Dunkin' Donuts 2013 Annual Report Download - page 56

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The senior credit facility requires us to comply on a quarterly basis with certain financial covenants, including a maximum ratio
(the “leverage ratio”) of debt to adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and a
minimum ratio (the “interest coverage ratio”) of adjusted EBITDA to interest expense, each of which becomes more restrictive
over time. As of December 28, 2013, the terms of the senior credit facility require that we maintain a leverage ratio of no more
than 8.00 to 1.00 and a minimum interest coverage ratio of 1.65 to 1.00. The leverage ratio financial covenant will become
more restrictive over time and will require us to maintain a leverage ratio of no more than 6.25 to 1.00 by the second quarter of
fiscal year 2017. The interest coverage ratio financial covenant will also become more restrictive over time and will require us
to maintain an interest coverage ratio of no less than 1.95 to 1.00 by the second quarter of fiscal year 2017. Failure to comply
with either of these covenants would result in an event of default under our senior credit facility unless waived by our senior
credit facility lenders. An event of default under our senior credit facility can result in the acceleration of our indebtedness
under the facility. Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants
contained in our senior credit facility, including our leverage ratio. Adjusted EBITDA is defined in our senior credit facility as
net income/(loss) before interest, taxes, depreciation and amortization and impairment of long-lived assets, as adjusted for the
items summarized in the table below. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of
the term adjusted EBITDA varies from others in our industry due to the potential inconsistencies in the method of calculation
and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net
income, operating income, or any other performance measures derived in accordance with GAAP, as a measure of operating
performance, or as an alternative to cash flows as a measure of liquidity. Adjusted EBITDA has important limitations as an
analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
Because of these limitations we rely primarily on our GAAP results. However, we believe that presenting adjusted EBITDA is
appropriate to provide additional information to investors to demonstrate compliance with our financing covenants. As of
December 28, 2013, we were in compliance with our senior credit facility financial covenants, including a leverage ratio of
4.64 to 1.00 and an interest coverage ratio of 4.99 to 1.00, which were calculated for fiscal year 2013 based upon the
adjustments to EBITDA, as provided for under the terms of our senior credit facility. The following is a reconciliation of our
net income to such adjusted EBITDA for fiscal year 2013 (in thousands):
Fiscal year
2013
Net income including noncontrolling interests $ 146,304
Interest expense 80,235
Income tax expense 71,784
Depreciation and amortization 49,366
Impairment charges 1,436
EBITDA 349,125
Adjustments:
Non-cash adjustments(a) 12,602
Loss on debt extinguishment and refinancing transactions(b) 5,018
Severance charges(c) 598
Third-party product volume guarantee 7,500
Gain on sale of joint venture (6,320)
Other(d) 4,412
Total adjustments 23,810
Adjusted EBITDA $ 372,935
(a) Represents non-cash adjustments, including stock compensation expense, legal reserves, and other non-cash gains and
losses.
(b) Represents transaction costs associated with the refinancing and repayment of long-term debt, including fees paid to
third parties and write-off of deferred financing costs and original issue discount.
(c) Represents severance and related benefits costs associated with reorganizations.
(d) Represents costs and fees associated with various franchisee-related information technology and other investments,
bank fees, the closure of the Company's Canadian ice cream manufacturing plant, as well as the net impact of other
insignificant adjustments.
Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and
amounts available under our revolving credit facility will be adequate to meet our anticipated debt service requirements, capital