Dunkin' Donuts 2012 Annual Report Download - page 44

-34-
Fiscal year Increase (Decrease)
2012 2011 $ %
(In thousands, except percentages)
Occupancy expenses – franchised restaurants $ 52,072 51,878 194 0.4 %
Cost of ice cream products 69,019 72,329 (3,310) (4.6)%
Company-owned restaurant expenses 23,133 12,854 10,279 80.0 %
General and administrative expenses, net 239,574 227,771 11,803 5.2 %
Depreciation and amortization 56,027 52,522 3,505 6.7 %
Impairment charges 1,278 2,060 (782) (38.0)%
Total operating costs and expenses $ 441,103 419,414 21,689 5.2 %
Net income (loss) of equity method investments 22,351 (3,475) 25,826 (743.2)%
Operating income $ 239,429 205,309 34,120 16.6 %
Occupancy expenses for franchised restaurants for fiscal year 2012 remained flat with the prior year as an increase in sales-
based rental expense was offset by a decline in the number of leased properties.
Cost of ice cream products declined $3.3 million, or 4.6% from the prior year, as a result of the 5.4% decline in sales of ice
cream products driven by the one-time delay in revenue recognition as a result of the change in shipping terms.
General and administrative expenses for fiscal year 2012 were impacted by an incremental legal reserve of $20.7 million
recorded upon the Canadian court’s ruling in June 2012 in the Bertico litigation, as well as $5.0 million of costs associated with
the announced closure of our ice cream manufacturing plant in Canada, consisting primarily of severance, payroll, and other
transition-related costs. General and administrative expenses for fiscal year 2012 also include $4.8 million of transaction costs
and incremental share-based compensation related to the secondary offerings and share repurchases that were completed in
April and August 2012. For fiscal year 2011, general and administrative expenses include $14.7 million related to the
termination of the Sponsor management agreement upon completion of the Company’s initial public offering ("IPO"), $1.8
million of Sponsor management fees prior to the IPO, and $2.6 million of share-based compensation expense recognized for
awards that became eligible to vest upon completion of the IPO. General and administrative expenses for fiscal year 2011 also
include transaction costs of $1.0 million and share-based compensation expense of $0.9 million related to the secondary
offering completed in November 2011.
Excluding the items noted above, general and administrative expenses increased $2.3 million, or 1.1%, in fiscal year 2012. This
increase was driven by a $10.3 million increase in personnel costs related to continued investments in our Dunkin’ Donuts U.S.
contiguous growth strategy and our international brands, additional stock compensation expense, and higher incentive
compensation payouts. Offsetting this increase was additional breakage income recorded in fiscal year 2012 of $5.4 million on
unredeemed gift card and gift certificate balances. The remaining decrease in other general and administrative costs of $2.6
million resulted primarily from costs incurred in the prior year related to the roll-out of a new point-of-sale system for Baskin-
Robbins franchisees and additional contributions made in 2011 to the advertising funds to support brand-building advertising.
Depreciation and amortization increased $3.5 million in fiscal year 2012 resulting primarily from accelerated depreciation
recorded as a result of the announced closure of the ice cream manufacturing plant in Canada, offset by terminations of lease
agreements in the normal course of business resulting in the write-off of favorable lease intangible assets, which thereby
reduced future amortization.
As a result of the announced closure of our ice cream manufacturing plant, the Company expects to incur a total reduction to
operating income associated with the plant closing and transition of between $16 million and $18 million. Of this amount,
$14.0 million was incurred in fiscal year 2012, including $5.0 million of general and administrative costs related to severance
and other transition-related costs, $4.2 million of accelerated depreciation on property, plant, and equipment, $2.7 million of
incremental ice cream production costs, and a one-time delay in revenue recognition, net of related cost of ice cream products,
as a result of the change in shipping terms of $2.1 million. The remaining costs to be incurred primarily consists of a loss of
approximately $3 million to $4 million related to the settlement of our Canadian pension plan. Additionally, the Company
expects to realize annual pre-tax savings in cost of ice cream products of approximately $4 million to $5 million beginning in
fiscal year 2013.
The decrease in impairment charges in fiscal year 2012 of $0.8 million resulted primarily from the timing of lease terminations
in the ordinary course, which results in the write-off of favorable lease intangible assets and leasehold improvements.