DineEquity, Inc. (now identified in request as Dine Brands Global, Inc.) — Form 10-Q summary
Business context and reporting period
The filing is for the first fiscal quarter of 2016. The company states that the quarter began January 4 and ended April 3, 2016; financial statements and tables generally label the period as the three months ended March 31. DineEquity owned and franchised Applebee’s and IHOP, with more than 3,700 restaurants combined and about 99% franchised.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $163.5 million | $175.8 million |
| Gross profit | $99.4 million | $100.3 million |
| Income before taxes | $41.1 million | $46.1 million |
| Net income | $25.5 million | $28.4 million |
| Diluted earnings per share | $1.37 | $1.47 |
| Operating cash flow | $37.5 million | $41.1 million |
| Free cash flow (company-defined) | $38.8 million | $41.1 million |
Revenue declined 7.0%; gross profit declined 0.9%. General and administrative expense rose to $39.4 million from $34.2 million, including $2.1 million related to the support-center consolidation. The effective tax rate was 37.9%, versus 38.4%.
Cash and cash equivalents were $140.3 million at quarter-end, including $60.6 million held for gift card programs and advertising funds. Long-term debt was $1.280 billion; the company also reported capital lease obligations of $81.1 million and financing obligations of $42.4 million. Its $100 million variable funding facility was undrawn, with $94.1 million available after letters of credit. Management said available cash, operating cash flow and borrowing capacity should cover liquidity needs for the next 12 months.
The company paid $17.0 million in dividends and repurchased $20.0 million of shares during the quarter. The declared quarterly dividend was $0.92 per share. Capital expenditures were $0.8 million; full-year 2016 capital expenditures were expected to be about $8 million.
Changes versus the prior comparable period
- The principal revenue comparison was affected by the July 2015 sale of 23 company-operated Applebee’s restaurants. Their refranchising reduced reported revenue by about $11.9 million and gross profit by about $0.6 million versus the prior-year quarter.
- Applebee’s domestic same-restaurant sales fell 3.7%, as lower traffic more than offset a higher average check. IHOP domestic same-restaurant sales rose 1.5%, reflecting a higher average check partly offset by lower traffic.
- Franchise and rental operations gross profit increased slightly, while company-restaurant gross profit declined to a loss of $0.4 million, principally reflecting the refranchising comparison. Higher G&A also weighed on earnings.
- Operating cash flow fell $3.6 million, with the company citing lower net income and a $5.6 million unfavorable working-capital comparison, largely due to the timing of holiday gift-card collections.
Outlook, risks and unusual items
- For 2016, management expected IHOP franchisees to open 60–70 restaurants and Applebee’s franchisees to open 35–45. Actual development could differ due to economic conditions, franchisee commitments, construction delays, approvals and currency movements.
- Management said first-quarter same-restaurant sales were not necessarily indicative of full-year results. It noted industrywide traffic declines and warned that sustained traffic weakness not offset by higher checks could adversely affect results. Applebee’s sales and traffic declines exceeded the casual-dining segment’s reported declines; IHOP’s sales performance exceeded family dining’s.
- The Kansas City support-center consolidation was expected to incur about $8 million in employee-related costs and up to a further $8 million in facility-exit costs. Most remaining personnel costs were expected in Q2 and Q3; most facility-exit costs were expected in Q2. The company had incurred $5.7 million in employee termination costs through March 31.
- Lease guarantees for certain franchised or sold restaurants represented a maximum potential future payment exposure of $391 million. No material guarantee liability was recorded. The company also faced ordinary-course legal proceedings; management did not expect a material adverse impact but could not assure outcomes.
- The $1.3 billion securitized notes had a 4.277% fixed rate. The reported leverage ratio was 4.51x and debt-service coverage ratio was 5.39x. Debt documents include cash-trapping and rapid-amortization triggers if coverage falls below specified thresholds; failure to repay or refinance by the September 2021 anticipated repayment date is also a specified event.
- The company was contesting part of an IRS assessment concerning 2008–2010 tax years and expected the appeals process to conclude during 2016. It estimated unrecognized tax benefits could decrease by up to $1.5 million over the next 12 months.
- New lease accounting guidance was expected to materially increase balance-sheet assets and liabilities when adopted in Q1 2019; management did not then expect a material impact on the income statement or cash flows. New revenue guidance was scheduled for adoption in Q1 2018, with its impact still under evaluation.
Important facts for investors to verify
- Whether the fiscal quarter-end used for comparison is April 3, 2016, as stated in the filing’s fiscal-calendar description, versus March 31, the date used in financial statement headings.
- Whether Applebee’s traffic and same-restaurant sales stabilize, and whether IHOP’s positive sales trend persists despite declining traffic.
- Actual restaurant openings and closures versus the 2016 development outlook, and the resulting franchise revenue contribution.
- Progress and final costs of the Kansas City consolidation, including the expected facility-exit charges.
- Debt-service coverage, leverage, available borrowing capacity and exposure under lease guarantees and tax matters.