Dine Brands Global, Inc. annual report, FY2022

Dine Brands Global, Inc. — FY2022 Form 10-K

Business context and reporting period. The filing covers the 52-week fiscal year ended January 1, 2023, referred to in the filing as the year ended December 31, 2022. Dine Brands franchises Applebee’s and IHOP and acquired Fuzzy’s Taco Shop in December 2022. Nearly all of its 3,596 restaurants were franchised at year-end; the company generated most revenue from franchise operations and also had rental, financing, and company-restaurant operations.

Financial performance and liquidity

Metric	FY2022	FY2021
Total revenue	$909.4 million	$896.2 million
Gross profit	$377.4 million	$375.2 million
Income before taxes	$114.8 million	$121.9 million
Net income	$81.1 million	$97.9 million
Diluted earnings per share	$4.96	$5.66
Cash from operating activities	$89.3 million	$195.8 million
Adjusted free cash flow	$64.6 million	$191.0 million

• Revenue increased 1.5%; franchise revenue rose $30.5 million, partly offset by lower company-restaurant revenue following the Applebee’s refranchising.
• Gross profit increased $2.1 million, but gross profit as a share of revenue declined to 41.5% from 41.9%, principally reflecting higher bad-debt expense.
• Net income declined 17.1%. Higher general and administrative costs, including acquisition-related and other professional fees, contributed to lower pretax income. The effective tax rate was 29.3%, versus 19.7% in 2021.
• Cash and cash equivalents were $269.7 million at year-end; restricted cash was $55.3 million. After the $100 million revolving-facility borrowing, cash, restricted cash and cash equivalents, net, totaled $225.0 million. A further $221.6 million of the $325 million facility was available, after letters of credit.
• Long-term debt was $1.342 billion, including $100 million outstanding under the variable-rate facility. The company reported a 4.4x leverage ratio and 4.1x debt-service coverage ratio. Management stated that cash, operating cash flow and available borrowing capacity should provide adequate liquidity for at least 12 months.
• Operating lease obligations were $334.2 million and finance lease obligations were $37.0 million; financing obligations were $29.4 million. The filing also reports $404.3 million of future operating lease payments and $45.1 million of financing-obligation payments before discounting.

Material changes versus the prior comparable period

• Applebee’s system-wide sales increased 4.7%, with domestic same-restaurant sales up 5.1%; IHOP system-wide sales increased 7.7%, with domestic same-restaurant sales up 5.8%. Management attributed the same-restaurant gains mainly to higher average checks, including menu pricing, rather than reporting a traffic-led recovery.
• Operating cash flow fell by $106.5 million, mainly because working capital used $38.6 million in 2022 versus providing $46.5 million in 2021, alongside lower net income. Capital expenditures rose to $35.3 million from $16.8 million.
• In October 2022, Dine Brands refranchised and sold its 69 Applebee’s company-operated restaurants. In December, it acquired Fuzzy’s for approximately $80 million; Fuzzy’s contributed only a limited period to 2022 results.
• The company repurchased $120.5 million of stock, paid $30.8 million in dividends, and made $38.8 million of voluntary debt repayments purchased below par, recording a $1.4 million gain on extinguishment. A new $100 million debt-repurchase program was authorized in February 2023.

Outlook, risks, contingencies and unusual items

• The filing provides no clear quantified forward financial guidance. Management’s stated priorities include growing the brands, expanding digital and off-premise access, developing restaurants with franchisees, and evaluating acquisitions.
• Development commitments at year-end included 302 IHOP restaurants over six years, 24 domestic and approximately 10 international Applebee’s restaurants over six years, and 128 Fuzzy’s restaurants over 13 years. The company cautions that commitments may not translate into openings.
• Key risks include economic weakness and inflation affecting discretionary dining, franchisee financial health and concentration, labor and commodity costs, restaurant development execution, cybersecurity and technology dependence, and the ability to refinance debt. The securitized debt is collateralized by substantially all domestic revenue-generating assets and domestic intellectual property held by specified subsidiaries.
• The Class A-2-I notes are anticipated to be repaid or refinanced by June 2024 and Class A-2-II notes by June 2026; failure to do so may trigger additional interest or other debt consequences. The company’s 2022 facility is variable-rate and expected to be repaid or refinanced by June 2027, subject to extensions.
• Outstanding lease guarantees or contingent lease liabilities had a stated maximum potential amount of $445.1 million; excluding unexercised options, potential future payments were $102.9 million. Management recorded no material liability for these guarantees.
• Legal proceedings arise in the ordinary course; management did not expect current matters to have a material adverse impact, while noting outcomes cannot be assured. The company recorded $3.1 million of closure and long-lived asset impairment charges in 2022. No goodwill or indefinite-lived intangible impairment was recorded in 2022; goodwill and intangible assessments relied on management estimates.
• Auditors issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded Fuzzy’s from the internal-control assessment following its December acquisition; Fuzzy’s represented 5% of consolidated assets at year-end.

Important facts for investors to verify

• Review the timing and terms of refinancing or repayment plans for the 2024 and 2026 anticipated note repayment dates, and monitor leverage, DSCR and securitized-debt covenant headroom.
• Assess whether operating cash flow and adjusted free cash flow recover from 2022 levels, including the impact of working capital, higher capital spending and shareholder distributions.
• Track franchisee health, bad-debt exposure and major-franchisee concentration, particularly for Applebee’s, and confirm that restaurant development commitments result in sustainable openings.
• Evaluate Fuzzy’s integration, purchase-price allocation and growth assumptions; the $57.2 million tradename valuation was identified as a critical audit matter and relied on forecast revenue growth and discount-rate assumptions.
• Monitor the large lease-guarantee exposure, consumer traffic versus average-check growth, and the company’s ability to manage inflation, staffing, and operating costs.