sales of ice cream and other products
|
24,514
|
|
|
24,409
|
|
|
71,164
|
|
|
72,400
|
|
Other revenues
|
14,045
|
|
|
13,590
|
|
|
40,924
|
|
|
39,277
|
|
Total revenues
|
361,543
|
|
|
355,882
|
|
|
972,063
|
|
|
1,034,310
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Occupancy expenses—franchised restaurants
|
18,908
|
|
|
19,823
|
|
|
56,540
|
|
|
58,995
|
|
Cost of ice cream and other products
|
19,276
|
|
|
21,066
|
|
|
55,410
|
|
|
59,724
|
|
Advertising expenses
|
133,352
|
|
|
130,846
|
|
|
362,702
|
|
|
379,898
|
|
General and administrative expenses
|
58,705
|
|
|
60,333
|
|
|
171,399
|
|
|
176,458
|
|
Depreciation
|
5,663
|
|
|
4,584
|
|
|
16,483
|
|
|
13,916
|
|
Amortization of other intangible assets
|
4,582
|
|
|
4,599
|
|
|
13,762
|
|
|
13,858
|
|
Long-lived asset impairment charges
|
—
|
|
|
36
|
|
|
560
|
|
|
361
|
|
Total operating costs and expenses
|
240,486
|
|
|
241,287
|
|
|
676,856
|
|
|
703,210
|
|
Net income of equity method investments
|
7,159
|
|
|
6,667
|
|
|
15,108
|
|
|
13,324
|
|
Other operating income, net
|
699
|
|
|
81
|
|
|
1,528
|
|
|
943
|
|
Operating income
|
128,915
|
|
|
121,343
|
|
|
311,843
|
|
|
345,367
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
Interest income
|
124
|
|
|
2,996
|
|
|
2,491
|
|
|
7,906
|
|
Interest expense
|
(31,854)
|
|
|
(31,787)
|
|
|
(96,541)
|
|
|
(96,758)
|
|
Loss on debt extinguishment
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,076)
|
|
Other income (loss), net
|
154
|
|
|
(258)
|
|
|
(302)
|
|
|
(308)
|
|
Total other expense, net
|
(31,576)
|
|
|
(29,049)
|
|
|
(94,352)
|
|
|
(102,236)
|
|
Income before income taxes
|
97,339
|
|
|
92,294
|
|
|
217,491
|
|
|
243,131
|
|
Provision for income taxes
|
23,371
|
|
|
19,929
|
|
|
54,960
|
|
|
58,821
|
|
Net income
|
$
|
73,968
|
|
|
72,365
|
|
|
162,531
|
|
|
184,310
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Common—basic
|
$
|
0.90
|
|
|
0.87
|
|
|
1.97
|
|
|
2.23
|
|
Common—diluted
|
0.89
|
|
|
0.86
|
|
|
1.96
|
|
|
2.20
|
|
See accompanying notes to unaudited consolidated financial statements.
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Net income
|
$
|
73,968
|
|
|
72,365
|
|
|
162,531
|
|
|
184,310
|
|
Other comprehensive income (loss), net:
|
|
|
|
|
|
|
|
Effect of foreign currency translation, net of deferred tax expense (benefit) of $12 and $(47) for the three months ended September 26, 2020 and September 28, 2019, respectively, and $(53) and $(39) for the nine months ended September 26, 2020 and September 28, 2019, respectively.
|
3,925
|
|
|
(5,457)
|
|
|
(986)
|
|
|
(9,470)
|
|
Other, net
|
(19)
|
|
|
(34)
|
|
|
(612)
|
|
|
(165)
|
|
Total other comprehensive income (loss), net
|
3,906
|
|
|
(5,491)
|
|
|
(1,598)
|
|
|
(9,635)
|
|
Comprehensive income
|
$
|
77,874
|
|
|
66,874
|
|
|
160,933
|
|
|
174,675
|
|
See accompanying notes to unaudited consolidated financial statements.
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Three Months Ended September 26, 2020 and September 28, 2019
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Treasury
stock, at cost
|
|
Accumulated
deficit
|
|
Accumulated
other
comprehensive
loss
|
|
Total
|
|
Shares
|
|
Amount
|
|
Balance at June 27, 2020
|
82,259
|
|
|
$
|
82
|
|
|
539,847
|
|
|
(64)
|
|
|
(1,102,284)
|
|
|
(25,313)
|
|
|
(587,732)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
73,968
|
|
|
—
|
|
|
73,968
|
|
Other comprehensive income, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,906
|
|
|
3,906
|
|
Exercise of stock options
|
143
|
|
|
—
|
|
|
6,959
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,959
|
|
Dividends paid on common stock ($0.4025 per share)
|
—
|
|
|
—
|
|
|
(33,169)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,169)
|
|
Share-based compensation expense
|
6
|
|
|
—
|
|
|
2,939
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
(230)
|
|
|
—
|
|
|
(216)
|
|
Balance at September 26, 2020
|
82,408
|
|
|
$
|
82
|
|
|
516,590
|
|
|
(64)
|
|
|
(1,028,546)
|
|
|
(21,407)
|
|
|
(533,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2019
|
82,817
|
|
|
$
|
83
|
|
|
603,868
|
|
|
(3,291)
|
|
|
(1,238,190)
|
|
|
(19,271)
|
|
|
(656,801)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,365
|
|
|
—
|
|
|
72,365
|
|
Other comprehensive loss, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,491)
|
|
|
(5,491)
|
|
Exercise of stock options
|
239
|
|
|
—
|
|
|
11,158
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,158
|
|
Dividends paid on common stock ($0.3750 per share)
|
—
|
|
|
—
|
|
|
(31,042)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,042)
|
|
Share-based compensation expense
|
7
|
|
|
—
|
|
|
3,777
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,777
|
|
Repurchases of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,673)
|
|
|
—
|
|
|
—
|
|
|
(14,673)
|
|
Retirement of treasury stock
|
(180)
|
|
|
—
|
|
|
(1,246)
|
|
|
14,673
|
|
|
(13,427)
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
98
|
|
|
—
|
|
|
(250)
|
|
|
—
|
|
|
(152)
|
|
Balance at September 28, 2019
|
82,883
|
|
|
$
|
83
|
|
|
586,613
|
|
|
(3,291)
|
|
|
(1,179,502)
|
|
|
(24,762)
|
|
|
(620,859)
|
|
See accompanying notes to unaudited consolidated financial statements.
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Nine Months Ended September 26, 2020 and September 28, 2019
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Treasury
stock, at cost
|
|
Accumulated
deficit
|
|
Accumulated
other
comprehensive
loss
|
|
Total
|
|
Shares
|
|
Amount
|
|
Balance at December 28, 2019
|
82,836
|
|
|
$
|
83
|
|
|
561,345
|
|
|
(64)
|
|
|
(1,129,565)
|
|
|
(19,809)
|
|
|
(588,010)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
162,531
|
|
|
—
|
|
|
162,531
|
|
Other comprehensive loss, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,598)
|
|
|
(1,598)
|
|
Exercise of stock options
|
360
|
|
|
—
|
|
|
17,202
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,202
|
|
Dividends paid on common stock ($0.8050 per share)
|
—
|
|
|
—
|
|
|
(66,226)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66,226)
|
|
Share-based compensation expense
|
77
|
|
|
—
|
|
|
9,134
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,134
|
|
Repurchases of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(64,292)
|
|
|
—
|
|
|
—
|
|
|
(64,292)
|
|
Retirement of treasury stock
|
(881)
|
|
|
(1)
|
|
|
(5,615)
|
|
|
64,292
|
|
|
(58,676)
|
|
|
—
|
|
|
—
|
|
Other
|
16
|
|
|
—
|
|
|
750
|
|
|
—
|
|
|
(2,836)
|
|
|
—
|
|
|
(2,086)
|
|
Balance at September 26, 2020
|
82,408
|
|
|
$
|
82
|
|
|
516,590
|
|
|
(64)
|
|
|
(1,028,546)
|
|
|
(21,407)
|
|
|
(533,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2018
|
82,437
|
|
|
$
|
82
|
|
|
642,017
|
|
|
(1,060)
|
|
|
(1,338,709)
|
|
|
(15,127)
|
|
|
(712,797)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
184,310
|
|
|
—
|
|
|
184,310
|
|
Other comprehensive loss, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,635)
|
|
|
(9,635)
|
|
Exercise of stock options
|
596
|
|
|
1
|
|
|
27,902
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,903
|
|
Dividends paid on common stock ($1.1250 per share)
|
—
|
|
|
—
|
|
|
(93,027)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(93,027)
|
|
Share-based compensation expense
|
154
|
|
|
—
|
|
|
11,073
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,073
|
|
Repurchases of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,802)
|
|
|
—
|
|
|
—
|
|
|
(24,802)
|
|
Retirement of treasury stock
|
(315)
|
|
|
—
|
|
|
(2,205)
|
|
|
24,802
|
|
|
(22,597)
|
|
|
—
|
|
|
—
|
|
Other
|
11
|
|
|
—
|
|
|
853
|
|
|
(2,231)
|
|
|
(2,506)
|
|
|
—
|
|
|
(3,884)
|
|
Balance at September 28, 2019
|
82,883
|
|
|
$
|
83
|
|
|
586,613
|
|
|
(3,291)
|
|
|
(1,179,502)
|
|
|
(24,762)
|
|
|
(620,859)
|
|
See accompanying notes to unaudited consolidated financial statements.
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
162,531
|
|
|
184,310
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
35,638
|
|
|
31,698
|
|
Amortization of debt issuance costs
|
3,726
|
|
|
3,759
|
|
Loss on debt extinguishment
|
—
|
|
|
13,076
|
|
Deferred income taxes
|
105
|
|
|
(8,419)
|
|
|
|
|
|
Provision for uncollectible accounts and notes receivable
|
6,497
|
|
|
1,452
|
|
Share-based compensation expense
|
9,134
|
|
|
11,073
|
|
Net income of equity method investments
|
(15,108)
|
|
|
(13,324)
|
|
Dividends received from equity method investments
|
5,090
|
|
|
4,367
|
|
|
|
|
|
Other, net
|
1,224
|
|
|
(702)
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts, notes, and other receivables, net
|
(16,004)
|
|
|
20,104
|
|
Prepaid income taxes, net
|
7,915
|
|
|
9,332
|
|
Prepaid expenses and other current assets
|
(7,074)
|
|
|
(532)
|
|
Accounts payable
|
(11,757)
|
|
|
(10,151)
|
|
Other current liabilities
|
(7,202)
|
|
|
(75,858)
|
|
Deferred revenue
|
(41,014)
|
|
|
(7,984)
|
|
Other, net
|
9,022
|
|
|
(4,422)
|
|
Net cash provided by operating activities
|
142,723
|
|
|
157,779
|
|
Cash flows from investing activities:
|
|
|
|
Additions to property, equipment, and software
|
(15,797)
|
|
|
(26,515)
|
|
|
|
|
|
Other, net
|
345
|
|
|
1,118
|
|
Net cash used in investing activities
|
(15,452)
|
|
|
(25,397)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
—
|
|
|
1,700,000
|
|
Repayment of long-term debt
|
(15,612)
|
|
|
(1,699,237)
|
|
Payment of debt issuance and other debt-related costs
|
—
|
|
|
(17,937)
|
|
Dividends paid on common stock
|
(66,226)
|
|
|
(93,027)
|
|
Repurchases of common stock
|
(64,292)
|
|
|
(24,802)
|
|
Exercise of stock options
|
17,202
|
|
|
27,903
|
|
|
|
|
|
Other, net
|
(2,566)
|
|
|
(4,779)
|
|
Net cash used in financing activities
|
(131,494)
|
|
|
(111,879)
|
|
Effect of exchange rates on cash, cash equivalents, and restricted cash
|
(62)
|
|
|
(208)
|
|
Increase (decrease) in cash, cash equivalents, and restricted cash
|
(4,285)
|
|
|
20,295
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
707,977
|
|
|
598,321
|
|
Cash, cash equivalents, and restricted cash, end of period
|
$
|
703,692
|
|
|
618,616
|
|
Supplemental cash flow information:
|
|
|
|
Cash paid for income taxes
|
$
|
47,470
|
|
|
58,179
|
|
Cash paid for interest
|
93,184
|
|
|
93,384
|
|
Noncash activities:
|
|
|
|
Leased assets obtained in exchange for operating lease liabilities, net
|
7,245
|
|
|
10,438
|
|
Property, equipment, and software included in accounts payable and other current liabilities
|
3,212
|
|
|
3,588
|
|
Leased assets obtained in exchange for finance lease liabilities, net
|
1,073
|
|
|
—
|
|
|
|
|
|
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 September 26, 2020, the consolidated statements of operations, comprehensive income, and stockholders' deficit for each of the three- and nine-month periods ended September 26, 2020 and September 28, 2019, and the consolidated statements of cash flows for each of the nine-month periods ended September 26, 2020 and September 28, 2019 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 28, 2019, included in the Company's Annual Report on Form 10-K.
(b) Fiscal year
The Company operates and reports financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and nine-month periods ended September 26, 2020 and September 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 ended September 26, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2020.
(c) Cash, cash equivalents, and restricted cash
In accordance with the Company’s securitized financing facility, certain cash accounts have been established in the name of Citibank, N.A. (the “Trustee”) for the benefit of the Trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents (i) cash collections held by the Trustee, (ii) interest, principal, and commitment fee reserves held by the Trustee related to the Company’s notes (see note 4), and (iii) real estate reserves used to pay real estate obligations.
Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of September 26, 2020 and December 28, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
Cash and cash equivalents
|
$
|
613,641
|
|
|
621,152
|
|
Restricted cash
|
89,626
|
|
|
85,644
|
|
Restricted cash, included in Other assets
|
425
|
|
|
1,181
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
703,692
|
|
|
707,977
|
|
(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 September 26, 2020 and December 28, 2019 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020
|
|
December 28, 2019
|
|
Significant other observable inputs (Level 2)
|
|
Total
|
|
Significant other observable inputs (Level 2)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Company-owned life insurance
|
$
|
11,537
|
|
|
11,537
|
|
|
12,367
|
|
|
12,367
|
|
Total assets
|
$
|
11,537
|
|
|
11,537
|
|
|
12,367
|
|
|
12,367
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
$
|
7,865
|
|
|
7,865
|
|
|
7,216
|
|
|
7,216
|
|
Total liabilities
|
$
|
7,865
|
|
|
7,865
|
|
|
7,216
|
|
|
7,216
|
|
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 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 September 26, 2020 and December 28, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020
|
|
December 28, 2019
|
|
Carrying value
|
|
Estimated fair value
|
|
Carrying value
|
|
Estimated fair value
|
|
|
|
|
|
|
|
|
Total long-term debt
|
$
|
3,023,480
|
|
|
3,227,605
|
|
|
3,035,366
|
|
|
3,149,505
|
|
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 note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and
licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. As of September 26, 2020 and December 28, 2019, one master licensee, including its majority-owned subsidiaries, accounted for approximately 11% and 15%, respectively, of total accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for any of the three- and nine-month periods ended September 26, 2020 and September 28, 2019.
Additionally, the Company engages various third parties to manufacture and/or distribute certain Dunkin' and Baskin-Robbins products under licensing arrangements. As of September 26, 2020, one of these third parties accounted for approximately 18% of total accounts and notes receivable. No individual third party accounted for more than 10% of total accounts and notes receivable as of December 28, 2019. No individual third party accounted for more than 10% of total revenues for any of the three- and nine-month periods ended September 26, 2020 and September 28, 2019.
(f) Recent accounting pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance for financial instruments which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted this new guidance in fiscal year 2020 using the modified retrospective transition method. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
The Company closely monitors the financial condition of our franchisees, licensees, and other third parties and estimates the allowance for credit losses based upon the lifetime expected loss on receivables. These estimates are based on historical collection experience with our franchisees, licensees, and other third parties as well as other factors, including those related to current market conditions and events. Included in the allowance for credit losses is a provision for uncollectible royalty, franchise fee, advertising fee, ice cream, and licensing fee receivables (see note 13).
The Company also monitors its off-balance sheet exposures under its letters of credit and supply chain and other guarantees. None of these arrangements has or is likely to have a material effect on the Company’s results of operations, financial condition, revenues, expenses or liquidity.
(g) Subsequent events
Subsequent events have been evaluated up through the date that these consolidated financial statements were filed.
(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 September 26, 2020
|
|
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
|
$
|
130,866
|
|
|
9,016
|
|
|
4,744
|
|
|
2,278
|
|
|
—
|
|
|
146,904
|
|
|
5,733
|
|
|
152,637
|
|
Franchise fees
|
6,485
|
|
|
380
|
|
|
335
|
|
|
229
|
|
|
—
|
|
|
7,429
|
|
|
(1)
|
|
|
7,428
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
123,025
|
|
|
123,025
|
|
|
1,223
|
|
|
124,248
|
|
Other revenues
|
627
|
|
|
2,985
|
|
|
104
|
|
|
8
|
|
|
—
|
|
|
3,724
|
|
|
9,775
|
|
|
13,499
|
|
Total revenues recognized over time
|
137,978
|
|
|
12,381
|
|
|
5,183
|
|
|
2,515
|
|
|
123,025
|
|
|
281,082
|
|
|
16,730
|
|
|
297,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of ice cream and other products
|
—
|
|
|
1,524
|
|
|
—
|
|
|
27,495
|
|
|
—
|
|
|
29,019
|
|
|
(4,505)
|
|
|
24,514
|
|
Other revenues
|
153
|
|
|
132
|
|
|
5
|
|
|
(23)
|
|
|
—
|
|
|
267
|
|
|
279
|
|
|
546
|
|
Total revenues recognized at a point in time
|
153
|
|
|
1,656
|
|
|
5
|
|
|
27,472
|
|
|
—
|
|
|
29,286
|
|
|
(4,226)
|
|
|
25,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues recognized under ASC 606
|
138,131
|
|
|
14,037
|
|
|
5,188
|
|
|
29,987
|
|
|
123,025
|
|
|
310,368
|
|
|
12,504
|
|
|
322,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues not subject to ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,032
|
|
|
8,032
|
|
Rental income
|
29,822
|
|
|
740
|
|
|
—
|
|
|
77
|
|
|
—
|
|
|
30,639
|
|
|
—
|
|
|
30,639
|
|
Total revenues not subject to ASC 606
|
29,822
|
|
|
740
|
|
|
—
|
|
|
77
|
|
|
—
|
|
|
30,639
|
|
|
8,032
|
|
|
38,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
167,953
|
|
|
14,777
|
|
|
5,188
|
|
|
30,064
|
|
|
123,025
|
|
|
341,007
|
|
|
20,536
|
|
|
361,543
|
|
(a)Revenues reported as “Other” include revenues earned through certain licensing arrangements, 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, certain franchisee incentives, and certain corporate financial relief provided to franchisees are reported as “Other.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 28, 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
|
$
|
130,993
|
|
|
8,973
|
|
|
5,769
|
|
|
2,197
|
|
|
—
|
|
|
147,932
|
|
|
5,288
|
|
|
153,220
|
|
Franchise fees
|
3,675
|
|
|
374
|
|
|
792
|
|
|
165
|
|
|
—
|
|
|
5,006
|
|
|
(1,002)
|
|
|
4,004
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
122,819
|
|
|
122,819
|
|
|
1,412
|
|
|
124,231
|
|
Other revenues
|
624
|
|
|
2,962
|
|
|
120
|
|
|
9
|
|
|
—
|
|
|
3,715
|
|
|
9,196
|
|
|
12,911
|
|
Total revenues recognized over time
|
135,292
|
|
|
12,309
|
|
|
6,681
|
|
|
2,371
|
|
|
122,819
|
|
|
279,472
|
|
|
14,894
|
|
|
294,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of ice cream and other products
|
—
|
|
|
1,021
|
|
|
—
|
|
|
28,459
|
|
|
—
|
|
|
29,480
|
|
|
(5,071)
|
|
|
24,409
|
|
Other revenues
|
288
|
|
|
52
|
|
|
68
|
|
|
(37)
|
|
|
—
|
|
|
371
|
|
|
308
|
|
|
679
|
|
Total revenues recognized at a point in time
|
288
|
|
|
1,073
|
|
|
68
|
|
|
28,422
|
|
|
—
|
|
|
29,851
|
|
|
(4,763)
|
|
|
25,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues recognized under ASC 606
|
135,580
|
|
|
13,382
|
|
|
6,749
|
|
|
30,793
|
|
|
122,819
|
|
|
309,323
|
|
|
10,131
|
|
|
319,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues not subject to ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,444
|
|
|
4,444
|
|
Rental income
|
30,824
|
|
|
942
|
|
|
—
|
|
|
218
|
|
|
—
|
|
|
31,984
|
|
|
—
|
|
|
31,984
|
|
Total revenues not subject to ASC 606
|
30,824
|
|
|
942
|
|
|
—
|
|
|
218
|
|
|
—
|
|
|
31,984
|
|
|
4,444
|
|
|
36,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
166,404
|
|
|
14,324
|
|
|
6,749
|
|
|
31,011
|
|
|
122,819
|
|
|
341,307
|
|
|
14,575
|
|
|
355,882
|
|
(a)Revenues reported as “Other” include revenues earned through certain licensing arrangements, 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 and certain franchisee incentives are reported as “Other.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 26, 2020
|
|
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
|
$
|
351,740
|
|
|
23,423
|
|
|
12,086
|
|
|
5,662
|
|
|
—
|
|
|
392,911
|
|
|
3,584
|
|
|
396,495
|
|
Franchise fees
|
16,503
|
|
|
980
|
|
|
1,095
|
|
|
534
|
|
|
—
|
|
|
19,112
|
|
|
(101)
|
|
|
19,011
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
331,139
|
|
|
331,139
|
|
|
3,309
|
|
|
334,448
|
|
Other revenues
|
2,002
|
|
|
7,481
|
|
|
192
|
|
|
8
|
|
|
—
|
|
|
9,683
|
|
|
29,593
|
|
|
39,276
|
|
Total revenues recognized over time
|
370,245
|
|
|
31,884
|
|
|
13,373
|
|
|
6,204
|
|
|
331,139
|
|
|
752,845
|
|
|
36,385
|
|
|
789,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of ice cream and other products
|
—
|
|
|
3,803
|
|
|
—
|
|
|
77,281
|
|
|
—
|
|
|
81,084
|
|
|
(9,920)
|
|
|
71,164
|
|
Other revenues
|
684
|
|
|
195
|
|
|
91
|
|
|
(42)
|
|
|
—
|
|
|
928
|
|
|
720
|
|
|
1,648
|
|
Total revenues recognized at a point in time
|
684
|
|
|
3,998
|
|
|
91
|
|
|
77,239
|
|
|
—
|
|
|
82,012
|
|
|
(9,200)
|
|
|
72,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues recognized under ASC 606
|
370,929
|
|
|
35,882
|
|
|
13,464
|
|
|
83,443
|
|
|
331,139
|
|
|
834,857
|
|
|
27,185
|
|
|
862,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues not subject to ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,433
|
|
|
24,433
|
|
Rental income
|
82,962
|
|
|
2,146
|
|
|
—
|
|
|
480
|
|
|
—
|
|
|
85,588
|
|
|
—
|
|
|
85,588
|
|
Total revenues not subject to ASC 606
|
82,962
|
|
|
2,146
|
|
|
—
|
|
|
480
|
|
|
—
|
|
|
85,588
|
|
|
24,433
|
|
|
110,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
453,891
|
|
|
38,028
|
|
|
13,464
|
|
|
83,923
|
|
|
331,139
|
|
|
920,445
|
|
|
51,618
|
|
|
972,063
|
|
(a)Revenues reported as “Other” include revenues earned through certain licensing arrangements, 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, certain franchisee incentives, and certain corporate financial relief provided to franchisees are reported as “Other.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 28, 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
|
$
|
379,772
|
|
|
23,904
|
|
|
17,078
|
|
|
6,055
|
|
|
—
|
|
|
426,809
|
|
|
12,524
|
|
|
439,333
|
|
Franchise fees
|
10,719
|
|
|
1,030
|
|
|
3,687
|
|
|
1,043
|
|
|
—
|
|
|
16,479
|
|
|
(1,002)
|
|
|
15,477
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
355,049
|
|
|
355,049
|
|
|
3,984
|
|
|
359,033
|
|
Other revenues
|
1,918
|
|
|
8,125
|
|
|
124
|
|
|
9
|
|
|
—
|
|
|
10,176
|
|
|
26,813
|
|
|
36,989
|
|
Total revenues recognized over time
|
392,409
|
|
|
33,059
|
|
|
20,889
|
|
|
7,107
|
|
|
355,049
|
|
|
808,513
|
|
|
42,319
|
|
|
850,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues recognized at a point in time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of ice cream and other products
|
—
|
|
|
2,772
|
|
|
—
|
|
|
81,531
|
|
|
—
|
|
|
84,303
|
|
|
(11,903)
|
|
|
72,400
|
|
Other revenues
|
1,154
|
|
|
183
|
|
|
181
|
|
|
(24)
|
|
|
—
|
|
|
1,494
|
|
|
794
|
|
|
2,288
|
|
Total revenues recognized at a point in time
|
1,154
|
|
|
2,955
|
|
|
181
|
|
|
81,507
|
|
|
—
|
|
|
85,797
|
|
|
(11,109)
|
|
|
74,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues recognized under ASC 606
|
393,563
|
|
|
36,014
|
|
|
21,070
|
|
|
88,614
|
|
|
355,049
|
|
|
894,310
|
|
|
31,210
|
|
|
925,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues not subject to ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising fees and related income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,099
|
|
|
16,099
|
|
Rental income
|
89,163
|
|
|
2,875
|
|
|
—
|
|
|
653
|
|
|
—
|
|
|
92,691
|
|
|
—
|
|
|
92,691
|
|
Total revenues not subject to ASC 606
|
89,163
|
|
|
2,875
|
|
|
—
|
|
|
653
|
|
|
—
|
|
|
92,691
|
|
|
16,099
|
|
|
108,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
482,726
|
|
|
38,889
|
|
|
21,070
|
|
|
89,267
|
|
|
355,049
|
|
|
987,001
|
|
|
47,309
|
|
|
1,034,310
|
|
(a)Revenues reported as “Other” include revenues earned through certain licensing arrangements, 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 and certain franchisee incentives are reported as “Other.”
(b) Contract balances
Information about receivables, contract assets, and deferred revenue subject to ASC 606 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
|
Balance Sheet Classification
|
Receivables
|
$
|
113,401
|
|
|
86,104
|
|
|
Accounts receivable, net, Notes and other receivables, net, and Other assets
|
Contract assets
|
7,235
|
|
|
4,894
|
|
|
Other assets
|
|
|
|
|
|
|
Deferred revenue:
|
|
|
|
|
|
Current
|
$
|
26,138
|
|
|
27,213
|
|
|
Deferred revenue—current
|
Long-term
|
284,023
|
|
|
320,457
|
|
|
Deferred revenue—long term
|
Total
|
$
|
310,161
|
|
|
347,670
|
|
|
|
Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, sales of ice cream and other products, and licensing fees. Contract assets relate primarily to consideration paid to customers, including franchisee incentives, that exceeds the fixed consideration received for certain contracts, net of any revenue recognized. Deferred revenue primarily represents the Company’s remaining performance obligations under its franchise and license agreements for which consideration has been received or is receivable, and is generally recognized on a straight-line basis over the remaining term of the related agreement.
The decrease in the deferred revenue balance as of September 26, 2020 was driven primarily by $27.1 million of revenues recognized that were included in the opening deferred revenue balance as of December 28, 2019, as well as franchisee incentives provided during fiscal year 2020, offset by cash payments received or due in advance of satisfying our performance obligations.
(c) Transaction price allocated to remaining performance obligations
Estimated revenue expected to be recognized in the future related to performance obligations that are either unsatisfied or partially satisfied at September 26, 2020 is as follows (in thousands):
|
|
|
|
|
|
Fiscal year:
|
|
2020(a)
|
$
|
7,169
|
|
2021
|
20,499
|
|
2022
|
16,662
|
|
2023
|
16,870
|
|
2024
|
17,231
|
|
Thereafter
|
195,981
|
|
Total
|
$
|
274,412
|
|
|
|
(a) Represents the estimate for remainder of fiscal year 2020 which excludes the nine months ended September 26, 2020.
|
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 September 26, 2020. Additionally, the table above excludes $46.1 million of consideration allocated to restaurants that were not yet open at September 26, 2020. 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.
(4) Debt
Debt at September 26, 2020 and December 28, 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
2017 Class A-2-I Notes
|
$
|
585,000
|
|
|
588,000
|
|
2017 Class A-2-II Notes
|
780,000
|
|
|
784,000
|
|
2019 Class A-2-I Notes
|
594,000
|
|
|
597,000
|
|
2019 Class A-2-II Notes
|
396,000
|
|
|
398,000
|
|
2019 Class A-2-III Notes
|
693,000
|
|
|
696,500
|
|
|
|
|
|
Other
|
1,138
|
|
|
1,250
|
|
Debt issuance costs, net of amortization
|
(25,658)
|
|
|
(29,384)
|
|
Total long-term debt, net
|
3,023,480
|
|
|
3,035,366
|
|
Less: current portion of long-term debt
|
31,150
|
|
|
31,150
|
|
Long-term debt, net
|
$
|
2,992,330
|
|
|
3,004,216
|
|
The Company's outstanding debt as of September 26, 2020 included Series 2017-1 3.629% Fixed Rate Senior Secured Notes, Class A-2-I (the “2017 Class A-2-I Notes”), 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”), Series 2019-1 3.787% Fixed Rate Senior Secured Notes, Class A-2-I (the “2019 Class A-2-I Notes”), Series 2019-1 4.021% Fixed Rate Senior Secured Notes, Class A-2-II (the “2019 Class A-2-II Notes”), 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”) issued by DB Master Finance LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of DBGI. In addition, the Master Issuer issued Series 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.
No principal payments are required on the Company's outstanding debt 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 base indenture and related supplemental indentures, collectively, the “Indenture”), is less than or equal to 5.0 to 1.0. As of March 28, 2020, the Company's leverage ratio was less than 5.0 to 1.0. As such, the Company did not make the scheduled principal payment of $7.8 million in May 2020. Based upon the Company's leverage ratio as of June 27, 2020 and September 26, 2020, the Company made the scheduled principal payment in August 2020 and intends to make the next scheduled principal payment in November 2020.
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic. On March 16, 2020, the Company borrowed $116.0 million against the 2019 Variable Funding Notes as a precautionary measure given the market uncertainty arising from COVID-19 and to further strengthen financial flexibility. Borrowings under the 2019 Variable Funding Notes bear interest at a rate equal to a LIBOR rate plus 1.50%. The Company repaid all borrowings under the 2019 Variable Funding Notes during the second fiscal quarter of 2020.
As of each of September 26, 2020 and December 28, 2019, $33.1 million of letters of credit were outstanding against the 2019 Variable Funding Notes, which related primarily to interest reserves required under the Indenture. There were no amounts drawn down on these letters of credit as of September 26, 2020 or December 28, 2019.
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 pledged substantially all of their assets to secure the 2017 Class A-2 Notes and 2019 Notes.
(5) Other current liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
Gift card/certificate liability
|
$
|
187,780
|
|
|
248,082
|
|
|
|
|
|
Accrued payroll and benefits
|
22,285
|
|
|
27,208
|
|
|
|
|
|
Accrued interest
|
12,687
|
|
|
13,086
|
|
|
|
|
|
Other current liabilities—advertising funds
|
106,206
|
|
|
48,089
|
|
Franchisee profit-sharing liability
|
8,012
|
|
|
14,184
|
|
Other
|
42,534
|
|
|
35,401
|
|
Total other current liabilities
|
$
|
379,504
|
|
|
386,050
|
|
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., Baskin-Robbins U.S., Dunkin’ International, 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 and franchise 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. Additionally, certain franchisee incentives and certain corporate financial relief provided to franchisees are reported as "Other." Revenues by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Dunkin’ U.S.
|
$
|
167,953
|
|
|
166,404
|
|
|
453,891
|
|
|
482,726
|
|
Baskin-Robbins U.S.
|
14,777
|
|
|
14,324
|
|
|
38,028
|
|
|
38,889
|
|
Dunkin’ International
|
5,188
|
|
|
6,749
|
|
|
13,464
|
|
|
21,070
|
|
Baskin-Robbins International
|
30,064
|
|
|
31,011
|
|
|
83,923
|
|
|
89,267
|
|
U.S. Advertising Funds
|
123,025
|
|
|
122,819
|
|
|
331,139
|
|
|
355,049
|
|
Total reportable segment revenues
|
341,007
|
|
|
341,307
|
|
|
920,445
|
|
|
987,001
|
|
Other
|
20,536
|
|
|
14,575
|
|
|
51,618
|
|
|
47,309
|
|
Total revenues
|
$
|
361,543
|
|
|
355,882
|
|
|
972,063
|
|
|
1,034,310
|
|
Amounts included in “Corporate and other” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services, net of “Other” revenues reported above. Segment profit by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Dunkin’ U.S.
|
$
|
129,081
|
|
|
127,755
|
|
|
334,545
|
|
|
365,888
|
|
Baskin-Robbins U.S.
|
9,373
|
|
|
9,711
|
|
|
25,281
|
|
|
26,110
|
|
Dunkin’ International
|
3,544
|
|
|
4,898
|
|
|
8,880
|
|
|
15,213
|
|
Baskin-Robbins International
|
14,985
|
|
|
13,028
|
|
|
34,363
|
|
|
32,919
|
|
U.S. Advertising Funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total reportable segments
|
156,983
|
|
|
155,392
|
|
|
403,069
|
|
|
440,130
|
|
Corporate and other
|
(23,486)
|
|
|
(29,414)
|
|
|
(76,904)
|
|
|
(80,544)
|
|
Interest expense, net
|
(31,730)
|
|
|
(28,791)
|
|
|
(94,050)
|
|
|
(88,852)
|
|
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)
|
|
Other income (loss), net
|
154
|
|
|
(258)
|
|
|
(302)
|
|
|
(308)
|
|
Income before income taxes
|
$
|
97,339
|
|
|
92,294
|
|
|
217,491
|
|
|
243,131
|
|
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 table below include the reduction in depreciation and amortization, net of tax, reported by our equity method investees as a result of previously recorded impairment charges. Net income of equity method investments by reportable segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income of equity method investments
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Dunkin’ International
|
$
|
44
|
|
|
168
|
|
|
4
|
|
|
189
|
|
Baskin-Robbins International
|
6,805
|
|
|
5,841
|
|
|
14,105
|
|
|
11,175
|
|
Total reportable segments
|
6,849
|
|
|
6,009
|
|
|
14,109
|
|
|
11,364
|
|
Other
|
310
|
|
|
658
|
|
|
999
|
|
|
1,960
|
|
Total net income of equity method investments
|
$
|
7,159
|
|
|
6,667
|
|
|
15,108
|
|
|
13,324
|
|
(7) Stockholders’ deficit
(a) Treasury stock
During the nine months ended September 26, 2020, the Company repurchased a total of 880,933 shares of common stock in the open market for total consideration of $64.3 million.
The Company accounts for treasury stock under the cost method based on the cost of the shares on the dates of repurchase plus any direct costs incurred. During the nine months ended September 26, 2020, the Company retired 880,933 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 $5.6 million and an increase in accumulated deficit of $58.7 million.
(b) Equity incentive plans
During the nine months ended September 26, 2020, the Company granted stock options to purchase 681,862 shares of common stock and 74,509 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 $75.80 per share and had a weighted-average grant-date fair value of $11.55 per share. The RSUs granted to certain employees and members of our board of
directors generally vest in equal 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 $69.00 per unit.
In addition, the Company granted 45,964 performance stock units (“PSUs”) to certain employees during the nine months ended September 26, 2020. These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 21,225 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 24,739 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 $81.64 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 $72.95 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.
Total compensation expense related to all share-based awards was $2.9 million and $3.8 million for the three months ended September 26, 2020 and September 28, 2019, respectively, and $9.1 million and $11.1 million for the nine months ended September 26, 2020 and September 28, 2019, respectively, and was included in general and administrative expenses in the consolidated statements of operations.
(c) Accumulated other comprehensive loss
The changes in the components of accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
|
Other
|
|
Accumulated other comprehensive loss
|
Balance as of December 28, 2019
|
$
|
(18,841)
|
|
|
|
|
(968)
|
|
|
(19,809)
|
|
Other comprehensive loss, net
|
(986)
|
|
|
|
|
(612)
|
|
|
(1,598)
|
|
Balance as of September 26, 2020
|
$
|
(19,827)
|
|
|
|
|
(1,580)
|
|
|
(21,407)
|
|
(d) Dividends
The Company paid a quarterly dividend of $0.4025 per share of common stock on March 18, 2020 and September 9, 2020 totaling approximately $33.1 million and $33.2 million, respectively. The Company's board of directors temporarily suspended the regular dividend program during the second fiscal quarter in response to the uncertainty arising from the COVID-19 pandemic. The dividend program was reinstated during the third fiscal quarter. On October 30, 2020, the Company, Inspire Brands, Inc. (“Inspire”) and Inspire’s indirect wholly-owned subsidiary, Vale Merger Sub, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which Inspire has agreed to acquire the Company on the terms, and subject to the conditions, set forth therein. 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. See note 15 for more information regarding the merger agreement.
(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
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Net income—basic and diluted
|
$
|
73,968
|
|
|
72,365
|
|
|
162,531
|
|
|
184,310
|
|
Weighted-average number of shares of common stock:
|
|
|
|
|
|
|
|
Common—basic
|
82,472,653
|
|
|
82,887,259
|
|
|
82,484,735
|
|
|
82,762,120
|
|
Common—diluted
|
82,975,900
|
|
|
83,867,413
|
|
|
82,929,043
|
|
|
83,665,397
|
|
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
|
|
The weighted-average number of shares of common stock in the common diluted earnings per share calculation includes the dilutive effect of 503,247 and 980,154 equity awards for the three months ended September 26, 2020 and September 28, 2019, respectively, and includes the dilutive effect of 444,308 and 903,277 equity awards for the nine months ended September 26, 2020 and September 28, 2019, 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 outstanding for which the contingent vesting criteria were not yet met as of the fiscal period end. As of September 26, 2020 and September 28, 2019, there were 70,598 and 35,804 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 1,174,229 and 628,783 equity awards for the three months ended September 26, 2020 and September 28, 2019, respectively, and 1,516,149 and 652,228 equity awards for the nine months ended September 26, 2020 and September 28, 2019, respectively, as they would be antidilutive.
(9) Commitments and contingencies
(a) Supply chain guarantees
The Company has entered into various agreements with suppliers of franchisee products, the majority of which contain guarantees by the Company related to franchisees' purchases of certain volumes of products over specified periods. The Company's guarantees decrease as franchisees purchase products over their respective terms of the agreements. The guarantees have varying terms, many of which are one year or less, and the latest of which expires in 2022. As of September 26, 2020 and December 28, 2019, the Company was contingently liable under such supply chain agreements for approximately $67.3 million and $100.9 million, respectively. 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, the Company accrued an inconsequential amount of reserves related to supply chain guarantees as of September 26, 2020 and December 28, 2019.
(b) Letters of credit
As of each of September 26, 2020 and December 28, 2019, the Company had standby letters of credit outstanding for a total of $33.1 million. There were no amounts drawn down on these letters of credit as of each of September 26, 2020 and December 28, 2019.
(c) Legal matters
The Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes related to compliance with the terms of franchise and development agreements, including claims or threats of claims of breach of contract, negligence, and other alleged violations by the Company. As of each of September 26, 2020 and December 28, 2019, 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
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
B-R 31 Ice Cream Company., Ltd.
|
$
|
587
|
|
|
396
|
|
|
1,089
|
|
|
1,259
|
|
BR-Korea Co., Ltd.
|
1,476
|
|
|
1,296
|
|
|
4,049
|
|
|
3,670
|
|
Palm Oasis Ventures Pty. Ltd.
|
706
|
|
|
1,370
|
|
|
2,292
|
|
|
2,883
|
|
|
$
|
2,769
|
|
|
3,062
|
|
|
7,430
|
|
|
7,812
|
|
As of September 26, 2020 and December 28, 2019, the Company had $3.3 million and $3.7 million, respectively, of receivables from its equity method investees, which were recorded in accounts receivable, net of allowances, in the consolidated balance sheets.
The Company made net payments to its equity method investees totaling approximately $1.7 million and $1.3 million during the three months ended September 26, 2020 and September 28, 2019, respectively, and $4.0 million and $3.1 million for the nine months ended September 26, 2020 and September 28, 2019, respectively, primarily for the purchase of ice cream products.
(11) Advertising funds
Assets and liabilities of the advertising funds, which are restricted in their use, included in the consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
December 28,
2019
|
Accounts receivable, net of allowances
|
$
|
26,587
|
|
|
20,194
|
|
Notes and other receivables, net of allowances
|
1,481
|
|
|
1,133
|
|
Prepaid income taxes
|
168
|
|
|
79
|
|
Prepaid expenses and other current assets
|
11,342
|
|
|
10,255
|
|
Total current assets
|
39,578
|
|
|
31,661
|
|
Property, equipment, and software, net
|
19,440
|
|
|
17,125
|
|
Operating lease assets
|
2,632
|
|
|
4,262
|
|
Other assets
|
655
|
|
|
1,126
|
|
Total assets
|
$
|
62,305
|
|
|
54,174
|
|
|
|
|
|
Operating lease liabilities—current
|
$
|
402
|
|
|
1,932
|
|
Accounts payable
|
51,809
|
|
|
69,232
|
|
Deferred revenue—current(a)
|
(722)
|
|
|
(722)
|
|
Other current liabilities
|
106,206
|
|
|
48,089
|
|
Total current liabilities
|
157,695
|
|
|
118,531
|
|
Operating lease liabilities—long-term
|
1,967
|
|
|
2,241
|
|
Deferred revenue—long-term(a)
|
(5,511)
|
|
|
(6,053)
|
|
|
|
|
|
Total liabilities
|
$
|
154,151
|
|
|
114,719
|
|
(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 restaurants and other properties, including land and buildings, as well as leases for office equipment and automobiles. In addition, the Company has leased and subleased land and buildings to others, primarily franchisees. Rental income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Rental income—operating leases
|
$
|
18,485
|
|
|
18,807
|
|
|
55,552
|
|
|
56,248
|
|
Variable rental income
|
12,154
|
|
|
13,177
|
|
|
30,036
|
|
|
36,443
|
|
Rental income
|
$
|
30,639
|
|
|
31,984
|
|
|
85,588
|
|
|
92,691
|
|
As a result of the COVID-19 pandemic, 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. Additionally, on properties the Company leases from third-party lessors, certain lessors provided waivers of rental payments, which the Company passed through to its franchisees, or permitted the short-term deferral of rental payments.
The FASB staff issued interpretive guidance on the application of lease accounting guidance related to lease concessions as a result of the COVID-19 pandemic. Under existing lease accounting guidance, certain rent waivers and deferrals provided to franchisees or received from lessors would be accounted for as lease modifications. The interpretive guidance provides companies the option to account for eligible lease concessions either as if the rent concessions were part of the enforceable rights and obligations under the original lease contracts, or as lease modifications under the existing guidance. The Company has elected to account for eligible lease concessions as if they were part of the enforceable rights and obligations under the original lease contracts. Accordingly, the Company has not remeasured the related lease assets or lease liabilities for eligible leases, and has recognized waivers of rental payments as reductions of variable rental income and variable occupancy expenses
for leases where the Company is the lessor and lessee, respectively. The deferral of rental payments had no impact on the Company’s recognition of rental income or occupancy expenses for the three or nine months ended September 26, 2020.
Variable rental income presented in the table above has been reduced by approximately $3 million of rent waivers being provided to the Company's franchisees for the nine months ended September 26, 2020. Occupancy expenses—franchised restaurants in the consolidated statements of operations has been reduced by approximately $1 million of rent waivers received from lessors for the nine months ended September 26, 2020.
(13) Allowances for accounts and notes receivable
The changes in the allowances for accounts and notes receivable were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for expected credit losses, excluding lease receivables(a)
|
|
Allowance for lease receivables
|
|
Total(b)
|
Balance at June 27, 2020
|
$
|
10,869
|
|
|
3,252
|
|
|
14,121
|
|
Provision for (recovery of) uncollectible accounts and notes receivable, net
|
(369)
|
|
|
894
|
|
|
525
|
|
Write-offs and other
|
88
|
|
|
—
|
|
|
88
|
|
Balance at September 26, 2020
|
$
|
10,588
|
|
|
4,146
|
|
|
14,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for expected credit losses, excluding lease receivables(a)
|
|
Allowance for lease receivables
|
|
Total(b)
|
Balance at December 28, 2019
|
$
|
7,742
|
|
|
1,108
|
|
|
8,850
|
|
Provision for uncollectible accounts and notes receivable, net
|
3,448
|
|
|
3,049
|
|
|
6,497
|
|
Write-offs and other
|
(602)
|
|
|
(11)
|
|
|
(613)
|
|
Balance at September 26, 2020
|
$
|
10,588
|
|
|
4,146
|
|
|
14,734
|
|
(a)Balance primarily consists of allowances recorded on receivables arising from contracts with customers under ASC 606.
(b)Balance is included in accounts receivable, net; notes and other receivables, net; and other assets in the consolidated balance sheets.
(14) COVID-19 pandemic
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The pandemic had an unfavorable impact on the Company’s business, financial condition, and results of operations for the three and nine months ended September 26, 2020, including temporary closures of restaurants and decreased traffic.
In response to the ongoing COVID-19 pandemic, the Company took a series of actions to preserve financial flexibility and support franchisees during this time of uncertainty. These actions included 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 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 (see note 12).
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.
(15) Subsequent event
On October 30, 2020, the Company entered into the Merger Agreement with Inspire and 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 Merger Agreement contemplates that the Merger will be effected as soon as practicable following consummation of the Offer pursuant to Section 251(h) of the General Corporation Law of the State of Delaware (the “DGCL”), which permits completion of the Merger without a shareholder vote. The obligation of Inspire and Merger Sub to consummate the Offer is subject to various conditions, including that there be validly tendered and not validly withdrawn that number of Shares representing, together with the number of Shares otherwise owned by Inspire and its affiliates, at least a majority of the Shares outstanding as of the scheduled expiration of the Offer (the “Minimum Tender Condition”). The Minimum Tender Condition may not be waived by Merger Sub without the prior written consent of the Company. Merger Sub will not be obligated to consummate the Offer on or prior to December 18, 2020. The obligation of Merger Sub to consummate the Offer is also subject to the expiration of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary conditions. Consummation of the Offer is not subject to a financing condition.
Following the consummation of the Offer and subject to the terms and conditions of the Merger Agreement, Merger Sub will merge with and into the Company pursuant to the provisions of Section 251(h) of the DGCL as provided in the Merger Agreement, with the Company being the surviving corporation.
The Merger Agreement includes customary representations, warranties and covenants of the Company, Inspire and Merger Sub. Subject to the terms of the Merger Agreement, the Company has agreed to operate its business in the ordinary course until the effective time of the Merger. The Company has also agreed, subject to certain conditions, not to solicit or engage in discussions with third parties regarding other acquisition proposals. Inspire and Merger Sub have agreed to use reasonable best efforts to take actions that may be required in order to obtain antitrust approval of the proposed transaction, subject to certain limitations.
The Merger Agreement also includes customary termination rights for both the Company and Inspire, subject, in certain circumstances, to the payment by the Company or Inspire of a termination fee of $268 million or $469 million, respectively.
The Offer will initially remain open for twenty business days, subject to possible extension on the terms set forth in the Merger Agreement. The parties currently expect the Offer and the Merger to be completed in the fourth quarter of 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 the Securities 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 ended March 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 of September 26, 2020, Dunkin’ had 12,658 global points of distribution with restaurants in 43 U.S. states, the District 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, the District 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, 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 September 26, 2020, we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators.
We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and nine-month periods ended September 26, 2020 and September 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 ended September 26, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2020.
On March 11, 2020, the World 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
On October 30, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Inspire 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,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
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.
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.
The COVID-19 pandemic had an unfavorable impact on systemwide sales for each of our segments for the three and nine months ended September 26, 2020. Global declines in systemwide sales of 1.3% and 7.7% for the three and nine months ended September 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 ended September 26, 2020 was primarily a result of comparable store sales growth of 0.9%, offset by 423 net restaurant closures since September 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 ended September 26, 2020 was primarily a result of a comparable store sales decline of 6.8%, as well as the 423 net restaurant closures since September 28, 2019. Comparable store sales declined for the nine months ended September 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 ended September 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-Robbins U.S. systemwide sales growth of 0.6% for the three months ended September 26, 2020 was primarily a result of comparable store sales growth of 6.5%, offset by 42 net restaurant closures since September 28, 2019. Baskin-Robbins U.S. systemwide sales decline of 2.2% for the nine months ended September 26, 2020 was primarily a result of the 42 net restaurant closures since September 28, 2019, offset by comparable store sales growth of 0.7%. The comparable store sales growth for the three and nine months ended September 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 ended September 26, 2020 was driven by sales declines in Latin America, Asia, and South Korea, offset by sales growth in the Middle East. Foreign exchange rates did not have a significant impact on systemwide sales as the negative impact of unfavorable foreign exchange rates on sales in Latin 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 ended September 26, 2020 was due primarily to declines in Asia, Latin America, South Korea, and Europe, offset by an increase in the Middle East.
Dunkin’ International systemwide sales decline of 22.8% for the nine months ended September 26, 2020 was driven by sales declines in Asia, Latin America, South Korea, Europe, and the Middle East. Sales in Asia 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 ended September 26, 2020. On a constant currency basis, systemwide sales decreased by approximately 21% for the nine months ended September 26, 2020. Dunkin’ International comparable store sales decline of 19.0% for the nine months ended September 26, 2020 was due primarily to declines in Asia, Latin America, Europe, the Middle East, and South Korea.
•Baskin-Robbins International systemwide sales decline of 4.2% for the three months ended September 26, 2020 was driven by sales declines in Japan, the Middle East, Asia, Europe, and Australia, offset by sales growth in South Korea. Foreign exchange rates did not have a significant impact on systemwide sales as the positive impact of favorable foreign exchange rates on sales in Japan, Australia, and South 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 in Japan, Asia, Europe, and Latin America, offset by increases in South Korea and the Middle East.
Baskin-Robbins International systemwide sales decline of 5.5% for the nine months ended September 26, 2020 was driven by sales declines in the Middle East, Japan, Asia, Europe, Australia, and Latin America, offset by sales growth in South Korea. Sales in Japan 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 ended September 26, 2020. On a constant currency basis, systemwide sales decreased by approximately 4% for the nine months ended September 26, 2020. Baskin-Robbins International comparable store sales decline of 1.0% for the nine months ended
September 26, 2020 was driven primarily by declines in the Middle East, Japan, Asia, Europe, and Latin America, offset by growth in South Korea and Australia.
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 ended September 26, 2020 and September 28, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020
|
|
September 28,
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,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
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.
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.
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,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
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,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
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,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
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
|
|
Results of operations
Consolidated results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
$
|
|
%
|
|
$
|
|
%
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
$
|
|
%
|
|
$
|
|
%
|
|
(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.
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 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
$
|
|
%
|
|
(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,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
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.
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,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
$
|
|
%
|
|
(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 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
(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)
|
%
|
Baskin-Robbins U.S. revenues for the three months ended September 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-Robbins U.S. revenues for the nine months ended September 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-Robbins U.S. segment profit for the three months ended September 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-Robbins U.S. segment profit for the nine months ended September 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
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
(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 ended September 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 for Dunkin’ International for the three and nine months ended September 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 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
(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 ended September 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 ended September 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.
Baskin-Robbins International segment profit for the three and nine months ended September 26, 2020 increased $2.0 million and $1.4 million, respectively, primarily as a result of increases in net income from our South Korea and Japan 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,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
September 26,
2020
|
|
September 28,
2019
|
|
Increase (Decrease)
|
|
$
|
|
%
|
|
|
|
$
|
|
%
|
|
(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 ended September 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 ended September 26, 2020 decreased $23.9 million, or 6.7%, driven primarily by the decrease in Dunkin' U.S. systemwide sales.
Expenses for the U.S. Advertising Funds were equivalent to revenues in each period, resulting in no segment profit.
Liquidity and capital resources
As of September 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 ended September 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 ended September 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 ended September 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.
On October 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 ended September 26, 2020 and September 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 ended September 26, 2020 and September 28, 2019, respectively. The decrease in adjusted operating and investing cash flow was driven primarily the 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 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
|
|
September 26,
2020
|
|
September 28,
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
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
|
|
|
|
|
|
|
|
|
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.
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.
Part II. Other Information