Herrera !1 Laura Herrera Professor Zameer Baksh Financial Acct (ACC-110-606) December 15, 2019 Dunkin' Financial Statement Report Section 1 Consolidated Statements of Operations - USD ($) $ in Thousands 12 Months Ended Dec.30,2018 Dec. 31,2017 Dec. 29, 2019 Revenues: Total revenues $130,863 $ 131,868, $ Operating costs and expenses: Consulated-operated expenses 0,0 101,490 108,585 Advertising Expense 186,000 4,591 0,0 General and administrative expenses, net 29,896 31,082 0,0 Depreciation and amortization expense 16,862 17,403 20,458 Amortization of other intangible assets 21,113 21,335 22,079 1,648 1,617 149 923,018 900,334 891,686 Net income (loss) of equity method investments 14,903 15,198 14,552 Other operating income (loss), net (1,670) 627 9,381 411,832 391,042 380,602 5,386 5,573 582 Long-lived asset impairment charges Total operating costs and expenses Equity Method Investment, Summarized Financial Information, Income Statement [Abstract] Operating income Other income (expense), net: Interest income Interest expense Loss on debt extinguishment and refinancing transactions Other income (loss), net franchise fees and royalty income Income before income taxes Provision for income taxes Net income (5,386) (5,573) (100,852) 0 (6,996) 0 (1,083) 391 (1,195) (122,631) (107,715) (101,465) 289,201 283,327 279,137 59,295 12,118 103,848 229,906 271,209 175,289 Herrera 2! Net income attributable to Dunkin' Brands $ 229,906 $ 271,209 $ 175,289 $ 2.75 $ 2.99 $ 1.91 2.71 2.94 1.89 $ 1.39 $ 1.29 $ 1.2 $ 578,342 $ 555,206 $ 536,396 493,590 470,984 453,553 104,413 104,643 101,020 95,197 96,388 100,542 77,412 77,012 77,608 0 0 11,975 50,075 48,330 44,869 $ 58,102 $ 60,301 $ 57,409 Earnings per share: Common-basic (in dollars per share) Common-diluted (in dollars per share) Cash dividends declared per common share (in dollars per share) Franchise fees and royalty income Revenues: Total revenues Advertising fees and related income Revenues: Total revenues Rental income Revenues: Total revenues Ice cream and other products Revenues: Total revenues Operating costs and expenses: Cost of ice cream and other products Sales at company-operated restaurants Revenues: Total revenues Other revenues Revenues: Total revenues Occupancy expensesfranchised restaurants Operating costs and expenses: Cost of ice cream and other products Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 29, 2018 Dec. 30, 2017 Current assets: Cash and cash equivalents $ 517,594 $ 1,018,317 Herrera 3! Restricted cash 79,008 94,047 Accounts receivable, net 75,963 69,517 Notes and other receivables, net 64,412 52,332 Prepaid income taxes 27,005 21,927 Prepaid expenses and other current assets 49,491 48,193 813,473 1,304,333 Total current assets 181,542 Property, equipment, and software, net Equity method investments 146,395 140,615 Goodwill 888,265 888,308 1,334,767 1,357,157 64,479 65,478 3,456,581 3,937,433 31,650 31,500 476 596 Accounts payable 80,037 53,417 Deferred revenue 38,082 44,876 Other current liabilities 389,336 355,110 Total current liabilities 539,581 485,499 3,010,626 3,035,857 Capital lease obligations 6,998 7,180 Unfavorable operating leases acquired 8,236 9,780 Deferred revenue 327,333 361,458 Deferred income taxes, net 204,027 214,345 72,577 77,853 3,629,797 3,706,473 0 0 82 90 Other intangible assets, net Other assets Total assets Current liabilities: Current portion of long-term debt Capital lease obligations Long-term debt, net Other long-term liabilities Total long-term liabilities Commitments and contingencies (note 17) Stockholders' deficit: Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued and outstanding Common stock, $0.001 par value; 475,000,000 shares authorized; 82,587,373 shares issued and 82,560,596 shares outstanding at December 29, 2018; 90,404,022 shares issued and 90,377,245 shares outstanding at December 30, 2017 Herrera 4! Additional paid-in capital Treasury stock, at cost; 26,777 shares at December 29, 2018 and December 30, 2017 Accumulated deficit Accumulated other comprehensive loss Total stockholders' deficit Total liabilities and stockholders' deficit Consolidated Statements of Cash Flows - USD ($) $ in Thousands 642,017 724,114 (1,060) (1,060) (1,338,709) (968,148) (15,127) (9,535) (712,797) (254,539) $ 3,456,581 $ 3,937,433 12 Months Ended Dec. 29, 2018 Dec. 30, 2017 Dec. 31, 2016 Cash flows from operating activities: $ 229,906 $ 271,209 $ 175,289 45,031 45,239 46,267 5,019 6,179 6,398 0 6,996 0 Deferred income taxes (9,897) (121,247) (26,362) Provision for bad debt 631 457 53 14,879 14,926 17,181 (14,903) (15,198) (14,552) 4,509 4,711 5,247 0 (1) (9,373) 2,791 (1,766) (2,172) (19,776) (18,496) 40,607 Prepaid income taxes, net (4,996) (2,441) 5,022 Prepaid expenses and other current assets (1,561) (6,481) (3,695) Accounts payable 26,974 5,066 5,374 Other current liabilities 34,144 30,031 (2,696) (41,071) 59,606 33,651 (2,725) 4,567 6,240 Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of debt issuance costs Loss on debt extinguishment and refinancing transactions Share-based compensation expense Net income of equity method investments Dividends received from equity method investments Gain on sale of real estate and companyoperated restaurants Other, net Change in operating assets and liabilities: Accounts, notes, and other receivables, net Deferred revenue Other, net Herrera 5! 268,955 283,357 282,479 Additions to property, equipment, and software (51,855) (21,055) (20,826) Proceeds from sale of real estate and companyoperated restaurants 0 854 20,523 20 (102) (4,006) (51,835) (20,303) (4,309) Net cash provided by operating activities Cash flows from investing activities: Other, net Net cash used in investing activities Cash flows from financing activities: 1,400,000 Proceeds from issuance of long-term debt Repayment of long-term debt (31,600) (754,375) (25,000) (18,441) Payment of debt issuance and other debtrelated costs Repurchases of common stock, including accelerated share repurchases (680,368) (127,186) (55,000) Dividends paid on common stock (114,828) (117,003) (109,703) 95,331 36,344 10,647 (895) (698) (122) (732,360) 418,641 (179,178) Effect of exchange rate changes on cash, cash equivalents, and restricted cash (538) 572 (275) Increase (decrease) in cash, cash equivalents, and restricted cash (515,778) 682,267 98,717 Cash, cash equivalents, and restricted cash, beginning of year 1,114,099 431,832 333,115 598,321 1,114,099 431,832 74,775 135,927 125,681 126,868 91,606 94,212 Property, equipment, and software included in accounts payable and other current liabilities 2,713 2,637 1,847 Purchase of leaseholds in exchange for capital lease obligations 325 449 624 1,500 0 0 Exercise of stock options Other, net Net cash provided by (used in) financing activities Cash, cash equivalents, and restricted cash, end of year Supplemental cash flow information: Cash paid for income taxes Cash paid for interest Noncash investing activities: Purchase of property, equipment, and software in exchange for note payable Herrera 6! $0 Receivable from exercise of stock options included in notes and other receivables, net Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands Increase (Decrease) in Stockholders' Equity [Roll Forward] Total $ 92 $ 876,557 $0 Noncontrollin g interests $ (1,075) 0 $ 108 (1,076,479) 0 (20,046) 175,289 $ 208 0 0 (3,935) 433,000 10,647 $1 10,646 (208) (208) (109,703) (109,703) 68,000 17,181 17,181 (55,000) Repurchases of common stock 25,000 (80,000) (1,707,000) 0 Retirement of treasury stock Excess tax benefits from sharebased compensation $ (2) (15,874) 2,735 (29,000) 195 91,293,000 (346,588) 271,209 $0 Balance at Dec. 31, 2016 80,000 (64,124) 2,735 Other Net income (loss) Accumulated other comprehensiv e loss $ (163,154) Share-based compensation expense Increase (Decrease) in Stockholders' Equity [Roll Forward] Dividends paid on common stock Balance, shares at Dec. 31, 2016 $0 Accumulate d deficit (3,935) Deconsolidation of noncontrolling interest Other, shares 175,289 Exercise of stock options Retirement of treasury stock (shares) 92,470,000 Other comprehensive income (loss), net Share-based compensation expense, shares (220,743) Net income (loss) Exercise of stock options, shares Balance at Dec. 26, 2015 Increase (Decrease) in Stockholders' Equity [Roll Forward] Treasury stock, at cost $ (163,046) Cumulative effect of the adoption of ASC 606 Balance, shares at Dec. 26, 2015 Additional paid-in capital Common stock $ 151 950 $ 91 15 807,492 (770) (1,060) (1,129,238) (23,873) 271,209 0 0 Herrera 7! Other comprehensive income (loss), net Exercise of stock options, shares 14,338 1,158,000 Exercise of stock options 36,495 (117,003) Dividends paid on common stock Share-based compensation expense, shares 36,494 (117,003) 14,926 (127,186) 0 (127,186) (2,271,448) 0 $ (2) 28,000 $ (730) $ (254,539) $ 90 Net income (loss) 229,906 127,186 1,066 Balance at Dec. 30, 2017 (18,861) 90,254,000 (108,323) 0 724,114 (1,796) (1,060) (968,148) (9,535) 95,177 (114,828) 229,906 2,721,000 95,180 Dividends paid on common stock (114,828) 0 (5,592) Exercise of stock options 0 (5,592) Other comprehensive income (loss), net $3 61,000 Share-based compensation expense 14,879 14,879 (680,368) Repurchases of common stock 0 (10,629,000 ) 0 Retirement of treasury stock Other, shares 90,377,245 Retirement of treasury stock (shares) Balance, shares at Dec. 30, 2017 Share-based compensation expense, shares 14,926 Other Exercise of stock options, shares Retirement of treasury stock Increase (Decrease) in Stockholders' Equity [Roll Forward] 46,000 Repurchases of common stock Other, shares $1 Share-based compensation expense Retirement of treasury stock (shares) 14,338 $ (11) 30,000 $ 2,565 Other (81,160) 680,368 3,835 Balance, shares at Dec. 29, 2018 82,560,596 82,437,000 Balance at Dec. 29, 2018 $ (712,797) $ 82 Section 2 Calculations (12 total) (680,368) 0 $ 642,017 (599,197) (1,270) $ (1,060) $ (1,338,709) $ (15,127) $0 Herrera 8! Net Income Preferred Dividends Net income - Preferred Dividends 229,906 0 229,906 EPS 2018 Weighted -Avg Common Shares Outstanding 2.78 Shares outstanding Beg of year Shares outstanding End of year 82,587.373 82,560.596 82,573.985 Current Assets Current Liabilities Working Capital 2018 813,473 539,581 273,892 Current Assets Current Liabilities Current Ratio 2018 813,473 539,581 1.51 Total Liabilities Total Assets Debt to Asset Ratio 4,169,378 3,456,581 121% Net Cash Provided by Operating Activities Capital Expenditures Cash Dividends Free Cash Flow 268,955 51,835 114,828 102,292 Net Income Average Total Assets Return on Assets 229,906 1,728,290.5 13.3% Net income Net Sales Profit Margin 229,906 1,321,617 17.4% Gross Profit Net Sales Gross Profit Ratio 398,599 1,321,617 30.2% 3,025,860 Herrera 9! Current Stock Price EPS Price Earnings Ratio 76.59 2.78 27.51 Dividends Paid Net Income Payout Ratio 114,828 229,906 49.9% Net Income Interest Expense Times Interest Earned 229,906 128,748 1.79 Cash, Cash equivalents, current Receivables Current Liabilities 657,969 539,581 Quick Ratio 1.22 Section 3 - Calculations Compared to Previous Year (Total 3) Earnings Per Share (EPS) is a very important figure that can be used to determine the income capabilities of a company. Earnings per share (EPS) is the amount of income that belongs to each Herrera 10 ! share of common stock. To calculate earnings per share, the dividends of preferred stocks need to subtracted from the total net income first, and divided over the weighted-Avg Common Shares Outstanding. From the data collected, we can say that Dunkin Brands EPS in 2018 decreased slightly (2.78) from the year 2017 (3.00). This means that they made less for each share of stock in 2018 than they did in 2017. This also tells us that Dunkin Brands was not as profitable in 2018, as it was in 2017. A higher EPS means more value and it also attracts more investors. Net Income Preferred Dividends Net income - Preferred Dividends 229,906 0 229,906 EPS 2018 Shares outstanding Beg of year Shares outstanding End of year Weighted -Avg Common Shares Outstanding 2.78 82,587 82,560 82,574 Net Income Preferred Dividends 271,209 0 271,209 EPS 2017 Shares outstanding Beg of year Shares outstanding End of year Weighted -Avg Common Shares Outstanding 3.00 90,404 90,377 90,391 Net income - Preferred Dividends Working Capital measures a company's ability to pay off its debts/liabilities with its current assets. The more working capital a company has, the stronger its financial standing is. Working capital is the difference between the company's current assets and current liabilities. Dunkin's working capital experienced a significant decline in 2018 compared to 2017. In 2018 Dunkin had $273,892 in working capital and $818,834 in 2017. Dunkin's current assets are still higher than its current liabilities, which means they can still pay off its debts. However, If Dunkin's working capital continues to decline, it may be headed to some financial trouble. Current Assets Current Liabilities Working Capital 2018 Herrera 11 ! 813,473 539,581 273,892 Current Assets Current Liabilities Working Capital 2017 1,304,333 485,499 818,834 Current ratio is used to measure a company's ability to pay short-term debts or debts due in the next 12 months. From the data collected below, we can see that Dunkin's current ratio dropped in 2018 to 1.51, compared to 2.69 in 2017. If a company's current ratio is below 1, it shows that it may not have the working capital to satisfy its current debt. Even though Dunkin's current ratio for 2018 is not lower than one, it indicates that the company could be facing financial issues. Current ratio is an important number for investors and Dunkin's current ratio for 2018 is not sending the right message, especially because of its big difference when compared to 2017. Current Assets Current Liabilities Current Ratio 2018 813,473 539,581 1.51 Current Assets Current Liabilities Current Ratio 2017 1,304,333 485,499 2.69 Section 4 - Notes to the Financial Statements. Revenue recognition Revenue is recognized in accordance with a five-step revenue model, as follows: identifying the contract with the customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations; and recognizing revenue when (or as) the entity satisfies a performance obligation. Summary: Dunkin uses the 5 step method for revenue recognition. This means that Dunkin recognizes revenue once the goods/services have been rendered. Herrera 12 ! Advertising expenses Advertising expenses in the consolidated statements of operations includes advertising expenses incurred by the Company, primarily through advertising funds, including those expenses 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 $15.0 million and $15.5 million at December 29, 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. Summary: Advertising expenditures include those acquired by Dunkin mainly by advertising moneys. This includes expenses acquired for running their gift card program. Costs are realized the moment they occur or in the period in which they occur. Allowance for doubtful accounts We monitor the financial condition of our franchisees and licensees and record provisions for estimated losses on receivables when we believe that our franchisees or licensees are unable to make their required payments. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Included in the allowance for doubtful notes and accounts receivables is a provision for uncollectible royalty, advertising fee, lease, ice cream, and licensing fee receivables. Summary: Dunkin keeps an eye on their franchisees/licensees and make arrangements for those they believe will not be able to make their payments. They do their best to track these potential Herrera 13 ! losses based on the information they have, but future economic occurrences play a big role in this as well. Section 5 - Auditing Agency KPMG LLP is the company that performed the financial audit for Dunkin' Brands