Dine Brands Global, Inc. — FY2020 Form 10-K
Business context and reporting period. Dine Brands owns and franchises Applebee’s and IHOP, with a small company-operated Applebee’s business and legacy rental and financing operations. Most restaurants are franchised. The filing refers to the fiscal year as ended December 31, 2020; the actual fiscal year ended January 3, 2021, comprised 53 weeks, and Q4 comprised 14 weeks.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $689.3 million | $910.2 million |
| Gross profit | $248.7 million | $382.8 million |
| Income (loss) before taxes | $(108.6) million | $138.5 million |
| Net income (loss) | $(104.0) million | $104.3 million |
| Diluted EPS | $(6.43) | $5.85 |
| Cash from operating activities | $96.5 million | $155.2 million |
| Adjusted free cash flow (non-GAAP) | $106.6 million | $148.8 million |
- Revenue fell 24.3%; gross profit declined 35.0%. Franchise revenue decreased $181.7 million, company restaurant revenue $23.1 million, and rental revenue $14.8 million.
- Cash and cash equivalents were $383.4 million at year-end; current and non-current restricted cash added $72.7 million. Cash and cash equivalents included $71.6 million held for gift card programs and IHOP advertising funds.
- Long-term debt, net of issuance costs, was $1.505 billion, including $220 million drawn on the revolving facility; $13 million was current. The revolver had $2.2 million of remaining borrowing availability after letters of credit.
- Operating cash flow fell $58.7 million year over year. Capital expenditures were $10.9 million. Interest expense, net, rose to $66.9 million from $60.4 million.
- Applebee’s and IHOP domestic same-restaurant sales fell 22.4% and 32.8%, respectively. System-wide sales fell 24.1% and 34.9%. The 53rd week added an estimated $14.4 million of revenue and $4.7 million of gross profit.
- In Q4, revenue was $196.0 million versus $227.5 million in Q4 2019; net loss was $1.6 million versus net income of $27.4 million. Q4 same-restaurant sales decreased 17.6% at Applebee’s and 30.1% at IHOP.
Material changes and unusual items
- The pandemic drove dine-in restrictions, temporary closures, reduced traffic and franchisee payment deferrals. At year-end, 77 restaurants were temporarily closed; restaurant operating status remained subject to changing restrictions.
- Impairment and closure charges totaled $132.6 million, versus $1.5 million in 2019. The 2020 charges included $92.2 million of Applebee’s goodwill impairment, $11.0 million of tradename impairment, $22.3 million of long-lived asset impairments, and other intangible-asset and closure charges.
- The company recorded a $104.0 million net loss despite lower G&A expenses, which declined $18.0 million to $144.8 million. The 2020 effective tax rate was 4.2%, primarily because the goodwill impairment was not tax-deductible.
- Applebee’s closed 82 franchised restaurants and opened six; IHOP closed 96 and opened 27. Management anticipated up to 27 further IHOP closures following an evaluation of restaurant viability.
- Franchisees deferred approximately $60 million of fees and rent payments; about $29 million remained outstanding at year-end. The company also received approximately $11 million in rent deferrals and abatements, with about $5 million deferred at year-end.
Liquidity, debt, outlook and risks
- Management said cash on hand, operating cash flow and mitigation actions were expected to provide adequate liquidity for at least the next 12 months. It planned to repay the $220 million revolver draw in March 2021; this was a stated plan, not a guarantee.
- The company’s leverage ratio was 7.20x at year-end, above the 5.25x threshold for suspending scheduled principal payments. It reported a debt-service coverage ratio of approximately 3.3x; specified securitized-debt thresholds can trigger cash sweeps, rapid amortization, manager termination or default events.
- The securitized notes are secured by substantially all domestic revenue-generating assets and domestic intellectual property. Anticipated repayment dates are June 2024 and June 2026; failure to repay or refinance may increase interest and constrain cash availability. S&P reaffirmed the notes’ BBB rating in September 2020 after removing them from credit watch-negative.
- The board suspended dividends after the first-quarter 2020 dividend and the company halted share repurchases in March. Management said capital allocation would be reassessed as conditions improve; no specific resumption date or financial guidance was provided.
- Key risks include the duration and effects of COVID-19, franchisee financial health and concentration, debt and covenant compliance, restaurant closures and sales recovery, refinancing access, and continued changes in government operating restrictions. Applebee’s five largest franchisees operated 52% of its franchise restaurants; two franchisees together accounted for 17.1% of consolidated revenue in 2020.
- Other exposures include $245.6 million of maximum potential lease guarantees, $90.0 million of purchase commitments, and ordinary-course litigation. Management did not expect current legal matters to have a material adverse impact, while noting outcomes are uncertain.
Investor facts to verify
- Whether sales, traffic, restaurant openings and closures, and franchisee collections recover as dining restrictions change—and whether the projected IHOP closures occur.
- Repayment of the $220 million revolver draw, the actual remaining liquidity, and compliance with securitized-debt requirements as leverage and cash flow evolve.
- Whether franchisee payment deferrals and bad-debt exposures increase, particularly among large and financially stressed franchisees.
- Whether further impairment charges arise from changes in sales forecasts, discount rates, stock price or restaurant performance.
- Any update to dividends, share repurchases, or formal financial guidance; the filing provides no specific forward earnings guidance.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; impairment testing of goodwill and indefinite-lived intangible assets was identified as a critical audit matter.