DineEquity, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended June 30, 2014 (the fiscal second quarter ended June 29). The filing is for DineEquity, Inc., parent of Applebee’s and IHOP, rather than a company named Dine Brands Global. Amounts below are in millions except per-share data and where noted.
Business context and results
DineEquity operated and franchised Applebee’s and IHOP, with more than 3,600 restaurants combined and approximately 99% franchised. Its four reporting segments are franchise operations, company restaurants, rental operations, and financing operations.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $160.5 | $158.1 | $327.7 | $321.3 |
| Segment profit | $94.5 | $91.1 | $191.6 | $185.5 |
| Segment profit margin | 58.9% | 57.6% | 58.4% | 57.7% |
| Net income | $19.2 | $16.9 | $40.0 | $35.2 |
| Diluted EPS | $1.00 | $0.87 | $2.07 | $1.80 |
| Operating cash flow | — | — | $56.0 | $55.4 |
| Free cash flow (non-GAAP) | — | — | $50.1 | $52.1 |
Financial position and material changes
- Revenue increased 1.5% in Q2 and 2.0% for the six months; net income rose 13.2% and 13.7%, respectively. Growth was led by IHOP franchise performance. Segment profit increased 3.8% in Q2 and 3.3% year to date, supported by lower franchise bad-debt expense and lower provisions against deferred rental revenue.
- Domestic same-restaurant sales: Applebee’s increased 0.6% in Q2 and was approximately flat for six months; IHOP increased 3.2% and 3.6%. Both brands experienced declining customer traffic, partly offset by higher average checks.
- At June 30, cash and cash equivalents were $100.4, down from $106.0 at year-end. Approximately $53.9 of cash was held for gift card programs and advertising funds. Current assets were $273.2 and current liabilities $224.8.
- Long-term debt carrying value, including current maturities, was about $1,207.7: a $464.8 variable-rate secured facility at 3.75% and $760.8 of 9.5% senior notes, less discount. Capital lease and financing obligations were also outstanding. The company reported compliance with debt covenants; trailing leverage was 4.7x and cash-interest coverage 2.6x.
- The $75 revolving facility had no borrowings; $8.7 of letters of credit reduced available capacity. Cash from operations was nearly unchanged year over year, while free cash flow declined $2.0. Financing used $64.4, including $30.0 of share repurchases and $28.5 of dividends. Cash declined $5.7 over the six months.
- Quarterly dividends were $0.75 per share. The company repurchased 367,256 shares for $30.0 during the first half, with $40.3 remaining under its $100.0 authorization at June 30.
Outlook, commentary, and risks
- Management expected each brand’s franchisees to open 40–50 restaurants in 2014, mostly in domestic markets. Actual openings could differ because of economic conditions, franchisee performance, construction delays, approvals, and currency fluctuations. Capital expenditures were expected to be approximately $10 for fiscal 2014.
- The company announced its intention to refinance existing debt with a proposed securitized facility expected to include $1.3 billion of senior term notes and $100 million of variable funding notes. Management expected materially lower annual interest expense if pricing conditions allowed, but gave no assurance that or when refinancing would be completed. A potential senior-note make-whole payment was estimated at $58.6 at June 30, declining over time under the indenture terms.
- Management believed operating cash flow, available cash, and revolver capacity would meet liquidity needs for the next 12 months. It had no hedging agreements for variable interest rates.
- Management cautioned that continued traffic declines not offset by higher checks could harm results. The first-half sales trend was not necessarily indicative of full-year performance. Revenue from rental and financing operations may decline as lease and note balances are repaid; the $1.4 of early-lease-termination fees recognized in the first half was described as infrequent.
- Potential exposures include ordinary-course litigation and lease guarantees with maximum future payments of $398.8; no material liability was recorded for those guarantees. The company also disclosed an IRS dispute concerning 2008–2010 tax assessments; it contested part of the proposed assessments and expected the appeals process to continue through 2014.
- No material change to previously disclosed risk factors was reported. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed refinancing was completed, its final size and pricing, and any make-whole or transaction costs.
- Subsequent restaurant openings and closures, same-restaurant sales, and traffic trends for both brands.
- Cash availability after accounting for cash held for gift-card and advertising programs, and compliance with restricted-payment and debt covenants.
- Progress and financial consequences of the IRS appeal, litigation, and any claims under lease guarantees.
- Whether free cash flow, dividends, and share repurchases remain sustainable given debt levels and declining cash balances.