DineEquity, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the first quarter of fiscal 2014, reported as the three months ended March 31, 2014 (the fiscal quarter ended March 30). DineEquity owns Applebee’s and IHOP; more than 99% of its 3,638 restaurants were franchised. The company reported 33 company-operated restaurants. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior balance date |
|---|---|---|
| Total revenue | $167.2 million | $163.2 million |
| Gross segment profit | $97.1 million; 58.1% of revenue | $94.4 million; 57.9% |
| Income before taxes | $33.7 million | $30.2 million |
| Net income | $20.8 million | $18.2 million |
| Diluted EPS | $1.08 | $0.93 |
| Operating cash flow | $52.8 million | $71.2 million |
| Free cash flow (company-defined, non-GAAP) | $50.3 million | $69.8 million |
Revenue increased 2.5%; net income increased about 14%. Franchise revenue rose $3.6 million, primarily from IHOP sales growth and restaurant development. Financing revenue included $1.4 million in fees from early termination of two leases, an unusual item that management said was not indicative of a trend. The effective tax rate was 38.2%, versus 39.6%.
Cash, debt and liquidity. Cash and cash equivalents were $133.2 million at March 31, up from $106.0 million at year-end; approximately $65.1 million was held for gift-card programs and advertising funds. Long-term debt, including current maturities, was about $1.208 billion: $466.0 million under the variable-rate secured facility (3.75%) and $760.8 million of 9.5% senior notes due October 2018, before discount. Capital lease and financing obligations were additional liabilities. The $75 million revolver had no borrowings; $11.1 million of letters of credit reduced available capacity. Management said cash, operating cash flow and revolver capacity were adequate for the next 12 months.
Operating cash flow fell $18.4 million, chiefly due to less favorable working-capital movements, including prepaid rent timing and bonus payments. Investing activities provided $2.0 million, including $3.4 million of long-term receivable collections, against $2.0 million of capital spending. Financing activities used $27.6 million, including $15.0 million of share repurchases and $14.3 million of dividends. Fiscal 2014 capital expenditures were expected to be approximately $10 million.
Changes, operating trends and management outlook
- Domestic same-restaurant sales: Applebee’s decreased 0.5%; IHOP increased 3.9%, its fourth consecutive quarterly increase. Management attributed both brands’ traffic declines partly to severe winter weather; higher average checks partly offset weaker traffic.
- IHOP added 10 net franchise and area-license restaurants in the quarter; Applebee’s had no net additions. Management expected each brand’s franchisees to open 40–50 restaurants in 2014, mostly in domestic markets; actual openings may differ.
- Applebee’s franchise revenue was essentially unchanged. IHOP franchise revenue and segment profit increased, supported by same-store sales and a larger restaurant base. Rental revenue continued to face pressure as financing balances are repaid.
- Management anticipated refinancing some or all debt in 2014 if market and economic conditions were favorable; completion and timing were not assured. Estimated senior-note make-whole payment was $75.3 million at March 31, declining under the note terms.
- The company paid a $0.75-per-share dividend and repurchased 178,528 shares for $15.0 million. Up to $55.3 million remained under the share repurchase authorization, subject to debt-document restrictions.
Risks, contingencies and unusual items
- Debt covenants were met. Trailing-four-quarter leverage was 4.7:1 versus a maximum of 6.75:1; cash-interest coverage was 2.5:1 versus a minimum of 1.75:1. Covenant thresholds tighten over time. The company had no hedging agreements for variable interest rates.
- Lease guarantees or potential continuing lease liabilities totaled $405.1 million maximum exposure; no material liability was recorded. The company cautioned actual losses could arise if assigned leases default.
- Ordinary-course lawsuits, claims and audits included some purported class actions. Management did not expect current proceedings to have a material adverse effect, but gave no assurance of outcomes.
- An IHOP franchisee bankruptcy involving 19 restaurants remained subject to an appeal and stay; the franchisee continued operating the remaining locations and making payments. Tax authorities’ proposed assessments for 2008–2010 were contested through IRS administrative appeals; the company said reserves were adequate.
- There were no significant impairment indicators reported. The filing identified no material changes to previously disclosed risk factors or market-risk information.
Most important facts for investors to verify
- Whether IHOP’s positive same-store sales continue and whether Applebee’s traffic and sales stabilize.
- Whether franchisees deliver the projected 40–50 openings per brand and how restaurant closures affect net growth.
- Cash-flow conversion and working-capital movements, given the year-over-year decline in operating and free cash flow.
- Debt refinancing terms, covenant headroom, variable-rate exposure and any potential make-whole payment.
- Actual exposure from guaranteed leases, litigation, tax disputes and the IHOP franchisee bankruptcy.
- Whether dividends and buybacks remain supportable within cash needs and debt-document restrictions.