DineEquity, Inc. — FY2011 Form 10-K Summary
Business context and period. The filing is for DineEquity, Inc. (NYSE: DIN), the parent of Applebee’s and IHOP; it is not a filing under the later Dine Brands Global name. The fiscal year was 52 weeks and ended January 1, 2012 (reported as December 31, 2011). At year-end, the system had 3,569 restaurants, 95% franchised. Results cover the full year, not Q4 alone.
Key financial metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $1,075.2 million | $1,333.6 million |
| Net income (loss) | $75.2 million | $(2.8) million |
| Diluted EPS | $3.89 | $(1.74) |
| Cash from operations | $121.7 million | $179.3 million |
| Free cash flow | $108.5 million | $153.9 million |
| Cash and equivalents, year-end | $60.7 million | $102.3 million |
| Long-term debt, including current maturities | $1,418.8 million | $1,640.5 million |
| Stockholders’ equity | $155.2 million | $83.6 million |
Margins and liquidity. Gross segment profit was $407.6 million, or about 37.9% of revenue, versus $429.8 million, or about 32.2%, in 2010. Company restaurant segment profit was $72.6 million (13.7% of segment revenue), down from $116.3 million (14.3%). Current assets were $276.9 million and current liabilities $257.6 million. The company reported $59.3 million available under its revolving facility after letters of credit. The 5.3x consolidated leverage ratio improved from 5.7x; cash-interest coverage was 2.3x.
Debt and cash flow. The company repaid $161.5 million of term loans and repurchased $59.3 million face value of 9.5% senior notes during 2011. Cash from operations fell by $57.6 million, partly due to lower segment profit, a $21.3 million cash payment for the Lenexa support-center sublease termination, and higher cash interest. Free cash flow, as defined by the company, excludes capital expenditures and includes receipts on long-term notes and equipment contracts.
Material changes versus FY2010
- Revenue declined $258.4 million, principally reflecting the refranchising of 215 Applebee’s company restaurants since October 2010. Company restaurant sales fell $284.6 million, while franchise revenue rose $21.4 million.
- Net income improved from a loss to $75.2 million. The comparison benefited substantially from the absence of the $107.0 million 2010 loss on debt extinguishment and preferred-stock redemption, and lower interest expense. FY2011 also included $43.3 million in asset-disposition gains and $29.9 million in impairment and closure charges.
- Applebee’s domestic system-wide same-restaurant sales increased 2.0%; IHOP’s declined 2.0%. The company attributed Applebee’s growth mainly to higher average checks, with traffic flat; IHOP’s decline primarily reflected lower traffic.
- Applebee’s was 91% franchised at year-end, up from 2010 as the company refranchised 132 restaurants during 2011. IHOP remained approximately 99% franchised.
Outlook, risks and unusual items
- Outlook: Management expected 25–30 new Applebee’s franchise restaurants and 45–55 new IHOP restaurants in 2012, with capital expenditures of approximately $18–20 million. It anticipated sufficient operating cash, available cash and revolver capacity for 2012 liquidity needs. The filing provides no specific consolidated revenue or earnings guidance.
- Strategy: Management plans to refranchise most remaining Applebee’s company restaurants over several years, retaining a Kansas City company market. Expected benefits include lower capital needs, less volatile cash flow and debt reduction; timing, sale prices and benefits are uncertain. The January 2012 sale of 17 restaurants generated an approximately $17 million gain.
- Notable charges and gains: FY2011 impairment and closure charges included $23.0 million related to terminating the Lenexa sublease and a $4.5 million asset impairment at that facility. Asset-disposition gains were $43.3 million; the debt-extinguishment loss was $11.2 million, and debt-modification costs were $4.0 million.
- Debt and shareholder restrictions: The company has substantial leverage, covenant requirements that become more stringent over time, and significant scheduled debt and lease obligations. Common dividends were suspended and remain restricted until specified financial ratios are achieved. The company repurchased $21.2 million of stock in 2011 under a $45 million authorization.
- Risks: Discretionary-spending weakness, competition, food and labor cost inflation, interest-rate exposure, franchisee credit and concentration, and execution of refranchising and development plans may affect results. A 1 percentage-point increase in rates was estimated to add about $6.8 million of annual interest expense on year-end variable-rate debt.
- Contingency: The company is defending the nationwide tipped-worker collective action Gerald Fast v. Applebee’s. The Supreme Court declined review in January 2012; trial was scheduled for September 2012. Management could not estimate a possible loss and recorded no accrual.
Most important facts for investors to verify
- Whether Applebee’s positive comparable sales and IHOP’s sales recovery continued after FY2011, and whether traffic trends improved.
- Progress, proceeds and realized debt reduction from additional Applebee’s refranchising; distinguish refranchising-related revenue declines from underlying performance.
- Debt balances, cash interest coverage and compliance with tightening credit-agreement covenants, including the availability of refinancing.
- Cash conversion and free cash flow after the FY2011 decline, and the effect of restaurant asset sales and the Lenexa payment.
- Developments and potential financial exposure in the Fast collective action, for which the filing states no loss estimate is available.