Krispy Kreme Inc

Note 2 —Acquisitions and Divestitures

2024 Acquisitions and Divestitures

Acquisition of Krispy Kreme Shops

In the quarter ended September 29, 2024, the Company acquired the business and operating assets oftwo franchisees, consisting ofnine Krispy Kreme shops in the U.S. andone Krispy Kreme shop in Canada. Prior to the acquisition, the Company was a minority investor in the shops via its equity method investments in KremeWorks USA, LLC and KremeWorks Canada, L.P. The Company paid consideration of $31.4 million, consisting of $26.7 million of cash (exclusive of $6.7 million proceeds for the Company’s equity method investments), $2.1 million of consideration payable to the sellers, and $2.6 million settlement of amounts related to pre-existing relationships, to acquire substantially all of the shops’ assets. Consideration payable of $2.1 million was withheld primarily to cover indemnification claims that could arise after closing. Absent any claims, these amounts are payable quarterly over the 18 months following the acquisition date. The settlement of pre-existing relationships included in the purchase consideration includes the settlement of accounts and notes receivable, net of deferred revenue, of $0.6 million. It also includes the disposal of the franchise intangible asset related to the franchisees with a cumulative net book value of $2.0 million at the acquisition date. The Company accounted for the transaction as a business combination.

Immediately prior to the acquisition, the Company recognized a gain of $5.6 million related to remeasurement of its equity method investments to a cumulative fair value of $6.7 million. The gain is recorded within Other income, net in the Condensed Consolidated Statements of Operations.

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition for the acquisition above.

The results of the acquired franchise businesses were reported within the Market Development segment prior to the acquisition date and are reported within the segments noted above following the acquisition date. During the measurement period, the Company will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments, if applicable, will be applied in the reporting period in which the adjustment amounts are determined.

Equity Method Investments in KK Brazil and KK Spain

In the quarter ended June 30, 2024, the Company acquired a 45% noncontrolling ownership interest in the newly formed entity Krispy Kreme Doughnuts Brasil S.A. (“KK Brazil”), for approximately $2.7 million in cash, and a 25% noncontrolling ownership interest in the newly formed entity Glaseadas Originales S.L. (“KK Spain”), for approximately $0.8 million in cash. As the Company has the ability to exercise significant influence over both KK Brazil and KK Spain, but does not have the ability to exercise control, the investments are accounted for using the equity method, and equity method earnings are recognized within Other income, net in the Condensed Consolidated Statements of Operations.

Acquisition of Additional Units in Consolidated Subsidiary Awesome Doughnut

In the quarter ended September 29, 2024, the Company purchased all units held by the noncontrolling interest holders in the consolidated subsidiary Awesome Doughnut, LLC (“Awesome Doughnut”) for $32.9 million in cash. The purchase increased the Company’s ownership interest in Awesome Doughnut from 70% to 100%. The Company financed the purchase via an existing structured payables program whereby the structured payable will mature within 180 days of August 20, 2024.

Divestiture of Insomnia Cookies

On July 17, 2024, the Company entered into an agreement to sell a portion of its shares of Insomnia Cookies Holdings, LLC (“Insomnia Cookies”) for cash proceeds of $120.9 million. On August 1, 2024, the Company received additional cash of $45.0 million from Insomnia Cookies related to the settlement of an intercompany loan. The transaction resulted in the Company’s ownership of Insomnia Cookies declining from 75.0% to 34.7% with a loss of control. Accordingly, the Company deconsolidated Insomnia Cookies from the Company’s Condensed Consolidated Financial Statements and recorded a gain on divestiture of $87.1 million (gross of income taxes) which is included within Gain on divestiture of Insomnia Cookies in the Condensed Consolidated Statements of Operations. The gain was calculated as follows:

As the Company has the ability to exercise significant influence over Insomnia Cookies, but does not have the ability to exercise control, the investment is accounted for using the equity method. The fair value of the equity method investment of $85.1 million was estimated using a Monte Carlo simulation in a risk-neutral framework to model the likelihood of the Company’s potential future sale of its noncontrolling interest in Insomnia Cookies. The valuation methodology includes assumptions and judgments regarding probability weighting, discount rates, operating results of Insomnia Cookies, and expected timing of a future exit by the investors. Equity method earnings are recognized within Other non-operating (income)/expense, net in the Condensed Consolidated Statements of Operations.

2023 Acquisitions and Divestitures

In the quarter and three quarters ended October 1, 2023, there wereno acquisitions or divestitures.

Note 3 —Inventories

The components of Inventories are as follows:

Note 4 —Goodwill and Other Intangible Assets, net

Goodwill

Changes in the carrying amount of goodwill by reportable segment are as follows:

Other Intangible Assets, net

Other intangible assets consist of the following:

(1)Trade names and trademarks were impacted by a reduction of $104.6 million in the quarter ended September 29, 2024 related to the divestiture of Insomnia Cookies.

(2)Reacquired franchise rights include the impact of foreign currency fluctuations associated with the respective countries.

Amortization expense related to intangible assets included in depreciation and amortization expense was $7.8 million and $22.6 million for the quarter and three quarters ended September 29, 2024, and $7.4 million and $22.0 million for the quarter and three quarters ended October 1, 2023.

Note 5 —Leases

The Company included the following amounts related to operating and finance lease assets and liabilities within the Condensed Consolidated Balance Sheets:

(1)Operating lease right of use asset, net was impacted by a reduction of $62.6 million in the quarter ended September 29, 2024 related to the divestiture of Insomnia Cookies.

(2)Current operating lease liabilities were impacted by a reduction of $8.6 million in the quarter ended September 29, 2024 related to the divestiture of Insomnia Cookies.

(3)Noncurrent operating lease liabilities were impacted by a reduction of $58.7 million in the quarter ended September 29, 2024 related to the divestiture of Insomnia Cookies.

Lease costs were as follows:

Supplemental disclosures of cash flow information related to leases were as follows:

(1)Operating cash flows from operating leases include variable rent payments which are not included in the measurement of lease liabilities. Variable rent payments were $21.4 million and $23.9 million for the three quarters ended September 29, 2024 and October 1, 2023, respectively.

There were no sale-leaseback transactions completed in the three quarters ended September 29, 2024. In the quarter ended April 2, 2023, the Company completed a sale-leaseback transaction whereby it disposed of the land atone real estate property for proceeds of $10.0 million. The Company subsequently leased back the property, which is accounted for as an operating lease. The Company recognized a gain on sale related to this transaction of $9.6 million, which is included in Other income, net in the Condensed Consolidated Statement of Operations.

Note 6 —Fair Value Measurements

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of September 29, 2024 and December 31, 2023:

There wereno assets or liabilities measured using Level 1 and Level 3 inputs and no transfers of financial assets or liabilities among the levels within the fair value hierarchy during the three quarters ended September 29, 2024 and fiscal year ended December 31, 2023. The Company’s derivatives are valued using discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and currency rates.

Note 7 —Derivative Instruments

Commodity Price Risk

The Company uses forward contracts to protect against the effects of commodity price fluctuations in the cost of ingredients of its products, of which flour, sugar, and shortening are the most significant, and the cost of gasoline used by its delivery vehicles. Management has not designated these forward contracts as hedges. As of September 29, 2024 and December 31, 2023, the total notional amount of commodity derivatives was 1.2 million and 1.8 million gallons of fuel, respectively. They are scheduled to mature between September 2024 and September 2025 and January 2024 and December 2024, respectively. As of both September 29, 2024 and December 31, 2023, the Company recorded liabilities of $0.1 million related to the fair market values of its commodity derivatives. The settlement of commodity derivative contracts is reported in the Condensed Consolidated Statements of Cash Flows as a cash flow from operating activities.

Interest Rate Risk

The Company uses interest rate swaps to manage its exposure to interest rate volatility from its debt arrangements. Management has designated the swap agreements as cash flow hedges and recognized the changes in the fair value of these swaps in other comprehensive income. As of September 29, 2024 and December 31, 2023, the Company has recorded a liability of $13.5 million and an asset of $1.6 million, respectively, related to the fair market values of its interest rate derivatives. The cash flows associated with the interest rate swaps are reflected in operating activities in the Condensed Consolidated Statements of Cash Flows, which is consistent with the classification as operating activities of the interest payments on the term loan.

In the quarter ended June 30, 2024, existing interest rate swap agreements (the “prior agreements”) with an aggregate notional amount of $505.0 million matured. The Company then entered into new interest rate swap agreements (the “new agreements”) with an aggregate notional amount of $500.0 million as of September 29, 2024. The primary difference between the new agreements and the prior agreements included the setting of new rates on the fixed component of the swaps (weighted average of approximately of 4.0%). The new agreements have a benchmark rate on the floating component of the swaps of one-month Secured Overnight Financing Rate (“SOFR”) and are scheduled to mature in March 2028.

The net effect of the interest rate swap arrangements will be to fix the variable interest rate on the term loan under the 2023 Facility (as defined in Note 9, Long-Term Debt) up to the notional amount outstanding at the rates payable under the swap agreements plus the Applicable Rate (as defined by the 2023 Facility), through the swap maturity dates in March 2028.

In the quarter ended April 2, 2023, the Company cancelled certain interest rate swap agreements with an aggregate notional amount of $265.0 million, collecting $7.7 million in cash proceeds, and entered into new agreements with the same counterparties. The cash flows are reflected in operating activities in the Condensed Consolidated Statements of Cash Flows.

Foreign Currency Exchange Rate Risk

The Company is exposed to foreign currency risk primarily from its investments in consolidated subsidiaries that operate in Canada, the U.K., Ireland, Australia, New Zealand, Mexico, and Japan. In order to mitigate the impact of foreign exchange fluctuations on commercial and financial transactions with these subsidiaries, the Company enters into foreign exchange forward contracts. Management has not designated these forward contracts as hedges. As of September 29, 2024 and December 31, 2023, the total notional amount of foreign exchange derivatives was $76.8 million and $49.8 million, respectively. The majority matured in October 2024 and January 2024, respectively. The Company recorded assets of $0.3 million and liabilities of $0.3 million as of September 29, 2024 and December 31, 2023, respectively, related to the fair market values of its foreign exchange derivatives.

Quantitative Summary of Derivative Positions and Their Effect on Results of Operations

The following tables present the fair values of derivative instruments included in the Condensed Consolidated Balance Sheets as of September 29, 2024 and December 31, 2023, for derivatives not designated as hedging instruments and derivatives designated as hedging instruments, respectively. The Company only has cash flow hedges that are designated as hedging instruments.

The effect of derivative instruments in the Condensed Consolidated Statements of Operations for the quarter and three quarters ended September 29, 2024 and October 1, 2023 is as follows:

Note 8 —Vendor Finance Programs

The following table presents liabilities related to vendor finance programs which the Company participates in as a buyer as of September 29, 2024 and December 31, 2023:

(1)SCF program liabilities were impacted by a reduction of $23.2 million in the quarter ended September 29, 2024 related to the divestiture of Insomnia Cookies.

(2)Structured payables program liabilities were impacted by a reduction of $25.6 million in the quarter ended September 29, 2024 related to the divestiture of Insomnia Cookies.

Supply Chain Financing (“SCF”) Programs

The Company has an agreement with a third-party administrator which allows participating vendors to track the Company’s payments, and if voluntarily elected by the vendor, to sell payment obligations from the Company to financial institutions as part of the SCF program. The Company’s typical payment terms for trade payables range up to 180 days outside of the SCF program, depending on the type of vendors and the nature of the supplies or services. For vendors under the SCF program, the Company has established payable terms ranging up to, but not exceeding,360 days. When participating vendors elect to sell one or more of the Company’s payment obligations, the Company’s rights and obligations to settle the payables on their contractual due date are not impacted. The Company has no economic or commercial interest in a vendor’s decision to enter into these agreements and the financial institutions do not provide the Company with incentives such as rebates or profit sharing under the SCF program. The Company agrees on commercial terms with vendors for the goods and services procured, which are consistent with payment terms observed at other peer companies in the industry, and as the terms are not impacted by the SCF program, such obligations are classified as Accounts payable in the Condensed Consolidated Balance Sheets and the associated cash flows are included in operating activities in the Condensed Consolidated Statements of Cash Flows.

Structured Payables Programs

The Company utilizes various card products issued by financial institutions to facilitate purchases of goods and services. By using these products, the Company may receive differing levels of rebates based on timing of repayment. The payment obligations under these card products are classified as Structured payables in the Condensed Consolidated Balance Sheets and the associated cash flows are included in financing activities in the Condensed Consolidated Statements of Cash Flows.

Note 9 —Long-Term Debt

The Company’s long-term debt obligations consists of the following:

2023 Secured Credit Facility

The Company is party to a credit agreement (the “2023 Facility”) consisting of a $300.0 million senior secured revolving credit facility and a term loan with an original principal amount of $700.0 million. The 2023 Facility is secured by a first priority lien on substantially all of the Company’s personal property assets, certain real properties, and all of the Company’s domestic wholly owned subsidiaries. Loans made pursuant to the 2023 Facility may be used for general corporate purposes of the Company (including, but not limited to, financing working capital needs, capital expenditures, acquisitions, other investments, dividends, and stock repurchases) and for any other purpose not prohibited under the related loan documents.

Borrowings under the 2023 Facility are generally subject to an interest rate of adjusted term SOFR plus a credit spread adjustment of 0.10% plus (i)2.25% if the Company’s leverage ratio (as defined in the 2023 Facility) equals or exceeds 4.00 to 1.00, (ii)2.00% if the Company’s leverage ratio is less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00, or (iii)1.75% if the Company’s leverage ratio is less than 3.00 to 1.00. As of September 29, 2024 and December 31, 2023, the unhedged interest rates were 6.95% and 7.46% under the 2023 Facility, respectively. As of September 29, 2024 and December 31, 2023, $500.0 million out of the $656.3 million term loan balance and $505.0 million out of the $682.5 million term loan balance, respectively, was hedged. As of September 29, 2024 and December 31, 2023, the effective interest rates on the term loan were approximately 6.32% and 6.80%, respectively. The Company is required to make equal installments of 1.25% of the aggregate closing date principal amount of the term loan on the last day of each fiscal quarter. All remaining term loan and revolving loan balances are to be due at maturity in March 2028.

Short-Term Lines of Credit

The Company is party totwo agreements with existing lenders providing for short-term, uncommitted lines of credit up to $25.0 million. Borrowings under these short-term lines of credit are payable to the lenders on a revolving basis for tenors up to a maximum of three months and are subject to an interest rate of adjusted term SOFR plus a credit spread adjustment of 0.10% plus a margin of 1.75%.

Note 10 —Share-based Compensation

Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”)

The Company and certain of its subsidiaries issue time-vested RSUs and PSUs under their respective executive ownership plans and long-term incentive plans.

Excluding the Insomnia Cookies plan which was removed from the table below due to the divestiture, RSU and PSU activity under the Company’s various plans during the periods presented is as follows:

The Company recorded total non-cash compensation expense related to RSUs and PSUs under the plans of $9.2 million and $22.1 million for the quarter and three quarters ended September 29, 2024, respectively, and $6.5 million and $15.1 million for the quarter and three quarters ended October 1, 2023, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The unrecognized compensation cost related to the unvested RSUs and PSUs and the weighted average period over which such cost is expected to be recognized are as follows:

The estimated fair value of restricted stock is calculated using a market approach (i.e., market multiple is used for the KK U.K. plan and an agreed-upon EBITDA buyout multiple is used for KK Australia and KK Mexico plans).

Time-Vested Stock Options

KKI issues time-vested stock options under its Omnibus Incentive Plan. The fair value of time-vested stock options was estimated on the date of grant using the Black-Scholes option pricing model.

A summary of the status of the time-vested stock options as of December 31, 2023 and changes during the first three quarters of fiscal 2024 is presented below:

The Company recorded total non-cash compensation expense related to the time-vested stock optionsof $0.8 million and $2.6 million for the quarter and three quarters ended September 29, 2024, respectively, and$0.9 million and $2.7 million for the quarter and three quarters ended October 1, 2023, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The unrecognized compensation cost related to the stock options and the weighted average period over which such cost is expected to be recognized are as follows:

During the three quarters ended September 29, 2024,1.5 million time-vested stock options vested. No time-vested stock options vested during the quarter ended September 29, 2024 or the quarter and three quarters ended October 1, 2023.

Note 11 —Income Taxes

For interim tax reporting, the Company estimates a worldwide annual effective tax rate and applies that rate to the year-to-date ordinary (loss)/income. The tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

The Company’s effective income tax rates were 32.0% and 41.4% for the quarter and three quarters ended September 29, 2024, respectively, and -153.3% and -80.0% for the quarter and three quarters ended October 1, 2023, respectively. The Company’s effective income tax rate for the quarter and three quarters ended September 29, 2024 differed from the respective statutory rates primarily due to disallowed executive compensation expense, the mix of income and taxes attributable to foreign jurisdictions, and noncontrolling interest in domestic joint ventures. Additionally, the Company recorded an income tax benefit in the quarter ended September 29, 2024 related to the release of valuation allowances on state net operating losses associated with the divestiture of Insomnia Cookies. The Company’s effective income tax rate for the quarter and three quarters ended October 1, 2023 differed from the respective statutory rates primarily due to the mix of income and taxes attributable to foreign jurisdictions, the recognition of previously unrecognized tax benefits, disallowed executive compensation expense, noncontrolling interest in domestic joint ventures, and a discrete tax benefit unrelated to ongoing operations.

Note 12 —Commitments and Contingencies

Pending Litigation

In March 2023, an employee filed a lawsuit on behalf of himself and all others similarly situated against the Company, alleging violations of the Illinois Biometric Information Privacy Act. In October 2024, the Company negotiated a settlement of this lawsuit, subject to court approval, which would require the Company to pay an amount immaterial to the Company’s Condensed Consolidated Financial Statements.

Other Legal Matters

The Company also is engaged in various legal proceedings arising in the normal course of business. The Company maintains insurance policies against certain kinds of such claims and suits, including insurance policies for workers’ compensation and personal injury, all of which are subject to deductibles. While the ultimate outcome of these matters could differ from management’s expectations, management currently does not believe their resolution will have a material adverse effect on the Company’s Condensed Consolidated Financial Statements.

Other Commitments and Contingencies

The Company’s primary banks issued letters of credit on its behalf totaling $20.3 million and $15.4 million as of September 29, 2024 and December 31, 2023, respectively, a majority of which secure the Company’s reimbursement obligations to insurers under its self-insurance arrangements.

Note 13 —Related Party Transactions

As of September 29, 2024 the Company held minority equity interests infour entities, Krispy Kreme Doughnuts France SAS (“KK France”) (33% ownership), KK Brazil (45% ownership), KK Spain (25% ownership), and Insomnia Cookies (35% ownership), with an aggregate carrying value of $91.0 million. As of December 31, 2023 the Company held minority equity interests in three entities, KremeWorks USA, LLC (20% ownership), KremeWorks Canada, L.P. (25% ownership), and KK France (33% ownership), with an aggregate carrying value of $2.8 million. Refer to Note 2, Acquisitions and Divestitures for further information.

In the quarter ended September 29, 2024, the Company purchased all units held by the noncontrolling interest holders in the consolidated subsidiary Awesome Doughnut. Refer to Note 2, Acquisitions and Divestitures for further information.

Note 14 —Revenue Recognition

Disaggregation of Revenues

Revenues are disaggregated as follows:

Other revenues include advertising fund contributions from franchisees, rental income, development and franchise fees, and licensing royalties from customers for use of the Krispy Kreme brand, such as Keurig coffee cups.

Contract Balances

Deferred revenue and related receivables are as follows:

Trade receivables relate primarily to payments due for royalties, franchise fees, advertising fees, sale of products, and licensing fees. Deferred revenue primarily represents the Company’s remaining performance obligations under gift cards and franchise and development 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 noncurrent portion of deferred revenue primarily relates to the remaining performance obligations in the franchise and development agreements.

Note 15 —Net Earnings/(Loss) per Share

The following table presents the calculations of basic and diluted EPS:

Potential dilutive shares consist of unvested RSUs and PSUs, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes certain unvested RSUs granted under certain subsidiaries’ executive ownership plans and long-term incentive plans, because their inclusion would have been antidilutive.

The following table summarizes the gross number of potential dilutive unvested RSUs and PSUs excluded due to antidilution (unadjusted for the treasury stock method):

For the quarter and three quarters ended September 29, 2024 and October 1, 2023, all 2.8 million and 3.0 million time-vested stock options, respectively, were excluded from the computation of diluted weighted average common shares outstanding based on application of the treasury stock method.

Note 16 —Segment Reporting

The Company conducts business through thethree reportable segments: U.S., International, and Market Development. Unallocated corporate costs are excluded from the Company’s measurement of segment performance. These costs include general corporate expenses.

As discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, effective January 1, 2024, the Company realigned its segment reporting structure such that the Company-owned Canada and Japan businesses have moved from the Market Development reportable operating segment to the International reportable operating segment. All segment information for comparative periods has been restated to be consistent with current presentation.

As discussed in Note 2, Acquisitions and Divestitures, the Company entered into an agreement to sell shares in Insomnia Cookies on July 17, 2024. Upon completion of the divestiture, the Company’s ownership interest decreased from 75.0% to 34.7%. The Company’s investment in Insomnia Cookies is now accounted for using the equity method, and results are no longer included within the U.S. reportable operating segment on a prospective basis from the date of the divestiture. Historical results for Insomnia Cookies have not been restated and are included within the results of the U.S. reportable operating segment through the date of the divestiture.

The reportable segment results are as follows:

(1)Primarily foreign translation gains and losses in each period.

(2)The quarter and three quarters ended September 29, 2024 consist primarily of costs associated with the divestiture of the Insomnia Cookies business, preparing for the McDonald’s U.S. expansion, and global transformation. The quarter and three quarters ended October 1, 2023 consist primarily of costs associated with global transformation and U.S. initiatives such as the decision to exit the Branded Sweet Treats business, including property, plant and equipment impairments, inventory write-offs, employee severance, and other related costs.

(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, and advisory fees incurred in connection with acquisition and integration-related activities for the applicable period.

(4)Consists of start-up costs associated with entry into new countries for which the Company’s brands have not previously operated, including Brazil and Spain.

(5)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment. The quarter and three quarters ended October 1, 2023 include gains related to the termination of leases at certain Krispy Kreme shops in the U.S. where the Company had already recognized impairment of the corresponding right of use assets in a prior period.

(6)The quarter and three quarters ended September 29, 2024 consists primarily of costs associated with the restructuring of the KK U.K. executive team. The quarter and three quarters ended October 1, 2023 consists primarily of costs associated with restructuring of the global executive team.

(7)Consists of a gain related to the remeasurement of the equity method investments in KremeWorks USA, LLC and KremeWorks Canada, L.P. to fair value immediately prior to the acquisition of the shops. Refer to Note 2, Acquisitions and Divestitures for further information.

(8)The quarter and three quarters ended September 29, 2024 and October 1, 2023 consist primarily of legal and other regulatory expenses incurred outside the ordinary course of business. The three quarters ended September 29, 2024 also include a gain from insurance proceeds received related to a shop in the U.S. that was destroyed and subsequently rebuilt.