Dine Brands Global, Inc. — Q2 2020 Form 10-Q
Business context and period. Dine Brands owns and franchises Applebee’s and IHOP, with more than 3,500 restaurants, most operated by franchisees. This unaudited report covers the fiscal quarter ended June 28, 2020, and the six months ended June 30, 2020. COVID-19 restrictions and changes in customer behavior materially disrupted restaurant operations.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $109.7 million | $228.1 million | $316.6 million | $465.3 million |
| Gross profit | $30.1 million | $94.9 million | $114.5 million | $197.4 million |
| Net income (loss) | ($134.8 million) | $21.4 million | ($112.5 million) | $53.0 million |
| Diluted EPS | ($8.04) | $1.18 | ($6.69) | $2.91 |
| Cash from operating activities | Not provided separately | Not provided separately | ($10.5 million) | $69.3 million |
- Q2 revenue fell 51.9%; six-month revenue fell 32.0%. Q2 gross profit margin was approximately 27.5%, compared with 41.6% a year earlier.
- At June 30, cash and cash equivalents were $278.5 million, with $64.0 million of restricted cash; total cash including restricted cash was $342.5 million. Management notes that cash and equivalents included $55.4 million held for gift-card programs and advertising funds.
- Six-month investing activities provided $2.1 million. Financing activities provided $178.4 million, principally reflecting the $220 million revolver draw. Adjusted free cash flow, a non-GAAP measure, was negative $12.4 million.
- Long-term debt, net of issuance costs, was $1.507 billion, including the $220 million revolver borrowing; face-value debt was $1.520 billion. The company had $2.2 million of revolver capacity remaining after letters of credit.
Material changes and notable items
- COVID-19-related restrictions drove steep sales declines. Q2 domestic same-restaurant sales fell 49.4% at Applebee’s and 59.1% at IHOP. Average weekly unit sales improved from April to June, but remained well below 2019 levels.
- Q2 included $124.4 million of impairment and closure charges: $92.2 million for Applebee’s goodwill, $11.0 million for its tradename, $3.3 million for reacquired franchise rights, $17.2 million for long-lived assets, and $0.7 million of closure costs. The goodwill impairment was not deductible for federal tax purposes.
- Bad-debt expense increased as franchisee credit risks rose. Franchisee accounts receivable were $97.3 million net of allowance at June 30, versus $63.5 million at year-end 2019. The total allowance for credit losses was $19.7 million, up from $11.3 million.
- During the first half, Applebee’s franchise restaurants declined by 38 net and IHOP franchise and area-license restaurants declined by 18 net. The company withdrew its 2020 net development and closure guidance.
- The company paid $23.9 million in dividends in the first half, including dividends declared before the pandemic response. It halted share repurchases and the board elected not to declare dividends for Q2 and Q3 2020.
Outlook, risks, and contingencies
- Management said it expected positive operating cash flow and positive adjusted free cash flow during the remainder of 2020, and believed liquidity was adequate for at least 12 months. These expectations depend on the uncertain course of the pandemic, restrictions, customer return, and franchisee health; they are not a guarantee of results.
- Management reported a 6.30x leverage ratio and a 3.34x debt-service coverage ratio at June 30. The leverage ratio is not a maintenance covenant, but the company anticipated a $3.25 million principal payment in Q4 2020. Debt documents include coverage and other triggers that could restrict or redirect cash flows if thresholds are breached.
- The $220 million revolver draw left only $2.2 million available. The company increased its securitized-debt interest reserve to $32.8 million and reported that interest payments due in September and December 2020 had been funded by July 27.
- Applebee’s franchisees deferred $33.4 million of payments; IHOP franchisees deferred $22.3 million. Repayments were scheduled to begin in Q3 2020. Franchisee rent, royalty, advertising, and other deferrals create collection and credit risks.
- Potential lease-guarantee liability was reported at a maximum of $250.3 million, or $36.8 million excluding unexercised option periods. The company also faces ordinary-course litigation; management did not believe current proceedings would have a material adverse effect, but could not assure outcomes.
- Goodwill and intangible assets remain exposed to further impairment if share prices or long-term performance assumptions weaken, or discount rates rise. The six-month effective tax rate was 4.5%, affected by the non-deductible goodwill impairment.
Important facts for investors to verify
- Whether restaurant sales and same-store sales recovery continued after June, and whether new or renewed restrictions affected operations.
- Franchisee solvency, collection of deferred payments, receivable allowances, and permanent restaurant closures.
- Cash generation, remaining liquidity, and compliance with securitized-debt coverage requirements and payment schedules.
- Key assumptions supporting the Applebee’s impairment valuations and the risk of additional impairment.
- Whether management’s stated second-half cash-flow expectations were achieved; the filing provides no clear quantified full-year earnings guidance.