Dine Brands Global, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (referred to in the filing as December 31); 52 weeks. This is an annual report, not a standalone fourth-quarter filing. The 10-K also provides unaudited Q4 results. Unless noted, amounts are U.S. dollars.
Business context and period highlights
Dine Brands owns and franchises Applebee’s and IHOP. At year-end it had 3,668 restaurants, including 69 company-operated Applebee’s acquired in December. The highly franchised model generated approximately 82% of consolidated revenue through the two franchise segments. International operations contributed less than 3% of revenue.
Management highlighted Applebee’s turnaround: domestic same-restaurant sales rose 5.0%, its strongest annual increase since the 2007 acquisition. IHOP domestic same-restaurant sales increased 1.5%. Combined system-wide sales were approximately $7.6 billion, up 3.0% from 2017.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $780.9 million | $731.7 million |
| Gross profit | $353.1 million | $338.7 million |
| Gross margin | 45.2% | 46.3% |
| Income (loss) before tax | $110.6 million | $(428.3) million |
| Net income (loss) | $80.4 million | $(342.8) million |
| Diluted EPS | $4.37 | $(18.96) |
| Cash from operating activities | $140.3 million | $65.7 million |
| Adjusted free cash flow | $140.9 million | $63.0 million |
Revenue increased $49.2 million, primarily from higher advertising revenue and royalties. Gross profit rose $14.4 million, but gross margin declined, mainly reflecting higher franchisor contributions to Applebee’s national advertising fund. Operating cash flow improved substantially; management attributed much of the year-over-year change to working-capital timing and improved franchisee collections. Adjusted free cash flow is a non-GAAP measure and the company cautions it is not residual cash available for discretionary use.
Q4 2018 revenue was $214.2 million, gross profit $98.4 million, net income $27.0 million, and diluted EPS $1.47. Q4 2017 figures were $176.7 million, $69.3 million, $69.9 million, and $3.82, respectively; 2017 quarterly results were retrospectively adjusted for ASC 606.
At year-end, cash and cash equivalents were $137.2 million; current assets were $382.2 million and current liabilities $316.2 million. The balance sheet also reported $63.2 million of restricted cash, of which $42.3 million was held in trust for securitized debt. Cash and cash equivalents included $52.2 million related to gift card programs and IHOP advertising funds.
Net long-term debt was $1.299 billion, including $25.0 million drawn under the variable funding facility; capital lease and financing obligations were approximately $140 million combined. The company reported a 4.90x leverage ratio and 4.58x debt service coverage ratio. Its $225 million variable funding facility had $196.9 million available after letters of credit at year-end. The $1.3 billion fixed-rate notes bear 4.277% interest and have an anticipated repayment date in September 2021; failure to repay or refinance by then could trigger substantially higher interest and rapid amortization provisions.
Changes, unusual items, and accounting
- 2018 net income compares with a 2017 loss largely because the company recorded $531.6 million of Applebee’s goodwill and tradename impairment in 2017; no comparable impairment was recorded in 2018. The 2018 result is not directly indicative of an equivalent operating improvement.
- ASC 606 was adopted retrospectively. It changed the presentation of Applebee’s advertising fees and deferred franchise and development fees over franchise terms. Adoption increased the reported 2017 net loss by $12.2 million and increased 2016 net income by $3.0 million.
- Applebee’s franchisees temporarily increased advertising contributions through 2019; this added approximately $25 million to 2018 advertising revenue. Dine Brands contributed $30 million to the Applebee’s advertising fund in 2018, with contributions ending June 30; management did not anticipate similar contributions in the foreseeable future.
- The December acquisition of 69 Applebee’s restaurants cost $21.6 million; related indirect costs of $1.1 million were expensed. The company intends to operate them in the near term and may refranchise them when circumstances are favorable.
- Cash dividends paid were $51.1 million and common-stock repurchases were $33.6 million in 2018. In February 2019, the board approved a $0.69-per-share dividend and a new authorization to repurchase up to $200 million of stock.
Outlook, management commentary, and risks
For 2019, management expected Applebee’s franchise system net closures of 20–30 restaurants and IHOP net additions of 35–55. These are expectations, not guarantees; franchisee development and closure decisions may differ. Management stated that available cash, operating cash flow, and revolver capacity should meet 2019 liquidity needs and did not anticipate required quarterly principal payments in 2019, based on the reported leverage ratio.
The company expected adoption of the new lease standard in 2019 to increase reported assets and liabilities by approximately $400 million, with no material effect expected on earnings or cash flows. Principal risks include high indebtedness and securitized-debt covenants, refinancing the notes by September 2021, dependence on franchisees and concentrated Applebee’s franchise ownership, franchisee financial health, restaurant competition and traffic trends, labor and food costs, cyber and technology incidents, brand reputation, litigation, and potential future impairment charges. Management did not believe pending legal matters would have a material adverse impact, but stated outcomes remain uncertain.
Important facts for investors to verify
- Whether Applebee’s sales and traffic recovery is sustained, and whether IHOP’s sales gains continue; Q4 gains included stronger average checks while traffic declined slightly at both brands.
- Franchisee financial condition and collections, including the remaining smaller Applebee’s franchisee with past-due payment issues and approximately $22.8 million of franchisee loans outstanding.
- Refinancing or repayment plans for the $1.3 billion notes by September 2021, and ongoing compliance with debt-service and other securitization tests.
- Cash-flow quality: distinguish operating improvement from working-capital timing, advertising-fund contributions, and the non-GAAP adjusted free-cash-flow measure.
- Execution and economics of the 69 acquired Applebee’s restaurants, planned refranchising, and the stated 2019 restaurant development outlook.
- Potential effect of lease-accounting adoption, lease guarantees (maximum potential liability $284.3 million), and other contractual commitments on liquidity and leverage.