DineEquity, Inc. (now identified in the request as Dine Brands Global) — Q2 2013 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. DineEquity operated Applebee’s and IHOP, with more than 99% of restaurants franchised following completion of its Applebee’s refranchising program in October 2012. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $158.1 | $229.4 | $321.3 | $475.0 |
| Gross segment profit | $91.0 | $98.3 | $185.5 | $206.8 |
| Income before taxes | $27.0 | $27.4 | $57.1 | $76.5 |
| Net income | $16.9 | $16.9 | $35.2 | $48.3 |
| Diluted EPS | $0.87 | $0.88 | $1.80 | $2.52 |
- Revenue fell 31% in Q2 and 32% in the six-month period, principally because refranchising removed Applebee’s company-operated restaurant sales. Franchise revenue rose to $108.0 in Q2 from $102.5, and to $219.9 for six months from $210.9.
- Gross segment profit declined, but segment profit as a share of revenue increased to 57.6% in Q2 from 42.9%, and to 57.7% for six months from 43.5%, reflecting the higher-margin franchise mix. Franchise segment margins were 75.8% and 75.3%, respectively.
- Six-month net income was lower partly because 2012 included a $16.0 gain on asset dispositions, primarily from Applebee’s refranchising. Q2 net income was essentially unchanged year over year.
- General and administrative expense fell to $35.6 in Q2 and $69.7 for six months, reflecting restructuring, refranchising-related reductions, and lower compensation costs. Interest expense fell to $25.0 and $50.3, respectively, principally due to lower debt balances; the term-loan rate also declined to 3.75% from 4.25% after a February credit-agreement amendment.
- Six-month cash from operations was $55.4, versus $36.4; company-defined free cash flow was $52.1, versus $22.5. Capital expenditures were $3.0. Cash increased to $75.6 from $64.5 at year-end 2012.
- At June 30, long-term debt was $1,208.8 before discount and current maturities; total debt reported on the balance sheet was approximately $1,208.8. The $75.0 revolving facility was unused, with $10.9 of letters of credit reducing availability. Current assets were $240.2 and current liabilities $203.6.
- The company declared and paid dividends of $0.75 per share in each of Q1 and Q2, totaling $28.9, and repurchased approximately 200,700 shares for $14.5. The board’s authorization was $100.0, with approximately $85.5 remaining at June 30.
Changes, outlook, and commentary
- Applebee’s domestic same-restaurant sales increased 1.3% in Q2, but were flat for the first six months. IHOP increased 1.9% in Q2 and 0.7% for six months. Management attributed improvements to higher average checks; Applebee’s Q2 traffic declined, while IHOP Q2 traffic increased.
- Management cited first-quarter consumer headwinds including the end of the payroll tax holiday, higher fuel prices, and delayed federal tax refunds. It cautioned that first-half same-store sales do not necessarily indicate full-year performance.
- For 2013, management expected Applebee’s franchisees to open 40–50 restaurants and IHOP franchisees 50–60, primarily in the U.S. By June 30, 6 Applebee’s and 22 IHOP restaurants had opened. Capital expenditures were expected to be approximately $8–$10 for the year. The filing provides no consolidated revenue or earnings guidance.
- Management said available cash, operating cash flow, and revolving-credit availability should cover investing and financing needs over the next 12 months. At June 30, the leverage covenant ratio was 4.8:1 versus a 7.0:1 maximum; cash-interest coverage was 2.5:1 versus a 1.75:1 minimum. Covenant thresholds become more stringent over time.
Risks, contingencies, and unusual items
- An IHOP franchisee in bankruptcy operated 19 restaurants. Two were expected to return to the company, prompting a $0.5 non-cash charge; further non-cash charges of up to $5.4 could arise depending on the remaining proceedings.
- An Applebee’s franchisee in bankruptcy closed 18 Illinois restaurants; 15 were sold to another franchisee. Termination payments and fees remained undetermined, though the company did not expect a material adverse effect on 2013 results.
- The company had $439.6 of maximum potential exposure under lease guarantees for restaurants sold or assigned to others; no material liability was recorded. It also disclosed ordinary-course litigation and stated outcomes could not be assured.
- The IRS issued a report proposing assessments for tax years 2008–2010. The company contests part of the assessments and expects the appeals process to continue into 2014; it believes reserves are adequate. Gross unrecognized tax benefits were $2.0, excluding interest and penalties.
- Six-month special items included $1.3 in debt-modification fees and $1.2 in closure charges, primarily an increased reserve for previously closed IHOP restaurants. The company reported compliance with debt covenants and no material changes to its previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- How much of the reported revenue and profit change reflects the 2012 refranchising rather than underlying franchise sales and restaurant economics.
- Whether same-store sales, traffic, development openings, and franchisee financial health sustain the trends management described.
- Debt-covenant headroom and the effect of tightening covenant thresholds, dividends, and share repurchases on liquidity and deleveraging.
- Outcomes and potential charges from the IHOP and Applebee’s bankruptcy proceedings, lease guarantees, and the IRS tax dispute.
- Whether management’s 2013 restaurant-opening and capital-expenditure expectations were achieved; the filing notes actual openings may differ from expectations.