DineEquity, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless noted. DineEquity operates and franchises Applebee’s and IHOP. The filing reports 3,600-plus system restaurants and reflects the substantial refranchising of Applebee’s company-operated locations completed in 2012.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total segment revenue | $163.2 million | $245.6 million; down $82.4 million |
| Gross segment profit | $94.4 million | $108.6 million |
| Income before taxes | $30.2 million | $49.0 million |
| Net income | $18.2 million | $31.3 million |
| EPS, basic / diluted | $0.95 / $0.93 | $1.69 / $1.64 |
| Cash from operating activities | $71.2 million | $44.7 million |
| Free cash flow, company-defined | $59.0 million | $44.0 million |
| Cash and cash equivalents, March 31 | $117.4 million | $64.5 million at Dec. 31, 2012 |
| Long-term debt, including current maturities | $1,209.1 million | $1,209.5 million at Dec. 31, 2012 |
| Current assets / current liabilities | $268.5 million / $226.3 million | Current ratio approximately 1.19 |
Revenue and segment profit fell primarily because 154 Applebee’s company-operated restaurants were refranchised during 2012, shifting sales out of company restaurant operations and into franchise royalties. Franchise revenue increased $3.5 million, while company restaurant sales declined $84.4 million. The prior-year quarter also included a $16.7 million gain on asset dispositions, versus $0.3 million in Q1 2013. Lower interest expense and general and administrative expense partially offset these effects.
Operating cash flow improved by $26.5 million, primarily reflecting favorable working-capital movements, including timing of rent and marketing payments and gift-card collections; cash interest paid also declined. Investing cash flow was $2.4 million, including $1.5 million of capital expenditures and $3.8 million of long-term receivable collections. Financing used $20.8 million, including $14.5 million of dividends. Total liabilities were $2.06 billion at quarter-end.
Business trends and changes
- Domestic system-wide same-restaurant sales decreased 1.3% at Applebee’s and 0.5% at IHOP. Management attributed declines at both brands to lower guest traffic, partly offset by higher average checks.
- Applebee’s franchise segment profit rose to $49.2 million from $46.8 million; IHOP franchise segment profit was $34.5 million versus $34.0 million. Rental segment profit declined to $6.7 million from $7.5 million.
- Franchise restaurant development was net negative three units for Applebee’s and net positive eight for IHOP during the quarter.
- Interest expense declined $4.9 million, reflecting lower average debt balances and a lower variable rate on term loans. G&A expense declined $5.6 million, substantially due to lower compensation costs following restructuring and refranchising.
Outlook, capital allocation and risks
- Development outlook: Management expected Applebee’s franchisees to open 40–50 restaurants in 2013, about half domestic, and IHOP franchisees to open 50–60, primarily domestic. The company did not plan to open company-operated restaurants of either brand.
- Capital spending and liquidity: Fiscal 2013 capital expenditures were expected to be approximately $8–$10 million. Management said operating cash flow, cash on hand and revolving-facility capacity should cover investing and financing needs for the next 12 months. The $75 million revolving facility was unused; letters of credit of $10.9 million reduced availability.
- Debt and covenants: The February credit amendment reduced term-loan pricing; the disclosed rate was 3.75% at March 31. The company reported covenant leverage of 4.7:1 versus a maximum of 7.0:1 and cash interest coverage of 2.5:1 versus a minimum of 1.75:1. It reported compliance with debt covenants.
- Shareholder returns: The company paid a $0.75-per-share quarterly dividend, totaling $14.5 million. The board approved a new authorization for up to $100 million of repurchases; the filing reported no purchases under the new program during the quarter. Permitted future restricted payments were approximately $140 million, subject to debt-agreement restrictions.
- Franchisee and legal risks: An IHOP franchisee operating 19 restaurants filed for bankruptcy in February and remained current on obligations. An Applebee’s franchisee operating 33 restaurants filed in April and expected to close eight; the effect on 2013 results could not be determined. The company also disclosed $444.9 million of maximum potential lease-guarantee exposure, with no material liability recorded, and ordinary-course litigation whose outcome could not be assured.
- Other items: The effective tax rate increased to 39.6% from 36.1%, largely due to fewer tax credits following Applebee’s refranchising and increased unrecognized tax benefits. Management provided no specific full-year earnings guidance and cautioned that Q1 results and sales trends may not predict full-year results.
Important facts for investors to verify
- How much of the revenue and profit decline reflects the refranchising-related change in business mix, versus underlying restaurant performance?
- Whether same-restaurant sales and traffic stabilize, and whether the planned 2013 franchise openings are achieved.
- Whether working-capital-driven operating cash flow is repeatable; Q1 cash flow benefited materially from working-capital changes.
- Debt covenant headroom, the cost and terms of debt, and the effect of dividends or repurchases on liquidity and leverage.
- The outcome and potential financial impact of the two franchisee bankruptcies, lease guarantees, tax examinations and litigation.
- System-wide sales are not company revenue: much of the restaurant system is franchisee-operated. Confirm reported company revenue and franchisee sales separately.