Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, for DineEquity, Inc. (now Dine Brands Global, Inc.), the parent company of Applebee's Neighborhood Grill and Bar and International House of Pancakes (IHOP). The company operates approximately 3,500 restaurants globally, with a strategic focus on transitioning Applebee's from a company-operated model to a heavily franchised system to reduce capital requirements and debt.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Segment Revenues | $335.4 million | $1,033.3 million |
| Net Income | $14.3 million | $48.0 million |
| Net Income Available to Common Stockholders | $7.8 million | $28.0 million |
| Diluted EPS | $0.44 | $1.60 |
| Operating Cash Flow (9 months) | $97.5 million | |
| Total Debt (Long-term + Current) | $1.58 billion (as of Sep 30, 2010) | |
| Cash and Cash Equivalents | $105.2 million |
Material Changes vs. Prior Period
- Revenue: Total segment revenues increased 0.6% for the three months ended September 30, 2010, compared to the prior year, driven by a 3.8% increase in Applebee's domestic franchise same-restaurant sales. For the nine-month period, revenues decreased 2.4% due to a decline in Applebee's company restaurant same-restaurant sales and the closure of seven company-operated restaurants.
- Profitability: Net income for the nine months ended September 30, 2010, decreased 36% to $48.0 million from $75.5 million in 2009. This decline was primarily due to a significant reduction in the "Gain on extinguishment of debt" (which was $38.8 million in 2009 vs. $4.6 million in 2010) and lower gains on asset dispositions.
- Segment Performance: Applebee's company restaurant same-restaurant sales increased 1.2% in the third quarter, marking the first quarter of positive performance since Q1 2008. However, for the nine-month period, same-restaurant sales declined 1.7%.
- Impairment Charges: Impairment and closure charges decreased significantly to $0.9 million for the quarter (from $4.5 million in 2009) and $3.1 million for the nine months (from $6.5 million in 2009).
Guidance, Outlook, and Subsequent Events
Refinancing and Debt Restructuring: In a major subsequent event occurring in October 2010, the company completed a refinancing of its $1.6 billion securitized indebtedness. This involved issuing $825 million of 9.5% Senior Notes due 2018 and borrowing $900 million under a new senior secured term loan facility. Proceeds were used to retire the old securitized debt and redeem a significant portion of Series A Preferred Stock.
Franchising Strategy: The company continues to pursue a strategy to franchise approximately 98% of Applebee's restaurants. In October 2010, the company completed the sale of 61 of 63 company-operated Applebee's restaurants in Minnesota and Wisconsin. Additional agreements were signed to sell 56 more restaurants in Virginia and the St. Louis area, expected to close in late 2010 or early 2011.
Risks and Contingencies:
- Litigation: The company is defending a collective action under the Fair Labor Standards Act (Gerald Fast v. Applebee's) regarding tipped workers. No loss contingency has been accrued as the outcome is uncertain.
- Economic Conditions: Management notes that high unemployment and financial market volatility continue to pressure consumer spending, potentially impacting same-restaurant sales.
- Debt Covenants: The new credit agreement imposes a maximum consolidated leverage ratio of 7.5x and a minimum cash interest coverage ratio of 1.5x, effective Q1 2011.
Key Facts for Investor Verification
- Debt Refinancing Impact: Verify the impact of the October 2010 refinancing on future interest expense, which is expected to increase annual cash interest by approximately $24 million, offset by the elimination of non-deductible preferred stock dividends.
- Franchising Execution: Monitor the closing of the remaining Applebee's restaurant sales (Virginia and St. Louis) and the proceeds generated, as these are critical to the debt reduction strategy.
- Same-Store Sales Trends: Track the sustainability of the positive same-restaurant sales trend at Applebee's, which reversed a multi-year decline in Q3 2010.
- Litigation Exposure: Review updates on the Gerald Fast collective action, as a negative outcome could result in significant liability.
- Preferred Stock Redemption: Confirm the full redemption of Series A Preferred Stock, which was partially completed in October and November 2010 using proceeds from asset sales.