Dine Brands Global, Inc. — Q1 2019 Form 10-Q
Business context and period. The quarter ended March 31, 2019 (the company’s fiscal quarter ran December 31, 2018–March 31, 2019); the comparable 2018 quarter ended April 1, 2018. Dine Brands owns and franchises Applebee’s and IHOP, with more than 3,600 restaurants, the substantial majority franchised. Results include 69 Applebee’s restaurants acquired in December 2018 and operated by the company; there were no company-operated restaurants in Q1 2018.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $237.2 million | $188.2 million | +26.1% |
| Gross profit | $102.6 million | $83.5 million | +22.8% |
| Income before tax | $41.1 million | $22.7 million | +$18.4 million |
| Net income | $31.6 million | $17.1 million | +$14.6 million |
| Diluted EPS | $1.73 | $0.92 | +$0.81 |
| Operating cash flow | $28.9 million | $16.5 million | +$12.4 million |
Advertising revenue and expense were each $72.6 million, up from $63.8 million. G&A expense was $42.8 million versus $41.9 million. Net interest expense was $15.4 million versus $15.2 million. The effective tax rate fell to 23.1% from 24.8%, primarily due to excess tax benefits on stock-based compensation.
Operating cash flow less capital expenditures was not reported as a GAAP measure; management’s adjusted free cash flow was $27.7 million, up from $15.3 million. Investing activities provided $0.4 million; financing activities used $45.5 million, including debt repayment, dividends and share repurchases. Cash, cash equivalents and restricted cash totaled $184.3 million at quarter-end, including $132.9 million of cash and cash equivalents. Management said available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
Financial position and liquidity
- Long-term debt, net of issuance costs, was $1.275 billion; the underlying fixed-rate senior notes had $1.284 billion principal and a 4.277% rate. The company repaid $25 million of variable funding notes during the quarter; none were drawn at March 31.
- The $225 million variable funding facility had $222.8 million available, net of $2.2 million pledged for letters of credit. Leverage ratio was 4.75x and debt service coverage ratio was 4.95x at quarter-end.
- Operating lease obligations recognized under ASC 842 were $453.7 million at quarter-end; finance lease obligations were $100.6 million. The company also had $280 million of maximum potential Applebee’s lease-guarantee exposure, or $42.1 million excluding unexercised renewal options.
- Current assets were $322.8 million and current liabilities $303.1 million. Stockholders’ deficit was $190.8 million.
Material changes and management commentary
- Revenue growth reflected the acquired Applebee’s restaurants, a higher Applebee’s advertising contribution rate, IHOP restaurant development and same-restaurant sales growth. The acquired restaurants contributed $35.8 million in sales and $4.2 million gross profit; management estimated a $2.8 million net gross-profit benefit after considering royalties that would otherwise have been earned.
- Gross profit increased largely because the $13.5 million Applebee’s National Advertising Fund contribution made in Q1 2018 did not recur. Separately, a temporary 0.75 percentage-point increase in the Applebee’s franchisee advertising contribution rate, effective July 2018 through December 2019, added approximately $7.7 million to advertising revenue and expense in Q1 2019.
- Applebee’s domestic same-restaurant sales increased 1.8% (sixth consecutive quarter of growth); higher average checks were partly offset by lower traffic. Off-premise sales were 13% of sales mix. IHOP domestic same-restaurant sales increased 1.2%; higher checks and off-premise sales (9.5% of mix) were partly offset by lower traffic. Management said the timing of Easter adversely affected IHOP’s quarter-over-quarter comparison.
- Applebee’s system-wide sales declined 1.4%, reflecting restaurant closures partly offset by same-store growth; IHOP system-wide sales increased 2.4%, reflecting development and same-store growth. Applebee’s franchisees had seven net closures in the quarter; IHOP had nine net franchise/area-license reductions.
- Management expected Applebee’s franchisees to close 20–30 net restaurants globally in 2019, mostly in the U.S.; IHOP franchisees and area licensees were projected to add 35–55 net restaurants, mostly in the U.S. Actual development may differ due to economic conditions, franchisee compliance, construction, approvals and other factors. No full-year financial guidance is stated in the provided filing text.
Other notable items and risks
- The company adopted ASC 842 lease accounting in Q1 2019, recognizing $453.0 million of operating lease liabilities and $395.6 million of right-of-use assets at adoption, and reducing retained earnings by $5.0 million net of tax. Adoption did not significantly affect cash flows or results of operations.
- The company expected a $12.4 million cash refund in 2019, excluding interest, following completion of IRS examinations for tax years 2011–2013; the amount was included in prepaid income taxes.
- A new $200 million share-repurchase authorization was approved in February 2019; $3.6 million was repurchased under it in Q1, alongside $8.4 million under the prior program. The company paid $11.2 million of dividends during the quarter and declared a $0.69-per-share dividend, paid April 5, 2019.
- The securitized notes include cash-trapping and rapid-amortization triggers tied to debt-service coverage, among other events. The Class A-2 notes have an anticipated repayment date in September 2021. The quarter-end coverage ratio of 4.95x was above the disclosed trigger thresholds.
- Management did not expect pending litigation to have a material adverse impact, but stated there is no assurance against material losses. The company identified risks including indebtedness and securitization compliance, franchisee financial health, restaurant-industry conditions, brand and food-safety issues, technology and cyber risks, litigation, and execution of development plans. No material change to previously disclosed risk factors was reported.
Investor verification priorities
- Assess whether Applebee’s and IHOP same-restaurant growth can persist given traffic declines, and monitor closures, franchisee health and royalty collectibility.
- Separate recurring earnings growth from the nonrecurring $13.5 million prior-year advertising-fund contribution, temporary higher Applebee’s advertising fees, and the acquired company-operated restaurants.
- Review debt-service and leverage covenant headroom, the September 2021 anticipated repayment date, and the potential effect of securitization triggers on cash availability.
- Evaluate liquidity after dividends and repurchases, including the sizeable lease obligations and Applebee’s lease guarantees.
- Confirm receipt and timing of the expected $12.4 million tax refund and track legal and tax contingencies.