DineEquity, Inc. 10-Q Summary — 2012 Q2
Reporting period: Quarter and six months ended June 30, 2012; the company’s second fiscal quarter ended July 1, 2012. The filing is under the registrant name DineEquity, Inc. (the company now identified in the request as Dine Brands Global).
Business context
DineEquity owned and franchised Applebee’s and IHOP. At quarter-end, the system had 3,575 restaurants and was 95% franchised. Management was pursuing a transition toward 99% franchising, principally by refranchising Applebee’s company-operated restaurants.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total segment revenue | $229.4 million | $268.3 million | $475.0 million | $568.5 million |
| Net income | $16.9 million | $0.3 million | $48.3 million | $30.0 million |
| Diluted EPS | $0.88 | $(0.02) | $2.52 | $1.53 |
| Gross segment profit | $98.3 million | $100.3 million | $206.8 million | $211.1 million |
| Cash provided by operating activities | — | $36.4 million | $48.2 million |
Q2 pretax income was $27.4 million versus $1.8 million; six-month pretax income was $76.5 million versus $43.0 million. Franchise segment profit increased 5.2% in Q2 to $76.2 million, while company restaurant, rental and financing segment profit declined. The company reported a 15.2% company-restaurant segment profit margin in Q2; Applebee’s company-restaurant operating margin was 16.9%.
Six-month free cash flow, as defined by the company, was $32.3 million, down from $41.8 million. Investing activities provided $16.7 million, including $21.5 million from asset sales; capital expenditures were $10.7 million. Financing activities used $81.3 million, primarily for debt repayment. Cash fell to $32.4 million from $60.7 million at year-end 2011. Current assets were $231.2 million and current liabilities $196.3 million.
Long-term debt, including current maturities and discount, was $1.346 billion at June 30, down from $1.419 billion at December 31. It comprised $612.0 million under the senior secured credit facility and $760.8 million of 9.5% senior notes, less discount. The company also reported $151.6 million of long-term financing obligations and $129.1 million of long-term capital lease obligations. It reported compliance with debt covenants; trailing-four-quarter leverage was 5.3x against a 7.25x maximum, and cash interest coverage was 2.4x against a 1.5x minimum.
Changes versus comparable periods
- Revenue declined 14.5% in Q2 and 16.5% for the first half, principally because refranchising reduced company restaurant sales. Franchise revenue grew as restaurants shifted to franchise operation.
- Net income improved substantially versus Q2 2011, when results included $21.3 million of Lenexa lease-termination charges. For the first half, lower impairment charges and interest expense supported higher earnings, partly offset by reduced segment profit and lower gains on asset dispositions.
- Interest expense decreased by $3.2 million in Q2 and $9.3 million in the first half, reflecting lower debt balances and, for the first half, the prior-year credit-agreement rate reduction.
- Applebee’s domestic same-restaurant sales increased 0.7% in Q2; IHOP’s decreased 1.4%. For the first half, the changes were +1.0% and -0.9%, respectively.
- Operating cash flow declined $11.8 million for the first half, partly due to lower segment profit following refranchising and higher cash taxes; lower interest payments and improved working-capital use partly offset the decline.
Outlook, management commentary and risks
- For 2012, management expected 30–40 new Applebee’s franchise openings and 45–55 IHOP openings, with no planned new company-operated restaurants. These are expectations, not guarantees; development may be affected by economic conditions, franchisee financing, construction and permitting.
- Agreements covered 39 Virginia and 33 Missouri/Indiana Applebee’s restaurants, with a further 65 Michigan restaurants agreed for sale in July. Management expected the transactions to close by year-end and estimated approximately $105 million of after-tax proceeds from the three pending transactions, to be used to repay debt. The Michigan agreement was a subsequent event.
- Management expected fiscal 2012 capital expenditures of approximately $18–20 million and said operating cash flow, cash on hand and revolving-credit availability should cover the next 12 months. The $75 million revolver had no balance outstanding at quarter-end; letters of credit of $13.8 million reduced availability.
- Management said Applebee’s Q2 sales gains were driven by higher guest checks, pricing and mix, partly offset by lower franchise traffic. IHOP’s decline was primarily traffic-related. The company cautioned that first-half same-restaurant sales do not necessarily indicate full-year results.
- A collective action, Gerald Fast v. Applebee’s, sought up to $17 million plus fees over alleged wage practices; trial was scheduled for September 10, 2012. No loss was accrued and the company could not estimate a reasonably possible loss range.
- Lease guarantees carried maximum potential future payments of $370.4 million; no material liability was recorded. The company also disclosed a $7.9 million liability for unrecognized tax benefits, including interest and penalties. It reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the pending Applebee’s refranchising transactions closed on schedule, the realized proceeds and the resulting debt reduction.
- Subsequent trends in Applebee’s and IHOP same-restaurant sales, guest traffic, franchise openings and restaurant closures.
- Cash generation after refranchising, cash availability, debt repayment progress and headroom under increasingly restrictive credit covenants.
- Developments and financial exposure in the Fast wage litigation, lease guarantees and tax examinations.
- Whether reported earnings and margins are sustainable apart from asset-sale gains, refranchising effects and prior-year unusual charges.