Dine Brands Global, Inc. — Form 10-Q Summary
Business context and reporting period
For the quarter ended September 30, 2018, and the nine months then ended. Dine Brands franchises Applebee’s and IHOP and also earns rental and financing revenue. It operated no restaurants at quarter-end, but announced after quarter-end an agreement to acquire 69 Applebee’s restaurants.
Financial performance and liquidity
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $194.1 million, up 11.0% | $566.7 million, up 2.1% |
| Gross profit | $92.6 million | $254.7 million |
| Net income | $23.6 million; diluted EPS $1.29 | $53.4 million; diluted EPS $2.90 |
| Operating cash flow | Not presented for the quarter | $61.6 million |
- Prior-year comparisons are as adjusted for ASC 606. 2017 net losses included $531.6 million of Applebee’s goodwill and tradename impairment charges; thus the swing to 2018 profit is not a like-for-like measure of underlying improvement.
- Nine-month gross profit fell $14.7 million, primarily because Dine contributed $30.0 million to the Applebee’s National Advertising Fund in 2018 versus $4.0 million in 2017. Q3 gross profit rose $10.5 million, helped by Applebee’s sales improvement and lower bad debt expense.
- At September 30, cash and cash equivalents were $102.7 million; cash, cash equivalents and restricted cash totaled $159.2 million. The company reported $201.9 million available under its new revolving variable-funding facility, after outstanding letters of credit.
- Long-term debt, net of issuance costs, was $1.297 billion, including $1.287 billion of fixed-rate notes and $20.0 million drawn under the new variable-rate facility. Leverage ratio was 5.30x; debt-service coverage ratio was 4.02x. A quarterly $3.25 million principal payment was required because leverage exceeded the 5.25x threshold.
- Operating cash flow increased from $31.0 million to $61.6 million year over year. Adjusted free cash flow, a non-GAAP measure, was $62.6 million versus $29.4 million. Financing used $68.9 million, including $40.0 million of dividends and $27.9 million of share repurchases.
Material changes versus prior period
- Applebee’s domestic same-restaurant sales increased 7.7% in Q3 and 5.5% for nine months; IHOP increased 1.2% and 1.0%, respectively. Applebee’s Q3 increase was its strongest quarterly result since Dine acquired the brand, according to management.
- Applebee’s system-wide restaurant count continued to contract: net 80 closures in the first nine months. IHOP added a net 28 restaurants.
- Revenue comparisons reflect ASC 606 adoption, applied retrospectively. Among other changes, Applebee’s advertising fees are now reported as franchise revenue, and franchise/development fees are recognized over the agreement term rather than at opening.
- The company replaced its prior $100 million revolving facility with a facility permitting up to $225 million of variable-funding notes and letters of credit; it repaid the prior facility’s $20 million outstanding balance. Refinancing-related costs of $2.5 million were expensed.
Outlook, commentary, risks and unusual items
- For 2018, management expected 5–10 Applebee’s openings and 90–105 net closures; IHOP was expected to open 75–85 and close 30–40, for 35–55 net additions. Expected 2018 capital expenditures were approximately $14 million. The filing provides no specific full-year earnings guidance.
- Management said cash from operations, available cash and borrowing capacity should meet liquidity needs for the next 12 months. It expected an approximately $12 million tax refund within that period. The nine-month effective tax rate was 32.1%, including a $5.7 million provision related to IRS audits.
- Applebee’s recovery remains subject to uncertainty. Dine reported franchisee payment and financial-health concerns, approximately $22.5 million of franchisee loans outstanding, and an ongoing Chapter 11 proceeding and litigation involving a franchisee. The planned acquisition of 69 restaurants is intended to address another franchisee situation; the company expects to operate them for the foreseeable future and may later refranchise them.
- Dine guaranteed or had potential continuing liability for $288.7 million of franchisee lease payments; excluding unexercised options, the amount was $47.1 million. Management did not expect pending legal proceedings to have a material adverse impact, but noted outcomes cannot be assured.
- No additional impairment indicators were identified at September 30, 2018; the annual impairment test was planned for Q4. The filing also notes that operating-lease accounting changes expected in 2019 would materially affect the balance sheet.
Most important facts for investors to verify
- Whether Applebee’s same-store sales gains persist and translate into franchisee financial health, timely payments and fewer closures.
- The closing, operating economics and financing implications of the 69-restaurant Applebee’s acquisition.
- Debt-service coverage, leverage, facility availability and compliance with securitized-debt terms, especially given leverage of 5.30x.
- The scale and timing of Applebee’s advertising-fund contributions, and whether advertising revenue and expense remain aligned under ASC 606.
- Cash generation after dividends, repurchases, debt service and the expected capital expenditure program; also verify the anticipated tax refund and IRS audit resolution.
- Potential exposure from lease guarantees, franchisee loans, litigation and future impairment testing.