Dine Brands Global, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017 (52 weeks); comparisons are with fiscal 2016, also 52 weeks. The filing was submitted under the former DineEquity name and reports the company’s name change to Dine Brands Global on February 20, 2018. Amounts below are in U.S. dollars.
Business context
The company franchises Applebee’s and IHOP and operates related rental and financing businesses. At year-end, all 3,722 restaurants were franchised or area-licensed; approximately 97% of 2017 revenue came from franchise and rental operations. Dine Brands had no permanently company-operated restaurants after refranchising nine IHOP locations in June 2017.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $604.8 million | $634.0 million |
| Gross profit | $341.6 million | $379.4 million |
| Gross margin | 56.5% | 59.8% |
| Operating cash flow | $65.7 million | $118.1 million |
| Adjusted free cash flow, a non-GAAP measure | $63.0 million | $122.5 million |
| Net income (loss) | $(330.5) million | $98.0 million |
| Diluted EPS | $(18.28) | $5.33 |
| Interest expense | $62.0 million | $61.5 million |
Revenue declined 4.6%; gross profit fell 10.0%. The reported net loss primarily reflects $531.6 million of Applebee’s goodwill and tradename impairment charges. A $77.5 million one-time tax benefit from revaluing deferred taxes under the Tax Cuts and Jobs Act partly offset the loss. The goodwill impairment was not deductible for federal tax purposes.
Year-end cash and cash equivalents were $117.0 million, with an additional $46.1 million of restricted cash. Current assets were $395.6 million and current liabilities $295.7 million. Long-term debt, net of current maturities, was $1.270 billion; the balance sheet also reported $61.9 million of long-term capital lease obligations and $39.2 million of long-term financing obligations. Stockholders’ deficit was $146.7 million. The company’s $1.3 billion securitized notes bear fixed interest of 4.277%; the leverage ratio was 5.70x, above the 5.25x threshold that requires quarterly principal payments.
Changes and operating trends
- Applebee’s domestic same-restaurant sales fell 5.3% for the year, following a 5.0% decline in 2016; domestic system-wide sales fell 6.8%. Applebee’s franchise segment profit decreased $38.1 million. Franchisee financial stress contributed to $11.5 million of additional bad-debt expense, $6.2 million of royalties not recognized due to collectibility concerns, and $4.1 million of lost royalties from closures.
- Applebee’s fourth-quarter same-restaurant sales increased 1.3%, the first quarterly increase in two and a half years. Management attributed the improvement partly to marketing, menu changes and operational initiatives; it cautioned that sustained improvement was not assured.
- IHOP domestic same-restaurant sales fell 1.9%, compared with a 0.1% decline in 2016. IHOP opened 77 restaurants and achieved net development of 54; Applebee’s closed 99 and had net restaurant reduction of 80.
- Cash from operations declined $52.4 million, reflecting lower franchise gross profit, higher G&A and a $27.5 million working-capital use. Capital expenditures increased to $13.4 million from $5.6 million, mainly due to technology projects.
Outlook, risks and unusual items
- For 2018, management projected 10–15 Applebee’s openings and 60–80 closures; IHOP openings of 85–100 and closures of 30–40. It forecast approximately $16 million in capital expenditures and expected four $3.25 million debt principal payments.
- The company planned to contribute an additional $30 million to the Applebee’s National Advertising Fund during the first half of 2018. Nearly all domestic Applebee’s franchisees agreed to a temporary advertising contribution increase through 2019, subject to contingencies.
- The quarterly dividend was reduced from $0.97 to $0.63 per share beginning in 2018. The board approved a $0.63 dividend payable in April 2018. Management said the reduction would provide more flexibility for opportunistic repurchases.
- Key risks include continued weak restaurant traffic and sales, franchisee financial distress and concentration, royalty collection and restaurant closures, high leverage and securitized-debt covenants, refinancing needs, and possible further impairment. Securitized debt has an anticipated repayment date in September 2021; failure to repay or refinance may trigger increased interest and rapid amortization. The company reported a 4.01x debt-service coverage ratio at year-end.
- Other notable items: $8.8 million of former CEO separation costs and $8.6 million of Applebee’s stabilization costs were recorded in 2017. The company recognized a $6.2 million gain on the IHOP refranchising transaction. Adoption of new revenue guidance in 2018 was expected to defer approximately $85 million of franchise and development fee revenue and increase both reported Applebee’s advertising revenue and expense, with no material expected effect on gross profit or net income.
- Management stated that operating cash flow, available cash and unused variable-funding capacity should meet 2018 liquidity needs. The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Applebee’s same-store sales recovery continued and whether franchisee delinquencies, bad debt and unrecognized royalties improved.
- Actual restaurant openings and closures for both brands compared with management’s 2018 projections.
- Debt-service coverage, leverage, required principal payments, covenant compliance and the company’s refinancing plan for the 2021 anticipated repayment date.
- Cash generation after dividends, advertising-fund support and capital expenditures; note that adjusted free cash flow is a company-defined non-GAAP measure.
- Effects of the 2018 revenue-accounting adoption and any further impairment charges or changes in tax estimates.