Edgar Filing: DUNKIN' BRANDS GROUP, INC.

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 June 30, 2018



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

For the transition period from to

Commission file number 001-35258

DUNKIN’ BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)



Delaware		20-4145825
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

130 Royall Street

Canton, Massachusetts 02021

(Address of principal executive offices) (zip code)

(781) 737-3000

(Registrants’ telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically 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, indicated 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

As of August 3, 2018, 83,776,757 shares of common stock of the registrant were outstanding.

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

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		Page

Part I. – Financial Information

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40

Part II. – Other Information

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44

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Part I. Financial Information

Item 1. Financial Statements

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)



	June 30, 2018			December 30, 2017
Assets
Current assets:
Cash and cash equivalents	$	367,940		1,018,317
Restricted cash	84,970			94,047
Accounts receivable, net of allowance for doubtful accounts of $3,855 and $4,390 as of June 30, 2018 and December 30, 2017, respectively	88,790			69,517
Notes and other receivables, net of allowance for doubtful accounts of $1,043 and $600 as of June 30, 2018 and December 30, 2017, respectively	40,117			52,332
Prepaid income taxes	17,754			21,927
Prepaid expenses and other current assets	56,906			48,193
Total current assets	656,477			1,304,333
Property, equipment, and software, net of accumulated depreciation of $151,483 and $143,319 as of June 30, 2018 and December 30, 2017, respectively	204,011			181,542
Equity method investments	137,910			140,615
Goodwill	888,284			888,308
Other intangible assets, net of accumulated amortization of $257,930 and $250,142 as of June 30, 2018 and December 30, 2017, respectively	1,345,309			1,357,157
Other assets	66,737			65,478
Total assets	$	3,298,728		3,937,433
Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of long-term debt	$	31,650		31,500
Capital lease obligations	631			596
Accounts payable	68,783			53,417
Deferred revenue	44,175			44,876
Other current liabilities	284,768			355,110
Total current liabilities	430,007			485,499
Long-term debt, net	3,023,955			3,035,857
Capital lease obligations	6,851			7,180
Unfavorable operating leases acquired	9,033			9,780
Deferred revenue	366,246			361,458
Deferred income taxes, net	205,859			214,345
Other long-term liabilities	74,582			77,853
Total long-term liabilities	3,686,526			3,706,473
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; 83,069,682 shares issued and 83,042,905 shares outstanding as of June 30, 2018; 90,404,022 shares issued and 90,377,245 shares outstanding as of December 30, 2017	83			90
Additional paid-in capital	511,379			724,114
Treasury stock, at cost; 26,777 shares as of June 30, 2018 and December 30, 2017	(1,060		)	(1,060	)
Accumulated deficit	(1,313,498		)	(968,148	)
Accumulated other comprehensive loss	(14,709		)	(9,535	)
Total stockholders’ deficit	(817,805		)	(254,539	)
Total liabilities and stockholders’ deficit	$	3,298,728		3,937,433

See accompanying notes to unaudited consolidated financial statements.

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)



	Three months ended					Six months ended
	June 30, 2018			July 1, 2017		June 30, 2018		July 1, 2017
Revenues:
Franchise fees and royalty income	$	151,242		143,894		283,749		271,609
Advertising fees and related income	131,539			122,361		242,546		232,564
Rental income	27,400			27,408		51,878		51,830
Sales of ice cream and other products	28,140			28,679		49,917		51,185
Other revenues	12,319			11,834		23,892		23,346
Total revenues	350,640			334,176		651,982		630,534
Operating costs and expenses:
Occupancy expenses—franchised restaurants	14,314			14,287		28,294		28,425
Cost of ice cream and other products	22,781			22,199		39,645		39,121
Advertising expenses	132,579			123,676		244,551		234,748
General and administrative expenses, net	59,301			61,074		119,125		121,443
Depreciation	5,125			5,071		10,158		10,155
Amortization of other intangible assets	5,307			5,333		10,682		10,660
Long-lived asset impairment charges	653			60		1,154		107
Total operating costs and expenses	240,060			231,700		453,609		444,659
Net income of equity method investments	3,845			4,327		5,878		7,146
Other operating income (loss), net	(575		)	33		(570	)	588
Operating income	113,850			106,836		203,681		193,609
Other income (expense), net:
Interest income	1,516			425		3,158		746
Interest expense	(32,538		)	(24,885	)	(65,015	)	(49,756	)
Other income (losses), net	(272		)	28		(599	)	215
Total other expense, net	(31,294		)	(24,432	)	(62,456	)	(48,795	)
Income before income taxes	82,556			82,404		141,225		144,814
Provision for income taxes	22,058			31,312		30,575		49,429
Net income	$	60,498		51,092		110,650		95,385
Earnings per share:
Common—basic	$	0.73		0.56		1.31		1.04
Common—diluted	0.72			0.55		1.29		1.03
Cash dividends declared per common share	0.35			0.32		0.70		0.65

See accompanying notes to unaudited consolidated financial statements.

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)



	Three months ended					Six months ended
	June 30, 2018			July 1, 2017		June 30, 2018		July 1, 2017
Net income	$	60,498		51,092		110,650		95,385
Other comprehensive income (loss), net:
Effect of foreign currency translation, net of deferred tax expense (benefit) of $(66) and $36 for the three months ended June 30, 2018 and July 1, 2017, respectively, and $(46) and $573 for the six months ended June 30, 2018 and July 1, 2017, respectively	(7,291		)	(2,749	)	(5,744	)	5,991
Effect of interest rate swaps, net of deferred tax benefit of $217 and $434 for the three and six months ended July 1, 2017	—			(318	)	—		(636	)
Other, net	(58		)	(1	)	570		653
Total other comprehensive income (loss), net	(7,349		)	(3,068	)	(5,174	)	6,008
Comprehensive income	$	53,149		48,024		105,476		101,393

See accompanying notes to unaudited consolidated financial statements.

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DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Six months ended
	June 30, 2018			July 1, 2017
Cash flows from operating activities:
Net income	$	110,650		95,385
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,840			20,815
Amortization of debt issuance costs	2,511			3,234
Deferred income taxes	(8,425		)	(11,781	)
Provision for bad debt	333			100
Share-based compensation expense	6,949			7,247
Net income of equity method investments	(5,878		)	(7,146	)
Dividends received from equity method investments	3,947			3,950
Other, net	3,150			(55	)
Change in operating assets and liabilities:
Accounts, notes, and other receivables, net	(7,459		)	(6,592	)
Prepaid income taxes, net	4,208			7,621
Prepaid expenses and other current assets	(8,866		)	(18,305	)
Accounts payable	15,940			24,660
Other current liabilities	(71,323		)	(65,832	)
Deferred revenue	3,902			13,531
Other, net	(2,740		)	228
Net cash provided by operating activities	67,739			67,060
Cash flows from investing activities:
Additions to property, equipment, and software	(32,902		)	(6,730	)
Other, net	—			(99	)
Net cash used in investing activities	(32,902		)	(6,829	)
Cash flows from financing activities:
Repayment of long-term debt	(15,750		)	(12,500	)
Dividends paid on common stock	(57,439		)	(58,847	)
Accelerated share repurchases of common stock	(650,368		)	(100,000	)
Exercise of stock options	30,433			19,928
Other, net	(901		)	(799	)
Net cash used in financing activities	(694,025		)	(152,218	)
Effect of exchange rates on cash, cash equivalents, and restricted cash	(228		)	398
Decrease in cash, cash equivalents, and restricted cash	(659,416		)	(91,589	)
Cash, cash equivalents, and restricted cash, beginning of period	1,114,099			431,832
Cash, cash equivalents, and restricted cash, end of period	$	454,683		340,243
Supplemental cash flow information:
Cash paid for income taxes	$	35,044		53,736
Cash paid for interest	65,633			46,751
Noncash investing activities:
Property, equipment, and software included in accounts payable and other current liabilities	3,219			1,942
Purchase of property, equipment, and software in exchange for note payable	1,486			—

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 and, in limited circumstances, have owned and operated locations. Through our Dunkin’ Donuts brand, we franchise restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. Additionally, we license Dunkin’ Donuts 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 Baskin-Robbins franchisees and licensees in certain international markets.

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

(2) Summary of significant accounting policies

(a) Unaudited consolidated financial statements

The consolidated balance sheet as of June 30, 2018, the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2018 and July 1, 2017, and the consolidated statements of cash flows for the six months ended June 30, 2018 and July 1, 2017 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 30, 2017, included in the Company’s Annual Report on Form 10-K.

(b) Fiscal year

The Company operates and reports financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within the three- and six-month periods ended June 30, 2018 and July 1, 2017 reflect the results of operations for the 13-week and 26-week periods ended on those dates, respectively. Operating results for the three- and six-month periods ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2018.

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.

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Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of June 30, 2018 and December 30, 2017 were as follows (in thousands):



	June 30, 2018		December 30, 2017
Cash and cash equivalents	$	367,940	1,018,317
Restricted cash	84,970		94,047
Restricted cash, included in Other assets	1,773		1,735
Total cash, cash equivalents, and restricted cash	$	454,683	1,114,099

(d) Fair value of financial instruments

Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 30, 2017 are summarized as follows (in thousands):



	June 30, 2018			December 30, 2017
	Significant other observable inputs (Level 2)		Total	Significant other observable inputs (Level 2)	Total
Assets:
Company-owned life insurance	$	11,033	11,033	10,836	10,836
Total assets	$	11,033	11,033	10,836	10,836
Liabilities:
Deferred compensation liabilities	$	11,448	11,448	13,543	13,543
Total liabilities	$	11,448	11,448	13,543	13,543

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 June 30, 2018 and December 30, 2017 were as follows (in thousands):

June 30, 2018

December 30, 2017

Carrying value

Estimated fair value

Carrying value

Estimated fair value

Financial liabilities

Long-term debt

3,055,605

3,068,647

3,067,357

3,156,099

The estimated fair value of our long-term debt is estimated primarily based on current market rates for debt with similar terms and remaining maturities or current bid prices for our long-term debt. Judgment is required to develop these estimates. As such, the fair value of our long-term debt is classified within Level 2, as defined under U.S. GAAP.

(e) Concentration of credit risk

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

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note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. As of June 30, 2018 and December 30, 2017, one master licensee, including its majority-owned subsidiaries, accounted for approximately 20% and 11%, respectively, of total accounts and notes receivable. No individual franchisee or master licensee accounted for more than 10% of total revenues for any of the three and six month periods ended June 30, 2018 and July 1, 2017.

(f) Advertising expenses

Advertising expenses in the consolidated statements of operations includes advertising expenses incurred by the Company, including those expenses incurred by the advertising funds and for the administration of the gift card program. The Company expenses production costs of commercial advertising upon first airing and expenses the costs of communicating the advertising in the period in which the advertising occurs. Costs of print advertising and certain promotion-related items are deferred and expensed the first time the advertising is displayed. Prepaid expenses and other current assets in the consolidated balance sheets include $17.3 million and $15.5 million at June 30, 2018 and December 30, 2017, respectively, that was related to advertising. Advertising expenses are allocated to interim periods in relation to the related revenues. When revenues of the advertising fund exceed the related advertising expenses, advertising costs are accrued up to the amount of revenues.

(g) Recent accounting pronouncements

Recently adopted accounting pronouncements

In February 2018, the Financial Accounting Standards Board (the “FASB”) issued new guidance allowing companies the option to reclassify from accumulated other comprehensive loss to accumulated deficit the stranded income tax effects resulting from the Tax Cuts and Jobs Act that was enacted on December 22, 2017. The Company early adopted this standard during the first quarter of fiscal year 2018 and has elected to present the change in the period of adoption. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued new guidance for revenue recognition related to contracts with customers (“ASC 606”), except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. We adopted this new guidance in fiscal year 2018. See note 3 for further disclosure of the impact of the new guidance.

Recent accounting pronouncements not yet adopted

In February 2016, the FASB issued new guidance for lease accounting, which replaces existing lease accounting guidance. The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This guidance is effective for the Company in fiscal year 2019 with early adoption permitted, and modified retrospective application is required with an option to not restate comparative periods in the period of adoption. The Company expects to adopt this new guidance in fiscal year 2019 without restating comparative periods, and expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption, thereby having a material impact to its consolidated balance sheet.

Though the majority of the assessment phase is complete, the Company continues to evaluate the impact the adoption of this new guidance will have on the Company's consolidated financial statements, as well as the impact on accounting policies and related disclosures. Additionally, the Company is in the process of implementing new accounting systems, business processes, and internal controls related to lease accounting to assist in the application of the new guidance.

(h) Subsequent events

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

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(3) Revenue recognition

(a) Updated revenue recognition policies

Franchise fees and royalty income

Domestically, the Company sells individual franchises as well as territory agreements in the form of store development agreements (“SDAs”) that grant the right to develop restaurants in designated areas. The franchise agreements and SDAs typically require the franchisee to pay initial nonrefundable franchise fees prior to opening the respective restaurants and continuing fees, or royalty income, on a weekly basis based upon a percentage of franchisee gross sales. The initial term of domestic franchise agreements is typically 20 years. Prior to the end of the franchise term or as otherwise provided by the Company, a franchisee may elect to renew the term of a franchise agreement, and, if approved, will typically pay a renewal fee upon execution of the renewal term. If approved, a franchisee may transfer a franchise agreement or SDA to a new or existing franchisee, at which point a transfer fee is paid. Occasionally, the Company offers incentive programs to franchisees in conjunction with a franchise/license agreement, territory agreement, or renewal agreement.

Internationally, the Company sells master franchise agreements that grant the master franchisee the right to develop and operate, and in some instances sub-franchise, a certain number of restaurants within a particular geographic area. The master franchisee is typically required to pay an upfront market entry fee upon entering into the master franchise agreement and an upfront initial franchise fee for each developed restaurant prior to each respective opening. For the Dunkin’ Donuts brand and in certain Baskin-Robbins international markets, the master franchisee will also pay continuing fees, or royalty income, generally on a monthly basis based upon a percentage of sales. Generally, the master franchise agreement serves as the franchise agreement for the underlying restaurants, and the initial franchise term provided for each restaurant typically ranges between 10 and 20 years.

Generally, the franchise license granted for each individual restaurant within an arrangement represents a single performance obligation. Therefore, initial franchise fees and market entry fees for each arrangement are allocated to each individual restaurant and recognized over the term of the respective franchise agreement from the date of the restaurant opening. Royalty income is also recognized over the term of the respective franchise agreement based on the royalties earned each period as the underlying sales occur. Renewal fees are generally recognized over the renewal term for the respective restaurant from the start of the renewal period. Transfer fees are recognized over the remaining term of the franchise agreement beginning at the time of transfer. Additionally, for Baskin-Robbins international markets that do not pay a royalty, a portion of the consideration from sales of ice cream and other products is allocated to royalty income as consideration for the use of the franchise license, which is recognized when the related sales occur and is estimated based on royalty rates in effect for markets where the franchise license is sold on a standalone basis. Fees received or receivable that are expected to be recognized as revenue within one year are classified as current deferred revenue in the consolidated balance sheets.

Advertising fees and related income

Domestically and in limited international markets, franchise agreements typically require the franchisee to pay continuing advertising fees on a weekly basis based on a percentage of franchisee gross sales, which are recognized over the term of the respective franchise agreement based on the fees earned each period as the underlying sales occur.

The Company and its franchisees sell gift cards that are redeemable for products in our Dunkin’ Donuts and Baskin-Robbins restaurants. The Company manages the gift card program, and therefore collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their restaurants. A liability for unredeemed gift cards, as well as historical gift certificates sold, is included in other current liabilities in the consolidated balance sheets.

There are no expiration dates or service fees charged on the gift cards. While the franchisees continue to honor all gift cards presented for payment, the likelihood of redemption may be determined to be remote for certain cards due to long periods of inactivity. In these circumstances, the Company may recognize revenue from unredeemed gift cards (“breakage revenue”) if they are not subject to unclaimed property laws. For Dunkin’ Donuts gift cards enrolled in the DD Perks® Rewards loyalty program and other cards with expected similar redemption behavior, breakage is estimated and recognized at the point in time when the likelihood of redemption of any remaining card balance becomes remote, generally after a period of sufficient inactivity. Breakage on all other Dunkin’ Donuts gift cards and all Baskin-Robbins gift cards is estimated and recognized over time in proportion to actual gift card redemptions, based on historical redemption rates.

The Company also collects gift card program service fees from franchisees to offset the costs to administer the gift card program. The gift card program service fees are based on the volume of gift card transactions processed and are recognized as the underlying transactions occur.

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Rental income

Rental income for base rentals is recorded on a straight-line basis over the lease term, including the amortization of any tenant improvement dollars paid. The differences between the straight-line rent amounts and amounts receivable under the leases are recorded as deferred rent assets in current or long-term assets, as appropriate. Contingent rental income is recognized as earned, and any amounts received from lessees in advance of achieving stipulated thresholds are deferred until such thresholds are actually achieved. Deferred contingent rentals are recorded as deferred revenue in current liabilities in the consolidated balance sheets.

Sales of ice cream and other products

We distribute Baskin-Robbins ice cream products and, in limited cases, Dunkin’ Donuts products to franchisees in certain international locations. Revenue from the sale of ice cream and other products is recognized when title and risk of loss transfers to the buyer, which is generally upon delivery. Payment for ice cream and other products is generally due within a relatively short period of time subsequent to delivery.

Other revenues

Other revenues include fees generated by licensing our brand names and other intellectual property, as well as gains, net of losses and transactions costs, from the sales of restaurants that were not company-operated to new or existing franchisees. Licensing fees are recognized over the term of the expected license agreement, with sales-based license fees being recognized based on the amount earned each period as the underlying sales occur. Gains on the refranchise or sale of a restaurant are recognized over the term of the related agreement.

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(b) Disaggregation of revenue

Revenues are disaggregated by timing of revenue recognition and reconciled to reportable segment revenues as follows (in thousands):



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

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

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

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

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

^(a) 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."

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	Three months ended July 1, 2017
	Dunkin' Donuts U.S.		Baskin-Robbins U.S.	Dunkin' Donuts 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	$	119,096	9,080	4,157		1,858	—	134,191	4,183		138,374
Franchise fees	4,564		193	475		288	—	5,520	—		5,520
Advertising fees and related income	—		—	—		—	113,824	113,824	668		114,492
Other revenues	577		3,187	—		1	—	3,765	7,506		11,271
Total revenues recognized over time	124,237		12,460	4,632		2,147	113,824	257,300	12,357		269,657

Revenues recognized at a point in time:
Sales of ice cream and other products	—		883	—		31,685	—	32,568	(3,889	)	28,679
Other revenues	221		150	(20	)	63	—	414	149		563
Total revenues recognized at a point in time	221		1,033	(20	)	31,748	—	32,982	(3,740	)	29,242

Total revenues recognized under ASC 606	124,458		13,493	4,612		33,895	113,824	290,282	8,617		298,899

Revenues not subject to ASC 606
Advertising fees and related income	—		—	—		—	—	—	7,869		7,869
Rental income	26,533		763	—		112	—	27,408	—		27,408
Total revenues not subject to ASC 606	26,533		763	—		112	—	27,408	7,869		35,277

Total revenues	$	150,991	14,256	4,612		34,007	113,824	317,690	16,486		334,176

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

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

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

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

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

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	Six months ended July 1, 2017
	Dunkin' Donuts U.S.		Baskin-Robbins U.S.	Dunkin' Donuts 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	$	226,271	15,764	8,569		3,289	—	253,893	6,974		260,867
Franchise fees	8,862		399	908		573	—	10,742	—		10,742
Advertising fees and related income	—		—	—		—	216,145	216,145	723		216,868
Other revenues	1,117		5,500	4		1	—	6,622	15,415		22,037
Total revenues recognized over time	236,250		21,663	9,481		3,863	216,145	487,402	23,112		510,514

Revenues recognized at a point in time:
Sales of ice cream and other products	—		1,409	—		56,089	—	57,498	(6,313	)	51,185
Other revenues	724		214	(36	)	109	—	1,011	298		1,309
Total revenues recognized at a point in time	724		1,623	(36	)	56,198	—	58,509	(6,015	)	52,494

Total revenues recognized under ASC 606	236,974		23,286	9,445		60,061	216,145	545,911	17,097		563,008

Revenues not subject to ASC 606
Advertising fees and related income	—		—	—		—	—	—	15,696		15,696
Rental income	50,057		1,547	—		226	—	51,830	—		51,830
Total revenues not subject to ASC 606	50,057		1,547	—		226	—	51,830	15,696		67,526

Total revenues	$	287,031	24,833	9,445		60,287	216,145	597,741	32,793		630,534

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



	June 30, 2018		December 30, 2017	Balance Sheet Classification
Receivables	$	99,950	76,455	Accounts receivable, net and Notes and other receivables, net

Deferred revenue:
Current	$	30,550	27,724	Deferred revenue—current
Long-term	366,246		361,458	Deferred revenue—long term
Total	$	396,796	389,182

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 increase in the deferred revenue balance for the six months ended June 30, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $16.7 million of revenues recognized that were included in the deferred revenue balance as of December 30, 2017.

As of June 30, 2018 and December 30, 2017, there were no contract assets from contracts with customers.

(d) 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 June 30, 2018 is as follows (in thousands):



Fiscal year:
2018^(a)	$	16,541
2019	25,091
2020	23,851
2021	23,614
2022	23,341
Thereafter	247,568
Total	$	360,006

^(a) Represents the estimate for remainder of fiscal year 2018 which excludes the six months ended June 30, 2018.

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 SDA does not exist at June 30, 2018. Additionally, the table above excludes $61.9 million of consideration allocated to restaurants that are not yet open as of June 30, 2018. 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. Additionally, the Company has applied the transition practical expedient that allows the Company to omit the above disclosures for the fiscal year ended December 30, 2017.

(e) Change in accounting principle

In fiscal year 2018, the Company adopted new revenue recognition guidance which provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The Company adopted the guidance using the full retrospective transition method which results in restating each prior reporting period presented. The restated amounts include the application of a practical expedient that permitted the Company to reflect the aggregate effect of all modifications that occurred prior to fiscal year 2016 when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.

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The Company implemented new business processes, internal controls, and modified information technology systems to assist in the ongoing application of the new guidance.

Franchise Fees

The adoption of the new guidance changed the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal and transfer fees. Previously, these fees were generally recognized upfront upon either opening of the respective restaurant, when a renewal agreement became effective, or upon transfer of a franchise agreement. The new guidance generally requires these fees to be recognized over the term of the related franchise license for the respective restaurant. Additionally, transfer fees were previously included within other revenues, but are now included within franchise fees and royalty income in the consolidated statements of operations. The new guidance did not materially impact the recognition of royalty income.

Advertising

The adoption of the new guidance changed the reporting of advertising fund contributions from franchisees and the related advertising fund expenditures, which were not previously included in the consolidated statements of operations. The new guidance requires these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. The assets and liabilities held by the advertising funds, which were previously reported as restricted assets and liabilities of advertising funds, respectively, are now included within the respective balance sheet caption to which the assets and liabilities relate. Additionally, advertising costs that have been incurred by the Company outside of the advertising funds were previously included within general and administrative expenses, net, but are now included within advertising expenses in the consolidated statements of operations.

Previously, breakage from Dunkin’ Donuts and Baskin-Robbins gift cards was recorded as a reduction to general and administrative expenses, net, to offset the related gift card program costs. In accordance with the new guidance, breakage revenue is now reported on a gross basis in the consolidated statements of operations within advertising fees and related income, and the related gift card program costs are included in advertising expenses.

Ice Cream Royalty Allocation

The adoption of the new guidance requires a portion of sales of ice cream products to be allocated to royalty income as consideration for the use of the franchise license. As such, a portion of sales of ice cream and other products has been reclassified to franchise fees and royalty income in the consolidated statements of operations under the new guidance. This allocation has no impact on the timing of recognition of the related sales of ice cream products or royalty income.

Other Revenue Transactions

The adoption of the new guidance requires certain fees generated by licensing of our brand names and other intellectual property to be recognized over the term of the related agreement, including a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in fiscal year 2015. Additionally, gains associated with the refranchise, sale, or transfer of restaurants that were not company-operated to new or existing franchisees are recognized over the term of the related agreement under the new guidance, instead of upon closing of the sale transaction or transfer.

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Impacts to Prior Period Information

The new guidance for revenue recognition impacted the Company's previously reported financial statements as follows:



Consolidated Balance Sheets
December 30, 2017
(In thousands)
				Adjustments for new revenue recognition guidance
	Previously reported			Franchise fees		Advertising		Other revenue transactions		Restated

Assets
Current assets:
Cash and cash equivalents	$	1,018,317		—		—		—		1,018,317
Restricted cash	94,047			—		—		—		94,047
Accounts receivables, net	51,442			—		18,075		—		69,517
Notes and other receivables, net	51,082			—		1,250		—		52,332
Restricted assets of advertising funds	47,373			—		(47,373	)	—		—
Prepaid income taxes	21,879			—		48		—		21,927
Prepaid expenses and other current assets	32,695			—		15,498		—		48,193
Total current assets	1,316,835			—		(12,502	)	—		1,304,333
Property and equipment, net	169,005			—		12,537		—		181,542
Equity method investments	140,615			—		—		—		140,615
Goodwill	888,308			—		—		—		888,308
Other intangibles assets, net	1,357,157			—		—		—		1,357,157
Other assets	65,464			—		14		—		65,478
Total assets	$	3,937,384		—		49		—		3,937,433
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt	$	31,500		—		—		—		31,500
Capital lease obligations	596			—		—		—		596
Accounts payable	16,307			—		37,110		—		53,417
Liabilities of advertising funds	58,014			—		(58,014	)	—		—
Deferred revenue	39,395			1,502		(550	)	4,529		44,876
Other current liabilities	326,078			—		29,032		—		355,110
Total current liabilities	471,890			1,502		7,578		4,529		485,499
Long-term debt, net	3,035,857			—		—		—		3,035,857
Capital lease obligations	7,180			—		—		—		7,180
Unfavorable operating leases acquired	9,780			—		—		—		9,780
Deferred revenue	11,158			328,183		(7,518	)	29,635		361,458
Deferred income taxes, net	315,249			(91,488	)	—		(9,416	)	214,345
Other long-term liabilities	77,823			—		30		—		77,853
Total long-term liabilities	3,457,047			236,695		(7,488	)	20,219		3,706,473
Stockholders’ equity (deficit)
Preferred stock	—			—		—		—		—
Common stock	90			—		—		—		90
Additional paid-in-capital	724,114			—		—		—		724,114
Treasury stock, at cost	(1,060		)	—		—		—		(1,060	)
Accumulated deficit	(705,007		)	(238,197	)	(196	)	(24,748	)	(968,148	)
Accumulated other comprehensive loss	(9,690		)	—		155		—		(9,535	)
Stockholders’ equity (deficit)	8,447			(238,197	)	(41	)	(24,748	)	(254,539	)
Total liabilities and stockholders’ equity (deficit)	$	3,937,384		—		49		—		3,937,433

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Consolidated Statements of Operations
Three months ended July 1, 2017
(In thousands, except per share data)
			Adjustments for new revenue recognition guidance
	Previously reported		Franchise fees		Advertising		Ice cream royalty allocation		Other revenue transactions		Restated

Revenues:
Franchise fees and royalty income	$	145,066	(5,355	)	—		4,183		—		143,894
Advertising fees and related income	—		—		122,361		—		—		122,361
Rental income	27,408		—		—		—		—		27,408
Sales of ice cream and other products	32,862		—		—		(4,183	)	—		28,679
Other revenues	13,186		(1,033	)	—		—		(319	)	11,834
Total revenues	218,522		(6,388	)	122,361		—		(319	)	334,176
Operating costs and expenses:
Occupancy expenses—franchised restaurants	14,287		—		—		—		—		14,287
Cost of ice cream and other products	22,199		—		—		—		—		22,199
Advertising expenses	—		—		123,676		—		—		123,676
General and administrative expenses, net	62,382		—		(1,308	)	—		—		61,074
Depreciation	5,071		—		—		—		—		5,071
Amortization of other intangible assets	5,333		—		—		—		—		5,333
Long-lived asset impairment charges	60		—		—		—		—		60
Total operating costs and expenses	109,332		—		122,368		—		—		231,700
Net income of equity method investments	4,327		—		—		—		—		4,327
Other operating income, net	33		—		—		—		—		33
Operating income	113,550		(6,388	)	(7	)	—		(319	)	106,836
Other income (expense), net: