Company Quick10K Filing
Quick10K
Dunkin'
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$73.70 83 $6,090
10-Q 2019-03-30 Quarter: 2019-03-30
10-K 2018-12-29 Annual: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-24 Quarter: 2016-09-24
10-Q 2016-06-25 Quarter: 2016-06-25
10-Q 2016-03-26 Quarter: 2016-03-26
10-K 2015-12-26 Annual: 2015-12-26
10-Q 2015-09-26 Quarter: 2015-09-26
10-Q 2015-06-27 Quarter: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-K 2014-12-27 Annual: 2014-12-27
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-28 Annual: 2013-12-28
8-K 2019-05-15 Shareholder Vote
8-K 2019-05-02 Regulation FD, Exhibits
8-K 2019-05-02 Earnings, Other Events, Exhibits
8-K 2019-04-30 Enter Agreement, Leave Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-03-20 Enter Agreement, Regulation FD, Exhibits
8-K 2019-03-12 Other Events, Exhibits
8-K 2019-02-07 Earnings, Other Events, Exhibits
8-K 2019-02-07 Regulation FD, Exhibits
8-K 2018-10-25 Earnings, Other Events, Exhibits
8-K 2018-10-10
8-K 2018-07-26 Earnings, Other Events, Exhibits
8-K 2018-07-10 Officers, Regulation FD, Exhibits
8-K 2018-05-16 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-26 Earnings, Other Events, Exhibits
8-K 2018-02-14 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-02-08 Regulation FD, Exhibits
8-K 2018-02-06 Earnings, Regulation FD, Other Events, Exhibits
FBHS Fortune Brands Home & Security 7,560
HMST Homestreet 764
GRSH Gores Holdings III 495
RM Regional Management 284
INSE Inspired Entertainment 162
SRTS Sensus Healthcare 105
MTEC MTech Acquisition 76
MICT MICT 11
NODC Nodechain 0
CNSX Tower One Wireless 0
DNKN 2019-03-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 dnkn-ex311_20190330x10q.htm
EX-31.2 dnkn-ex312_20190330x10q.htm
EX-32.1 dnkn-ex321_20190330x10q.htm
EX-32.2 dnkn-ex322_20190330x10q.htm

Dunkin' Earnings 2019-03-30

DNKN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 dnkn-20190330x10q.htm 10-Q Document

 
 
 
 
 
FORM 10-Q 
 
 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from              to             
Commission file number 001-35258 
 
 
 
DUNKIN’ BRANDS GROUP, INC.
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
20-4145825
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
130 Royall Street
Canton, Massachusetts 02021
(Address of principal executive offices) (zip code)
(781) 737-3000
(Registrants’ telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
DNKN
Nasdaq Global Select Market
As of May 3, 2019, 82,645,468 shares of common stock of the registrant were outstanding.



DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 


2


Part I.        Financial Information
Item 1.       Financial Statements
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
March 30,
2019
 
December 29,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
458,708

 
517,594

Restricted cash
79,555

 
79,008

Accounts receivable, net of allowance for doubtful accounts of $4,405 and $3,584 as of March 30, 2019 and December 29, 2018, respectively
78,246

 
75,963

Notes and other receivables, net of allowance for doubtful accounts of $931 and $884 as of March 30, 2019 and December 29, 2018, respectively
36,209

 
64,412

Prepaid income taxes
17,386

 
27,005

Prepaid expenses and other current assets
51,865

 
49,491

Total current assets
721,969

 
813,473

Property, equipment, and software, net of accumulated depreciation of $163,903 and $147,550 as of March 30, 2019 and December 29, 2018, respectively
204,120

 
209,202

Operating lease assets
380,209

 

Equity method investments
142,156

 
146,395

Goodwill
888,276

 
888,265

Other intangible assets, net of accumulated amortization of $241,923 and $265,762 as of March 30, 2019 and December 29, 2018, respectively
1,316,543

 
1,334,767

Other assets
72,100

 
64,479

Total assets
$
3,725,373

 
3,456,581

Liabilities and Stockholders’ Deficit
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
26,900

 
31,650

Operating lease liabilities
33,146

 

Accounts payable
51,552

 
80,037

Deferred revenue
35,922

 
38,541

Other current liabilities
321,162

 
389,353

Total current liabilities
468,682

 
539,581

Long-term debt, net
3,008,745

 
3,010,626

Operating lease liabilities
393,235

 

Deferred revenue
325,103

 
331,980

Deferred income taxes, net
198,597

 
204,027

Other long-term liabilities
22,304

 
83,164

Total long-term liabilities
3,947,984

 
3,629,797

Commitments and contingencies (note 9)

 

Stockholders’ deficit:
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value; 475,000,000 shares authorized; 82,663,316 shares issued and 82,601,734 shares outstanding as of March 30, 2019; 82,587,373 shares issued and 82,560,596 shares outstanding as of December 29, 2018
83

 
82

Additional paid-in capital
618,326

 
642,017

Treasury stock, at cost; 61,582 shares and 26,777 shares as of March 30, 2019 and December 29, 2018, respectively
(3,291
)
 
(1,060
)
Accumulated deficit
(1,288,758
)
 
(1,338,709
)
Accumulated other comprehensive loss
(17,653
)
 
(15,127
)
Total stockholders’ deficit
(691,293
)
 
(712,797
)
Total liabilities and stockholders’ deficit
$
3,725,373

 
3,456,581


See accompanying notes to unaudited consolidated financial statements.

3

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

 
Three months ended
 
March 30,
2019
 
March 31,
2018
Revenues:
 
 
 
Franchise fees and royalty income
$
139,328

 
132,507

Advertising fees and related income
117,198

 
111,007

Rental income
29,028

 
24,478

Sales of ice cream and other products
20,733

 
21,777

Other revenues
12,804

 
11,573

Total revenues
319,091

 
301,342

Operating costs and expenses:
 
 
 
Occupancy expenses—franchised restaurants
19,475

 
13,980

Cost of ice cream and other products
16,640

 
16,864

Advertising expenses
118,091

 
111,972

General and administrative expenses, net
56,203

 
59,824

Depreciation
4,621

 
5,033

Amortization of other intangible assets
4,633

 
5,375

Long-lived asset impairment charges
323

 
501

Total operating costs and expenses
219,986

 
213,549

Net income of equity method investments
2,230

 
2,033

Other operating income, net
37

 
5

Operating income
101,372

 
89,831

Other income (expense), net:
 
 
 
Interest income
1,831

 
1,642

Interest expense
(32,129
)
 
(32,477
)
Other loss, net
(4
)
 
(327
)
Total other expense, net
(30,302
)
 
(31,162
)
Income before income taxes
71,070

 
58,669

Provision for income taxes
18,747

 
8,517

Net income
$
52,323

 
50,152

Earnings per share:
 
 
 
Common—basic
$
0.63

 
0.58

Common—diluted
0.63

 
0.57

See accompanying notes to unaudited consolidated financial statements.

4

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

 
Three months ended
 
March 30,
2019
 
March 31,
2018
Net income
$
52,323

 
50,152

Other comprehensive income (loss), net:
 
 
 
Effect of foreign currency translation, net of deferred tax expense of $26 and $20 for the three months ended March 30, 2019 and March 31, 2018, respectively
(2,353
)
 
1,547

Other, net
(173
)
 
628

Total other comprehensive income (loss), net
(2,526
)
 
2,175

Comprehensive income
$
49,797

 
52,327

See accompanying notes to unaudited consolidated financial statements.

5

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
(In thousands)
(Unaudited)


 
Three months ended March 30, 2019
 
Common stock
 
Additional
paid-in
capital
 
Treasury
stock, at cost
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
 
Shares
 
Amount
 
Balance at December 29, 2018
82,437

 
$
82

 
642,017

 
(1,060
)
 
(1,338,709
)
 
(15,127
)
 
(712,797
)
Net income

 

 

 

 
52,323

 

 
52,323

Other comprehensive loss, net

 

 

 

 

 
(2,526
)
 
(2,526
)
Exercise of stock options
84

 

 
3,830

 

 

 

 
3,830

Dividends paid on common stock ($0.3750 per share)

 

 
(30,975
)
 

 

 

 
(30,975
)
Share-based compensation expense
143

 
1

 
3,606

 

 

 

 
3,607

Repurchases of common stock

 

 

 
(129
)
 

 

 
(129
)
Retirement of treasury stock
(2
)
 

 
(14
)
 
129

 
(115
)
 

 

Other
1

 

 
(138
)
 
(2,231
)
 
(2,257
)
 

 
(4,626
)
Balance at March 30, 2019
82,663

 
$
83

 
618,326

 
(3,291
)
 
(1,288,758
)
 
(17,653
)
 
(691,293
)
 
Three months ended March 31, 2018
 
Common stock
 
Additional
paid-in
capital
 
Treasury
stock, at cost
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
 
Shares
 
Amount
 
Balance at December 30, 2017
90,254

 
$
90

 
724,114

 
(1,060
)
 
(968,148
)
 
(9,535
)
 
(254,539
)
Net income

 

 

 

 
50,152

 

 
50,152

Other comprehensive income, net









 
2,175

 
2,175

Exercise of stock options
773

 
1

 
18,174





 

 
18,175

Dividends paid on common stock ($0.3475 per share)

 

 
(28,639
)
 

 

 

 
(28,639
)
Share-based compensation expense
38

 

 
3,204

 

 

 

 
3,204

Accelerated share repurchases of common stock

 

 
(130,000
)
 
(520,368
)
 

 

 
(650,368
)
Retirement of treasury stock
(8,479
)
 
(8
)

(65,246
)

520,368


(455,114
)
 

 

Other
12

 

 
445

 

 
(886
)
 

 
(441
)
Balance at March 31, 2018
82,598

 
$
83

 
522,052

 
(1,060
)
 
(1,373,996
)
 
(7,360
)
 
(860,281
)
See accompanying notes to unaudited consolidated financial statements.


6

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

 
Three months ended
 
March 30,
2019
 
March 31,
2018
Cash flows from operating activities:
 
 
 
Net income
$
52,323

 
50,152

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
10,425

 
11,267

Amortization of debt issuance costs
1,281

 
1,249

Deferred income taxes
(5,447
)
 
(4,251
)
Provision for bad debt
689

 
358

Share-based compensation expense
3,607

 
3,204

Net income of equity method investments
(2,230
)
 
(2,033
)
Dividends received from equity method investments
3,777

 
3,947

Other, net
194

 
371

Change in operating assets and liabilities:
 
 
 
Accounts, notes, and other receivables, net
25,222

 
15,531

Prepaid income taxes, net
10,766

 
(6,962
)
Prepaid expenses and other current assets
(6,967
)
 
(11,352
)
Accounts payable
(27,902
)
 
7,891

Other current liabilities
(67,865
)
 
(82,685
)
Deferred revenue
(9,511
)
 
(477
)
Other, net
(4,354
)
 
(2,413
)
Net cash used in operating activities
(15,992
)
 
(16,203
)
Cash flows from investing activities:
 
 
 
Additions to property, equipment, and software
(1,946
)
 
(5,803
)
Other, net
(304
)
 

Net cash used in investing activities
(2,250
)
 
(5,803
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(7,912
)
 
(7,875
)
Dividends paid on common stock
(30,975
)
 
(28,639
)
Repurchases of common stock, including accelerated share repurchases
(129
)

(650,368
)
Exercise of stock options
3,830

 
18,175

Other, net
(5,065
)
 
(731
)
Net cash used in financing activities
(40,251
)
 
(669,438
)
Effect of exchange rates on cash, cash equivalents, and restricted cash
89

 
64

Decrease in cash, cash equivalents, and restricted cash
(58,404
)
 
(691,380
)
Cash, cash equivalents, and restricted cash, beginning of period
598,321

 
1,114,099

Cash, cash equivalents, and restricted cash, end of period
$
539,917

 
422,719

Supplemental cash flow information:
 
 
 
Cash paid for income taxes
$
13,571

 
19,929

Cash paid for interest
30,763

 
34,917

Noncash investing activities:
 
 
 
Property, equipment, and software included in accounts payable and other current liabilities
1,405

 
2,133

Leased assets obtained in exchange for new finance lease liabilities
402

 

Noncash operating activities:
 
 
 
Leased assets obtained in exchange for operating lease liabilities, net
856

 

See accompanying notes to unaudited consolidated financial statements.

7


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 March 30, 2019 and the consolidated statements of operations, comprehensive income, stockholders' deficit, and cash flows for the three months ended March 30, 2019 and March 31, 2018 are unaudited.
The accompanying unaudited consolidated financial statements include the accounts of DBGI and its consolidated subsidiaries and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. All significant transactions and balances between subsidiaries and affiliates have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with U.S. GAAP have been recorded. Such adjustments consisted only of normal recurring items. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 29, 2018, included in the Company's Annual Report on Form 10-K.
(b) Fiscal year
The Company operates and reports financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three-month periods ended March 30, 2019 and March 31, 2018 reflect the results of operations for the 13-week periods ended on those dates. Operating results for the three-month period ended March 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2019.
(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.

8


Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of March 30, 2019 and December 29, 2018 were as follows (in thousands):
 
March 30,
2019
 
December 29,
2018
Cash and cash equivalents
$
458,708

 
517,594

Restricted cash
79,555

 
79,008

Restricted cash, included in Other assets
1,654

 
1,719

Total cash, cash equivalents, and restricted cash
$
539,917

 
598,321

(d) Fair value of financial instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis as of March 30, 2019 and December 29, 2018 are summarized as follows (in thousands):
 
March 30, 2019
 
December 29, 2018
 
Significant other observable inputs (Level 2)
 
Total
 
Significant other observable inputs (Level 2)
 
Total
Assets:
 
 
 
 
 
 
 
Company-owned life insurance
$
11,219

 
11,219

 
9,906

 
9,906

Total assets
$
11,219

 
11,219

 
9,906

 
9,906

Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
10,499

 
10,499

 
9,759

 
9,759

Total liabilities
$
10,499

 
10,499

 
9,759

 
9,759

The deferred compensation liabilities relate to the Dunkin’ Brands, Inc. non-qualified deferred compensation plans (“NQDC Plans”), which allow for pre-tax deferral of compensation for certain qualifying employees and directors. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, as defined under U.S. GAAP, because their inputs are derived principally from observable market data by correlation to hypothetical investments. The Company holds company-owned life insurance policies to partially offset the Company’s liabilities under the NQDC Plans. The changes in the fair value of any company-owned life insurance policies are derived using determinable cash surrender value. As such, the company-owned life insurance policies are classified within Level 2, as defined under U.S. GAAP.
The carrying value and estimated fair value of long-term debt as of March 30, 2019 and December 29, 2018 were as follows (in thousands):
 
March 30, 2019
 
December 29, 2018
 
Carrying value
 
Estimated fair value
 
Carrying value
 
Estimated fair value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
3,035,645

 
3,067,173

 
3,042,276

 
3,011,843

The estimated fair value of our long-term debt is estimated primarily based on current market rates for debt with similar terms and remaining maturities or current midpoint prices for our long-term debt. Judgment is required to develop these estimates. As such, the estimated fair value of long-term debt is classified within Level 2, as defined under U.S. GAAP.
(e) Concentration of credit risk
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees, royalty income, advertising fees, and sales of ice cream and other products. In addition, we have

9


note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. As of March 30, 2019 and December 29, 2018, one master licensee, including its majority-owned subsidiaries, accounted for approximately 15% and 11%, respectively, of total accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for either of the three-month periods ended March 30, 2019 and March 31, 2018.
(f) Recent accounting pronouncements
Recently adopted accounting pronouncements
In fiscal year 2019, the Company adopted new guidance for lease accounting, which replaces existing lease accounting guidance. The Company adopted this new guidance in fiscal year 2019 using the modified retrospective transition method and elected the option to not restate comparative periods in the year of adoption, including amounts as of December 29, 2018 and for the three months ended March 31, 2018 included herein.
As a result of adopting this new guidance on the first day of fiscal year 2019, substantially all of the Company's operating lease commitments were subject to the new guidance and were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date. The Company recognized operating lease assets and liabilities of $388.8 million and $435.1 million, respectively, as of the first day of fiscal year 2019. The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets. Finance leases, previously known as capital leases, were not impacted by the adoption of the new guidance, as finance lease liabilities and the corresponding assets were recorded on the consolidated balance sheet under the previous guidance. The accounting guidance for lessors remained largely unchanged from previous guidance, with the exception of the presentation of certain lease costs that the Company passes through to lessees, including but not limited to, property taxes, insurance, and maintenance. These costs are generally paid by the Company and reimbursed by the lessee. Historically, these costs have been recorded on a net basis in the consolidated statements of operations, but are now presented on a gross basis upon adoption of the new guidance. The adoption of the new guidance resulted in the recognition of additional rental income and occupancy expenses—franchised restaurants of $4.7 million related to these lease costs during the three months ended March 30, 2019.
The effects of the changes made to the Company's condensed consolidated balance sheet as of December 30, 2018 for the adoption of the new lease guidance were as follows (in thousands):
 
Balance at December 29, 2018
 
Adjustments due to adoption of the new lease guidance
 
Balance at December 30, 2018
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Prepaid expenses and other current assets
$
49,491

 
(4,720
)
 
44,771

Operating lease assets

 
388,811

 
388,811

Other intangible assets, net
1,334,767

 
(13,598
)
 
1,321,169

Other assets
64,479

 
(961
)
 
63,518

Liabilities and Stockholders' Deficit
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Operating lease liabilities

 
33,822

 
33,822

Operating lease liabilities

 
401,249

 
401,249

Other long-term liabilities(a)
83,164

 
(65,539
)
 
17,625

(a)
Other long-term liabilities at December 29, 2018 reflects certain reclassifications to conform to current period presentation as discussed below.
The adoption of the new guidance had no impact on net cash flows from operating, investing, or financing activities and had no impact on compliance with debt agreements.

10


The Company elected the package of practical expedients permitted under the new guidance, which among other things, allowed the Company to continue utilizing historical classification of leases. However, the Company did not adopt the hindsight practical expedient, and therefore continued to utilize lease terms determined under previous lease guidance. See note 12 for additional information regarding our lease arrangements and the Company's updated lease accounting policies.
In conjunction with the adoption of this new lease guidance and to conform to the current period presentation, the Company revised the presentation of certain lease liabilities within the consolidated balance sheets. Other current liabilities and other long-term liabilities totaling $0.5 million and $4.6 million as of December 29, 2018 were reclassified to current and long-term deferred revenue, respectively. Amounts separately presented as unfavorable operating leases acquired of $8.2 million as of December 29, 2018 were reclassified to other long-term liabilities. Additionally, amounts separately presented as current capital lease obligations and long-term capital lease obligations of $0.5 million and $7.0 million as of December 29, 2018 were reclassified to other current liabilities and other long-term liabilities, respectively. There was no impact to total current liabilities and total long-term liabilities as a result of these reclassifications.
(g) Subsequent events
Subsequent events have been evaluated through the date these consolidated financial statements were filed.

11


(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 March 30, 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
$
117,097

 
6,103

 
5,913

 
1,905

 

 
131,018

 
3,149

 
134,167

Franchise fees
3,626

 
312

 
865

 
358

 

 
5,161

 

 
5,161

Advertising fees and related income

 

 

 

 
108,642

 
108,642

 
1,176

 
109,818

Other revenues
710

 
2,163

 
4

 

 

 
2,877

 
9,058

 
11,935

Total revenues recognized over time
121,433

 
8,578

 
6,782

 
2,263

 
108,642

 
247,698

 
13,383

 
261,081

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized at a point in time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of ice cream and other products

 
671

 

 
23,075

 

 
23,746

 
(3,013
)
 
20,733

Other revenues
464

 
68

 
69

 
21

 

 
622

 
247

 
869

Total revenues recognized at a point in time
464

 
739

 
69

 
23,096

 

 
24,368

 
(2,766
)
 
21,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues recognized under ASC 606
121,897

 
9,317

 
6,851

 
25,359

 
108,642

 
272,066

 
10,617

 
282,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues not subject to ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising fees and related income

 

 

 

 

 

 
7,380

 
7,380

Rental income
27,848

 
960

 

 
220

 

 
29,028

 

 
29,028

Total revenues not subject to ASC 606
27,848

 
960

 

 
220

 

 
29,028

 
7,380

 
36,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
149,745

 
10,277

 
6,851

 
25,579

 
108,642

 
301,094

 
17,997

 
319,091

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

12


 
Three months ended March 31, 2018
 
Dunkin' U.S.
 
Baskin-Robbins U.S.
 
Dunkin' International
 
Baskin-Robbins International
 
U.S. Advertising Funds
 
Total reportable segment revenues
 
Other(a)
 
Total revenues
Revenues recognized under ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized over time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty income
$
110,833

 
6,409

 
4,938

 
1,543

 

 
123,723

 
3,134

 
126,857

Franchise fees
4,707

 
289

 
448

 
206

 

 
5,650

 

 
5,650

Advertising fees and related income

 

 

 

 
104,167

 
104,167

 
259

 
104,426

Other revenues
535

 
2,277

 
2

 

 

 
2,814

 
8,154

 
10,968

Total revenues recognized over time
116,075

 
8,975

 
5,388

 
1,749

 
104,167

 
236,354

 
11,547

 
247,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues recognized at a point in time:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of ice cream and other products

 
678

 

 
23,972

 

 
24,650

 
(2,873
)
 
21,777

Other revenues
245

 
93

 
(23
)
 
47

 

 
362

 
243

 
605

Total revenues recognized at a point in time
245

 
771

 
(23
)
 
24,019

 

 
25,012

 
(2,630
)
 
22,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues recognized under ASC 606
116,320

 
9,746

 
5,365

 
25,768

 
104,167

 
261,366

 
8,917

 
270,283

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues not subject to ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising fees and related income

 

 

 

 

 

 
6,581

 
6,581

Rental income
23,591

 
767

 

 
120

 

 
24,478

 

 
24,478

Total revenues not subject to ASC 606
23,591

 
767

 

 
120

 

 
24,478

 
6,581

 
31,059

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
139,911

 
10,513

 
5,365

 
25,888

 
104,167

 
285,844

 
15,498

 
301,342

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

13


(b) Contract balances
Information about receivables and deferred revenue subject to ASC 606 is as follows (in thousands):
 
March 30,
2019
 
December 29,
2018
 
Balance Sheet Classification
Receivables
$
86,646

 
81,609

 
Accounts receivable, net and Notes and other receivables, net
 
 
 
 
 
 
Deferred revenue:
 
 
 
 
 
Current
$
22,605

 
24,002

 
Deferred revenue—current
Long-term
320,326

 
327,333

 
Deferred revenue—long term
Total
$
342,931

 
351,335

 
 
Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, sales of ice cream and other products, and licensing fees. Deferred revenue primarily represents the Company’s remaining performance obligations under its franchise and license agreements for which consideration has been received or is receivable, and is generally recognized on a straight-line basis over the remaining term of the related agreement.
The decrease in the deferred revenue balance as of March 30, 2019 was primarily driven by $8.7 million of revenues recognized that were included in the deferred revenue balance as of December 29, 2018, as well as franchisee incentives provided during fiscal year 2019, offset by cash payments received or due in advance of satisfying our performance obligations.
As of March 30, 2019 and December 29, 2018, there were no contract assets from contracts with customers.
(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 March 30, 2019 is as follows (in thousands):
Fiscal year:
 
2019(a)
$
15,788

2020
18,692

2021
18,752

2022
18,665

2023
18,582

Thereafter
215,956

Total
$
306,435

 
 
(a) Represents the estimate for remainder of fiscal year 2019 which excludes the three months ended March 30, 2019.
The estimated revenue in the table above does not contemplate future franchise renewals or new franchise agreements for restaurants for which a franchise agreement or store development agreement does not exist at March 30, 2019. Additionally, the table above excludes $60.7 million of consideration allocated to restaurants that were not yet open at March 30, 2019. The Company has applied the sales-based royalty exemption which permits exclusion of variable consideration in the form of sales-based royalties from the disclosure of remaining performance obligations in the table above.

14


(4) Debt
Debt at March 30, 2019 and December 29, 2018 consisted of the following (in thousands):
 
March 30,
2019
 
December 29,
2018
2015 Class A-2-II Notes
$
1,680,000

 
1,684,375

2017 Class A-2-I Notes
592,500

 
594,000

2017 Class A-2-II Notes
790,000

 
792,000

Other
1,363

 
1,400

Debt issuance costs, net of amortization
(28,218
)
 
(29,499
)
Total debt
3,035,645

 
3,042,276

Less current portion of long-term debt
26,900

 
31,650

Total long-term debt
$
3,008,745

 
3,010,626

The Company's outstanding debt as of March 30, 2019 consisted of Series 2015-1 3.980% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Class A-2-II Notes”), Series 2017-1 3.629% Fixed Rate Senior Secured Notes, Class A-2-I (the “2017 Class A-2-I Notes”), and Series 2017-1 4.030% Fixed Rate Senior Secured Notes, Class A-2-II (the “2017 Class A-2-II Notes” and, together with the 2017 Class A-2-I Notes, the “2017 Class A-2 Notes”) issued by 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 2017-1 Variable Funding Senior Secured Notes, Class A-1 (the “2017 Variable Funding Notes” and, together with the 2017 Class A-2 Notes, the “2017 Notes”), which allow for the issuance of up to $150.0 million of 2017 Variable Funding Notes and certain other credit instruments, including letters of credit.
In April 2019, the Master Issuer issued Series 2019-1 3.787% Fixed Rate Senior Secured Notes, Class A-2-I (the “2019 Class A-2-I Notes”) with an initial principal amount of $600.0 million, Series 2019-1 4.021% Fixed Rate Senior Secured Notes, Class A-2-II (the “2019 Class A-2-II Notes”) with an initial principal amount of $400.0 million, and Series 2019-1 4.352% Fixed Rate Senior Secured Notes, Class A-2-III (the “2019 Class A-2-III Notes” and together with the 2019 Class A-2-I Notes and 2019 Class A-2-II Notes, the “2019 Class A-2 Notes”) with an initial principal amount of $700.0 million. In addition, the Master Issuer issued Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019 Variable Funding Notes” and, together with the 2019 Class A-2 Notes, the “2019 Notes”), which allow for the issuance of up to $150.0 million of 2019 Variable Funding Notes and certain other credit instruments, including letters of credit. The proceeds received from the issuance of the 2019 Notes were used to repay the remaining $1.68 billion outstanding on the 2015 Class A-2-II Notes and to pay related transaction fees and expenses. In connection with the issuance of the 2019 Variable Funding Notes, the Master Issuer terminated the commitments with respect to its existing 2017 Variable Funding Notes.
The 2015 Class A-2-II Notes, 2017 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 2015 Class A-2-II Notes, 2017 Notes, and 2019 Notes and that have pledged substantially all of their assets to secure the 2015 Class A-2-II Notes, 2017 Notes, and 2019 Notes.
The 2015 Class A-2-II Notes, 2017 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 2019 Class A-2 Notes is May 2049, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2019 Class A-2-I Notes will be repaid by February 2024, the 2019 Class A-2-II Notes will be repaid by May 2026, and the 2019 Class A-2-III Notes will be repaid by May 2029 (the “Anticipated Repayment Dates”). If the 2019 Class A-2 Notes have not been repaid or refinanced by their respective Anticipated Repayment Dates, a rapid amortization event will occur in which residual net cash flows of the Master Issuer, after making certain required payments, will be applied to the outstanding principal of the 2017 Class A-2 Notes and the 2019 Class A-2 Notes. Various other events, including failure to maintain a minimum ratio of net cash flows to debt service (“DSCR”), may also cause a rapid amortization event. Borrowings under the 2019 Class A-2-I Notes, 2019 Class A-2-II Notes, and 2019 Class A-2-III Notes bear interest at fixed rates equal to 3.787%, 4.021%, and 4.352%, respectively. If the 2019 Class A-2 Notes are not repaid or refinanced prior to their respective Anticipated Repayment Dates, incremental interest will accrue. Principal payments are required to be made on the 2019 Class A-2-I Notes, 2019 Class A-2-II Notes, and 2019 Class A-2-III Notes equal to $6.0 million, $4.0 million, and $7.0 million, respectively, per calendar year, payable in quarterly installments beginning in August 2019. No principal payments are required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and

15


amortization, adjusted for certain items (as specified in the Indenture), is less than or equal to 5.0 to 1.0. Other events and transactions, such as certain asset sales and receipt of various insurance or indemnification proceeds, may trigger additional mandatory prepayments.
It is anticipated that the principal and interest on the 2019 Variable Funding Notes will be repaid in full on or prior to August 2024, subject to two additional one-year extensions. Borrowings under the 2019 Variable Funding Notes bear interest at a rate equal to a LIBOR rate plus 1.50%, or the lenders' commercial paper funding rate plus 1.50%. If the 2019 Variable Funding Notes are not repaid prior to August 2024 or prior to the end of the extension period, if applicable, incremental interest will accrue. In addition, the Company is required to pay a 1.50% fee for letters of credit amounts outstanding and a commitment fee on the unused portion of the 2019 Variable Funding Notes which ranges from 0.50% to 1.00% based on utilization.
As of March 30, 2019 and December 29, 2018, $32.3 million and $32.4 million, respectively, of letters of credit were outstanding against the 2017 Variable Funding Notes which related primarily to interest reserves required under the base indenture and related supplemental indentures. There were no amounts drawn down on these letters of credit as of March 30, 2019 or December 29, 2018.
The 2017 Notes and 2019 Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the 2017 Notes and 2019 Notes, (ii) provisions relating to optional and mandatory prepayments, including mandatory prepayments in the event of a change of control as defined in the Indenture and the related payment of specified amounts, including specified make-whole payments in the case of the 2017 Notes and 2019 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the 2017 Notes and 2019 Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information, and similar matters. As noted above, the 2017 Notes and 2019 Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated DSCR, failure to maintain an aggregate level of Dunkin’ U.S. retail sales on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the 2017 Notes or the 2019 Notes on the applicable Anticipated Repayment Dates. The 2017 Notes and 2019 Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the 2017 Notes and 2019 Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.





16


(5) Other current liabilities
Other current liabilities consisted of the following (in thousands):
 
March 30,
2019
 
December 29,
2018
Gift card/certificate liability
$
183,464

 
239,531

Accrued payroll and benefits
18,696

 
26,544

Accrued interest
13,343

 
13,274

Accrued advertising expenses
55,653

 
52,536

Franchisee profit-sharing liability
5,010

 
13,764

Other
44,996

 
43,704

Total other current liabilities
$
321,162

 
389,353

The franchisee profit-sharing liability represents amounts owed to franchisees from the net profits primarily on the sale of Dunkin’ K-Cup® pods, retail packaged coffee, and ready-to-drink bottled iced coffee in certain retail outlets.
(6) Segment information
The Company is strategically aligned into two global brands, Dunkin’ and Baskin-Robbins, which are further segregated between U.S. operations and international operations. Additionally, the Company administers and directs the development of all advertising and promotional programs in the U.S. As such, the Company has determined that it has five reportable segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. Dunkin’ U.S., Baskin-Robbins U.S., and Dunkin’ International primarily derive their revenues through royalty income and franchise fees. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement and rental income. Dunkin’ U.S. also derives revenue through rental income. Baskin-Robbins International primarily derives its revenues from sales of ice cream products, as well as royalty income, franchise fees, and license fees. U.S. Advertising Funds primarily derive revenues through continuing advertising fees from Dunkin’ and Baskin-Robbins franchisees. The operating results of each segment are regularly reviewed and evaluated separately by the Company’s senior management, which includes, but is not limited to, the chief executive officer. Senior management primarily evaluates the performance of its segments and allocates resources to them based on operating income adjusted for amortization of intangible assets, long-lived asset impairment charges, and certain non-recurring, infrequent or unusual charges, which does not reflect the allocation of any corporate charges. This profitability measure is referred to as segment profit. When senior management reviews a balance sheet, it is at a consolidated level. The accounting policies applicable to each segment are generally consistent with those used in the consolidated financial statements.
Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include revenues earned through certain licensing arrangements with third parties in which our brand names are used, including the licensing fees earned from the Dunkin’ K-Cup® pod licensing agreement and sales of Dunkin’ branded ready-to-drink bottled iced coffee and retail packaged coffee, revenues generated from online training programs for franchisees, advertising fees and related income from international advertising funds, and breakage and other revenue related to the gift card program, all of which are not allocated to a specific segment. Revenues by segment were as follows (in thousands):
 
Revenues
 
Three months ended
 
March 30,
2019
 
March 31,
2018
Dunkin’ U.S.
$
149,745

 
139,911

Dunkin’ International
6,851

 
5,365

Baskin-Robbins U.S.
10,277

 
10,513

Baskin-Robbins International
25,579

 
25,888

U.S. Advertising Funds
108,642

 
104,167

Total reportable segment revenues
301,094

 
285,844

Other
17,997

 
15,498

Total revenues
$
319,091

 
301,342


17


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
 
March 30,
2019
 
March 31,
2018
Dunkin’ U.S.
$
111,034

 
105,063

Dunkin’ International
4,831

 
3,206

Baskin-Robbins U.S.
6,323

 
7,235

Baskin-Robbins International
7,802

 
7,441

U.S. Advertising Funds

 

Total reportable segments
129,990

 
122,945

Corporate and other
(23,662
)
 
(27,238
)
Interest expense, net
(30,298
)
 
(30,835
)
Amortization of other intangible assets
(4,633
)
 
(5,375
)
Long-lived asset impairment charges
(323
)
 
(501
)
Other loss, net
(4
)
 
(327
)
Income before income taxes
$
71,070

 
58,669

Net income of equity method investments is included in segment profit for the Dunkin’ International and Baskin-Robbins International reportable segments. Amounts reported as “Other” in the segment profit table below include the reduction in depreciation and amortization, net of tax, reported by our equity method investees as a result of previously recorded impairment charges. Net income of equity method investments by reportable segment was as follows (in thousands):
 
Net income (loss) of equity method investments
 
Three months ended
 
March 30,
2019
 
March 31,
2018
Dunkin’ International
$
(140
)
 
(444
)
Baskin-Robbins International
1,717

 
1,727

Total reportable segments
1,577

 
1,283

Other
653

 
750

Total net income of equity method investments
$
2,230

 
2,033

(7) Stockholders’ deficit
(a) Equity incentive plans
During the three months ended March 30, 2019, the Company granted stock options to purchase 619,306 shares of common stock and 50,287 restricted stock units (“RSUs”) to certain employees. The stock options vest in equal annual amounts over a four-year period subsequent to the grant date, and have a maximum contractual term of seven years. The stock options were granted with a weighted average exercise price of $72.28 per share and had a weighted average grant-date fair value of $12.54 per share. The RSUs granted to employees vest in equal annual amounts over a three-year period subsequent to the grant date and had a weighted average grant-date fair value of $69.13 per unit.
In addition, the Company granted 47,431 performance stock units (“PSUs”) to certain employees during the three months ended March 30, 2019. These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 20,681 PSUs are subject to a service condition and a market vesting condition linked to the level of total shareholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 500 Composite Index (“TSR PSUs”). The remaining 26,750 PSUs granted are subject to a service condition and a performance vesting condition based on the level of adjusted operating income growth achieved over the performance period (“AOI PSUs”). The maximum vesting percentage that could be realized for each of the TSR PSUs and the AOI PSUs is 200% based on the level of performance achieved for the respective awards. All of the PSUs are also subject to a one-year post-

18


vesting holding period. The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total shareholder return market condition, resulting in a weighted average grant-date fair value of $86.97 per unit. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The AOI PSUs had a weighted average grant-date fair value of $69.19 per unit. Total compensation cost for the AOI PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest based on the outcome.
During the three months ended March 30, 2019, contingently issuable restricted shares granted in fiscal year 2014 realized a 52.2% vesting percentage based upon level of performance achieved against the market vesting condition, and 78,300 restricted shares vested.
Total compensation expense related to all share-based awards was $3.6 million and $3.2 million for the three months ended March 30, 2019 and March 31, 2018, respectively, and was included in general and administrative expenses, net in the consolidated statements of operations.
(b) 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 29, 2018
$
(14,307
)
 
(820
)
 
(15,127
)
Other comprehensive loss, net
(2,353
)
 
(173
)
 
(2,526
)
Balance as of March 30, 2019
$
(16,660
)
 
(993
)
 
(17,653
)
(c) Dividends
The Company paid a quarterly dividend of $0.3750 per share of common stock on March 20, 2019, totaling approximately $31.0 million. On May 2, 2019, the Company announced that its board of directors approved the next quarterly dividend of $0.3750 per share of common stock payable June 12, 2019 to stockholders of record as of the close of business on June 3, 2019.
(8) Earnings per share
The computation of basic and diluted earnings per share of common stock is as follows (in thousands, except for share and per share data):
 
Three months ended
 
March 30,
2019
 
March 31,
2018
Net income—basic and diluted
$
52,323

 
50,152

Weighted average number of shares of common stock:
 
 
 
Common—basic
82,620,759

 
86,451,167

Common—diluted
83,432,042

 
87,877,254

Earnings per share of common stock:
 
 
 
Common—basic
$
0.63

 
0.58

Common—diluted
0.63

 
0.57

The weighted average number of shares of common stock in the common diluted earnings per share calculation includes the dilutive effect of 811,283 and 1,426,087 equity awards for the three months ended March 30, 2019 and March 31, 2018, respectively, using the treasury stock method. The weighted average number of shares of common stock in the common diluted earnings per share calculation for all periods excludes all contingently issuable equity awards for which the contingent vesting criteria were not yet met as of the fiscal period end. As of March 30, 2019 and March 31, 2018, there were 42,888 and 258,019 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 670,944 and 1,883,298 equity awards for the three months ended March 30, 2019 and March 31, 2018, respectively, as they would be antidilutive.

19


(9) Commitments and contingencies
(a) Supply chain guarantees
The Company has various supply chain agreements that provide for purchase commitments, the majority of which result in the Company being contingently liable upon early termination of the agreement. As of March 30, 2019 and December 29, 2018, the Company was contingently liable under such supply chain agreements for approximately $107.4 million and $119.4 million, respectively. For certain supply chain commitments, as product is purchased by the Company’s franchisees over the term of the agreement, the amount of the guarantee is reduced. The Company assesses the risk of performing under each of these guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and ability to extend contract terms, we accrued an inconsequential amount of reserves related to supply chain commitments as of March 30, 2019 and December 29, 2018.
(b) Letters of credit
As of March 30, 2019 and December 29, 2018, the Company had standby letters of credit outstanding for a total of $32.3 million and $32.4 million, respectively. There were no amounts drawn down on these letters of credit.
(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 March 30, 2019 and December 29, 2018, an inconsequential amount was accrued related to outstanding litigation.
(10) Related-party transactions
The Company recognized revenues from its equity method investees, consisting of royalty income and sales of ice cream and other products, as follows (in thousands):
 
Three months ended
 
March 30,
2019
 
March 31,
2018
B-R 31 Ice Cream Company., Ltd.
$
340

 
345

BR-Korea Co., Ltd.
1,183

 
946

Palm Oasis Ventures Pty. Ltd.
435

 
705

 
$
1,958

 
1,996

As of March 30, 2019 and December 29, 2018, the Company had $3.8 million and $5.5 million, respectively, of receivables from its equity method investees, which were recorded in accounts receivable, net of allowance for doubtful accounts, in the consolidated balance sheets.
The Company made net payments to its equity method investees totaling approximately $1.1 million and $1.0 million during the three months ended March 30, 2019 and March 31, 2018, respectively, primarily for the purchase of ice cream products.

20


(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):
 
March 30,
2019
 
December 29,
2018
Accounts receivable, net
$
20,441

 
19,501

Notes and other receivables, net
12,075

 
16,050

Prepaid income taxes
74

 
11

Prepaid expenses and other current assets
17,367

 
14,978

Total current assets
49,957

 
50,540

Property, equipment, and software, net
15,562

 
15,187

Other assets
1,154

 
1,255

Total assets
$
66,673

 
66,982

 
 
 
 
Accounts payable
$
34,829

 
60,302

Deferred revenue—current(a)
(743
)
 
(743
)
Other current liabilities
13,191

 
43,198

Total current liabilities
47,277

 
102,757

Deferred revenue—long-term(a)
(6,589
)
 
(6,775
)
Other long-term liabilities
11

 
15

Total liabilities
$
40,699

 
95,997

(a)
Amounts represent franchisee incentives that have been deferred and are being recognized over the terms of the respective franchise agreements.
(12) Leases
The Company is party as a lessor and/or lessee to various leases for property, including land and buildings, as well as leases for office equipment and automobiles.
We determine if an arrangement is a lease at inception or modification of a contract, and classify each lease as either an operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. Finance and operating lease assets represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. Generally, the Company's lease contracts do not provide a readily determinable implicit rate and, therefore, the Company uses an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments. The lease asset also reflects any prepaid rent, initial direct costs incurred, and lease incentives received. The Company’s lease terms, as both lessee and lessor, include option periods to extend or terminate the lease when it is reasonably certain that those options will be exercised, which are generally through the end of the related franchise agreement term.
We record lease expense and lease income as lessee and lessor, respectively, on a straight-line basis over the lease term as noted above. In certain cases, the Company also has variable lease payments and receipts that are based on sales levels of our franchisees, in excess of stipulated amounts. The Company is generally obligated for the cost of property taxes, insurance, and maintenance relating to its leases, which are often variable lease payments. Such costs are typically charged to the sublessee based on the terms of the sublease agreements. These costs are presented on a gross basis in the consolidated statements of operations in rental income and occupancy expenses—franchised restaurants. Variable lease receipts and payments are included in rental income and rent expense as they are earned and accrued, respectively. The Company accounts for the lease components and non-lease components, primarily maintenance, as a single lease component for new and modified leases under the new lease accounting guidance. Leases with an initial expected term of 12 months or less are not recorded in the consolidated balance sheets and the related lease expense is recognized on a straight-line basis over the lease term.

21


Included in the Company’s consolidated balance sheets were the following amounts related to operating and finance lease assets and liabilities (in thousands):
 
March 30,
2019
 
December 29,
2018
Consolidated balance sheet classification
Assets:
 
 
 
 
Operating lease assets
$
380,209

 

Operating lease assets
Finance lease assets(a)
5,514

 
5,264

Property, equipment, and software, net
Total lease assets
$
385,723

 
5,264

 
Liabilities:
 
 
 
 
Current:
 
 
 
 
Operating lease liabilities
$
33,146

 

Operating lease liabilities
Finance lease liabilities
509

 
476

Other current liabilities
Long-term:
 
 
 
 
Operating lease liabilities
393,235

 

Operating lease liabilities
Finance lease liabilities
7,058

 
6,998

Other long-term liabilities
Total lease liabilities
$
433,948

 
7,474

 
(a)
Finance lease assets are recorded net of accumulated amortization of $5.2 million and $5.0 million as of March 30, 2019 and December 29, 2018, respectively.
The weighted average remaining lease term and weighted-average discount rate for operating and finance leases as of March 30, 2019 were as follows:
 
March 30,
2019
Weighted average remaining lease term:
 
Operating leases
12.2

Finance leases
11.7

Weighted average discount rate:
 
Operating leases
4.6
%
Finance leases
20.3
%
Lease costs and rental income for the three months ended March 30, 2019 were as follows (in thousands):
 
Three months ended
 
March 30,
2019
Finance lease cost:
 
Amortization of lease assets(a)
$
150

Interest on lease liabilities(b)
267

Total finance lease cost
$
417

 
 
Operating lease cost(c)
$
14,154

Variable lease cost(c)
6,094

Short-term lease cost(c)
2,695

Rental income(d)
29,028

(a)
Amortization of finance lease assets is included in depreciation in the consolidated statements of operations.
(b)
Interest recognized on finance lease liabilities is included in interest expense in the consolidated statements of operations.
(c)
Operating and variable lease costs associated with franchised locations are included in occupancy expenses—franchised restaurants in the consolidated statements of operations. Operating, variable, and short-term lease costs for all other leases, including corporate facilities, vehicles, and other non-franchised assets are included in general and administrative expenses, net, and advertising expenses in the consolidated statements of operations.

22


(d)
Rental income in the consolidated statements of operations primarily consists of sublease income. Lease income relating to variable lease payments was $10.3 million.

Cash paid for amounts included in the measurement of lease liabilities were as follows (in thousands):
 
Three months ended
 
March 30,
2019
Operating cash flows from operating leases
$
14,140

Operating cash flows from finance leases
267

Financing cash flows from finance leases
163

Future lease commitments to be paid and received by the Company as of March 30, 2019 were as follows (in thousands):
 
Payments
 
Receipts
 
Net leases
 
Finance
leases
 
Operating
leases
 
Subleases
 
Fiscal year:
 
 
 
 
 
 
 
2019(a)
$
1,197

 
37,703

 
(49,880
)
 
(10,980
)
2020
1,473

 
55,519

 
(70,074
)
 
(13,082
)
2021
1,405

 
54,518

 
(66,581
)
 
(10,658
)
2022
1,398

 
51,763

 
(60,708
)
 
(7,547
)
2023
1,427

 
46,657

 
(52,000
)
 
(3,916
)
Thereafter
11,771

 
331,009

 
(309,491
)
 
33,289

Total lease commitments
18,671

 
577,169

 
(608,734
)
 
(12,894
)
Less amount representing interest
11,104

 
150,788

 
 
 
 
Present value of lease liabilities
$
7,567

 
426,381

 
 
 
 
(a)
Represents the remainder of fiscal year 2019 which excludes the three months ended March 30, 2019.
As of March 30, 2019, the Company had certain executed real estate leases that had not yet commenced of $15.1 million which are not reflected in the tables above. These leases are expected to commence between fiscal year 2019 and fiscal year 2025 with lease terms of 10 years to 20 years.
Future lease commitments to be paid and received by the Company as of December 29, 2018 were as follows (in thousands):
 
Payments
 
Receipts
 
Net leases
 
Finance
leases
 
Operating
leases
 
Subleases
 
Fiscal year:
 
 
 
 
 
 
 
2019
$
1,535

 
60,166

 
(72,751
)
 
(11,050
)
2020
1,327

 
58,389

 
(69,704
)
 
(9,988
)
2021
1,361

 
56,107

 
(66,154
)
 
(8,686
)
2022
1,398

 
51,968

 
(60,282
)
 
(6,916
)
2023
1,427

 
46,340

 
(51,532
)
 
(3,765
)
Thereafter
11,770

 
329,641

 
(304,954
)
 
36,457

Total lease commitments
18,818

 
602,611

 
(625,377
)
 
(3,948
)
Less amount representing interest
11,344

 
 
 
 
 
 
Present value of lease liabilities
$
7,474

 
 
 
 
 
 



23


Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained herein are not based on historical fact and are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” or “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These risks and uncertainties include, but are not limited to: the ongoing level of profitability of franchisees and licensees; our franchisees’ and licensees’ ability to sustain same store sales growth; successful westward expansion; changes in working relationships with our franchisees and licensees and the actions of our franchisees and licensees; our master franchisees’ relationships with sub-franchisees; the success of our investments in the Dunkin' U.S. Blueprint for Growth; the strength of our brand in the markets in which we compete; changes in competition within the quick service restaurant segment of the food industry; changes in consumer behavior resulting from changes in technologies or alternative methods of delivery; economic and political conditions in the countries where we operate; our substantial indebtedness; our ability to protect our intellectual property rights; consumer preferences, spending patterns and demographic trends; the impact of seasonal changes, including weather effects, on our business; the success of our growth strategy and international development; changes in commodity and food prices, particularly coffee, dairy products and sugar, and other operating costs; shortages of coffee; failure of our network and information technology systems; interruptions or shortages in the supply of products to our franchisees and licensees; the impact of food borne-illness or food safety issues or adverse public or media opinions regarding the health effects of consuming our products; our ability to collect royalty payments from our franchisees and licensees; uncertainties relating to litigation; the ability of our franchisees and licensees to open new restaurants and keep existing restaurants in operation; our ability to retain key personnel; any inability to protect consumer credit card data and catastrophic events.
Forward-looking statements reflect management’s analysis as of the date of this quarterly report. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our most recent annual report on Form 10-K. Except as required by applicable law, we do not undertake to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.
Introduction and overview
We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin’ and Baskin-Robbins brands. With more than 20,900 points of distribution in more than 60 countries worldwide, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of March 30, 2019, Dunkin’ had 12,900 global points of distribution with restaurants in 43 U.S. states, the District of Columbia, and 42 foreign countries. Baskin-Robbins had 8,020 global points of distribution as of the same date, with restaurants in 44 U.S. states, the District of Columbia, Puerto Rico, and 53 foreign countries.
We are organized into five reporting segments: Dunkin’ U.S., Dunkin’ International, Baskin-Robbins U.S., Baskin-Robbins International, and U.S. Advertising Funds. We generate revenue from five primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) continuing advertising fees from Dunkin’ and Baskin-Robbins franchisees and breakage and other revenue related to the gift card program, (iii) rental income from restaurant properties that we lease or sublease to franchisees, (iv) sales of ice cream and other products to franchisees in certain international markets, and (v) other income including fees for the licensing of our brands for products sold in certain retail outlets, the licensing of the rights to manufacture Baskin-Robbins ice cream products sold to U.S. franchisees, refranchising gains, and online training fees.
Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With no company-operated points of distribution as of March 30, 2019, we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators.
We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three-month periods ended March 30, 2019 and March 31, 2018 reflect the results of operations for the 13-week periods ended on those dates. Operating

24


results for the three-month period ended March 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2019.
The Company adopted new lease guidance in the first quarter of fiscal year 2019 using the modified retrospective transition method, and elected the option to not restate comparative periods in the year of adoption, including amounts as of December 29, 2018 and for the three months ended March 31, 2018 included herein. See note 2(f) to the unaudited consolidated financial statements included in Item 1 of Part I of this Form 10-Q.
Selected operating and financial highlights
 Amounts and percentages may not recalculate due to rounding
Three months ended
 
March 30,
2019
 
March 31,
2018
Financial data (in thousands):
 
 
 
Total revenues
$
319,091

 
301,342

Operating income
101,372

 
89,831

Adjusted operating income
106,328

 
95,707

Net income
52,323

 
50,152

Adjusted net income
55,891

 
54,383

Systemwide sales (in millions):
 
 
 
Dunkin’ U.S.
$
2,126.3

 
2,015.9

Dunkin’ International
198.9

 
190.2

Baskin-Robbins U.S.
128.5

 
132.7

Baskin-Robbins International
314.6

 
321.2

Total systemwide sales
$
2,768.2

 
2,660.0

Systemwide sales growth
4.1
 %
 
5.1
 %
Comparable store sales growth (decline):
 
 
 
Dunkin’ U.S.
2.4
 %
 
(0.5
)%
Dunkin’ International
2.9
 %
 
2.1
 %
Baskin-Robbins U.S.
(2.8
)%
 
(1.0
)%
Baskin-Robbins International
(2.0
)%
 
10.0
 %

Our financial results are largely driven by changes in systemwide sales, which include sales by all points of distribution, whether owned by our franchisees or joint ventures. While we do not record sales by franchisees or joint ventures as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue and in evaluating our performance relative to competitors.
Comparable store sales growth (decline) for Dunkin’ U.S. and Baskin-Robbins U.S. is calculated by including only sales from franchisee-operated restaurants that have been open at least 78 weeks and that have reported sales in the current and comparable prior year week. Comparable store sales growth (decline) for Dunkin’ International and Baskin-Robbins International generally represents the growth (decline) in local currency average monthly sales for franchisee-operated restaurants, including joint ventures, that have been open at least 13 months and that have reported sales in the current and comparable prior year month.
Overall growth in systemwide sales of 4.1% for the three months ended March 30, 2019 over the same period in the prior fiscal year resulted from the following:
Dunkin’ U.S. systemwide sales growth of 5.5% for the three months ended March 30, 2019 was primarily a result of 256 net new restaurants opened since March 31, 2018 and comparable store sales growth of 2.4%. The comparable store sales growth was driven by increased average ticket, offset by a decline in traffic. The increase in average ticket was driven primarily by strategic pricing increases and favorable mix shift to premium priced espresso and frozen beverages, as well as our value breakfast sandwich platform.
Dunkin’ International systemwide sales growth of 4.6% for the three months ended March 30, 2019 was driven by sales growth in the Middle East. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 9%. Dunkin’ International comparable store sales grew 2.9% for the three months ended March 30, 2019 due primarily to growth in the Middle East.

25


Baskin-Robbins U.S. systemwide sales decline of 3.2% for the three months ended March 30, 2019 was primarily as a result of comparable store sales decline of 2.8% and 19 net restaurant closures since March 31, 2018. The comparable store sales decline was driven by a decrease in traffic, offset by an increase in average ticket. Unfavorable weather significantly affected all product categories in the first quarter of fiscal year 2019. The increase in average ticket was driven primarily by strategic pricing increases and favorable mix shift to beverages, take-home quarts, and desserts.
Baskin-Robbins International systemwide sales decline of 2.0% for the three months ended March 30, 2019 was driven by a sales decline in Japan, offset by sales growth in South Korea. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 2%. Baskin-Robbins International comparable store sales decline of 2.0% for the three months ended March 30, 2019 was driven primarily by declines in Japan and the Middle East, offset by growth in South Korea.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings (closings) as of and for the three months ended March 30, 2019 and March 31, 2018 were as follows:
 
March 30,
2019
 
March 31,
2018
Points of distribution, at period end:
 
 
 
Dunkin’ U.S.
9,453

 
9,197

Dunkin’ International
3,447

 
3,401

Baskin-Robbins U.S.
2,547

 
2,566

Baskin-Robbins International
5,473

 
5,427

Consolidated global points of distribution
20,920

 
20,591

 
Three months ended
 
March 30,
2019
 
March 31,
2018
Net openings (closings) during the period:
 
 
 
Dunkin’ U.S.
34

 
56

Dunkin’ International
(5
)
 
4

Baskin-Robbins U.S.
(3
)
 
6

Baskin-Robbins International
(18
)
 
5

Consolidated global net openings
8

 
71

Total revenues for the three months ended March 30, 2019 increased $17.7 million, or 5.9%, due primarily to increases in royalty income and advertising fees and related income, driven by Dunkin’ U.S. systemwide sales growth. Also contributing to the increase in revenues was an increase in rental income resulting from the adoption of a new lease accounting standard in the first quarter of fiscal year 2019, which requires gross presentation of certain lease costs that the Company passes through to franchisees. See note 2(f) to the unaudited consolidated financial statements included herein for further disclosure of the impact of the new guidance.
Operating income and adjusted operating income for the three months ended March 30, 2019 increased $11.5 million, or 12.8%, and $10.6 million, or 11.1%, respectively, from the prior year period. The increases were primarily a result of the increases in royalty income and a reduction in general and administrative expenses resulting primarily from a decrease in personnel costs.
Net income and adjusted net income for the three months ended March 30, 2019 increased $2.2 million, or 4.3%, and $1.5 million, or 2.8%, respectively. These increases were primarily a result of the increases in operating income and adjusted operating income, respectively, offset by an increase in income tax expense primarily driven by excess tax benefits from share-based compensation of $1.2 million for the three months ended March 30, 2019 compared to $7.6 million in the prior year period and the increase in income in the current period. 
Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairment charges, and certain non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. We use adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results

26


in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies.
Adjusted operating income and adjusted net income are reconciled from operating income and net income, respectively, determined under GAAP as follows:
 
Three months ended
 
March 30,
2019
 
March 31,
2018
 
(In thousands)
Operating income
$
101,372

 
89,831

Adjustments: