Dine Brands Global, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Dine Brands owns and franchises Applebee’s and IHOP, with more than 3,500 restaurants, most operated by franchisees. This filing covers the three and nine months ended September 30, 2020; the fiscal third quarter ended September 27. COVID-19 restrictions and reduced customer traffic materially affected operations.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $176.6 million | $217.4 million | $493.2 million | $682.7 million |
| Gross profit | $66.8 million | $89.7 million | $181.3 million | $287.1 million |
| Income (loss) before tax | $9.2 million | $31.7 million | ($108.6 million) | $101.9 million |
| Net income (loss) | $10.0 million | $23.9 million | ($102.4 million) | $77.0 million |
| Diluted earnings (loss) per share | $0.60 | $1.36 | ($6.34) | $4.27 |
- Q3 revenue declined 18.7% year over year; gross profit fell 25.6%. Franchise revenue was down $34.4 million, principally reflecting weaker system sales and lower advertising revenues.
- Domestic same-restaurant sales declined 13.3% at Applebee’s and 30.2% at IHOP in Q3; both improved substantially from Q2. Average weekly sales remained below the prior-year quarter.
- Nine-month operating cash flow was $36.7 million, versus $105.6 million. Adjusted free cash flow, a company-defined non-GAAP measure, was $35.6 million versus $100.8 million.
- At September 30, cash and cash equivalents were $309.3 million; restricted cash was $80.3 million, for total cash and restricted cash of $389.6 million. Cash and cash equivalents included $59.0 million held for gift-card programs and advertising funds.
- Debt, net of issuance costs, was $1.508 billion, including $220 million drawn on the revolver. Only $2.2 million remained available after letters of credit. Leverage was 6.67x and debt-service coverage was approximately 3.2x.
- The company reported a $124.5 million impairment and closure charge for the first nine months, recorded primarily in Q2: $92.2 million of Applebee’s goodwill, $14.3 million of intangible assets and $17.2 million of long-lived assets. No additional impairment indicators were identified in Q3.
Material changes, outlook and risks
- Management attributed weaker results primarily to pandemic-related dining restrictions, reduced traffic and franchisee payment deferrals. Most restaurants were operating in some capacity by September, but dining rooms were generally subject to capacity limits.
- Cost controls helped reduce general and administrative expense by $2.0 million in Q3 and $15.8 million for the first nine months. Bad-debt expense increased as franchisee credit risk worsened.
- The company drew $220 million on its revolving facility to increase financial flexibility, increased its securitized-debt interest reserve from $16.4 million to $32.8 million, and reported that upcoming specified interest payments were fully funded as of October 26.
- Dividends were suspended for Q2 through Q4 2020, and share repurchases were halted for the foreseeable future. Management said it expected positive adjusted free cash flow in the final three months of 2020 and believed available cash, operating cash flow and mitigation actions would provide adequate liquidity for the next 12 months.
- The company withdrew its 2020 restaurant development and closure guidance. It said evaluations could result in up to 100 IHOP restaurant closures over the following six months. Franchisee financial health, further restrictions, consumer demand and potential additional restaurant closures remain significant uncertainties.
- Standard & Poor’s removed the notes from credit watch-negative in September and reaffirmed their BBB rating. The company’s leverage ratio above 5.25x requires quarterly principal payments of $3.25 million to resume; this is not itself a covenant violation. Debt terms include coverage and sales thresholds that could trigger cash-sweep or rapid-amortization events.
- The company corrected previously reported 2020 Q2 and six-month loss-per-share calculations: the corrected amounts were ($8.33) and ($6.96), respectively. The filing says the earlier calculations allocated an incorrect portion of net loss to unvested participating restricted stock.
- Other exposures include $253.5 million of maximum potential Applebee’s lease-guarantee liability, or $38.2 million excluding unexercised renewal options, and ordinary-course litigation. Management did not believe current legal matters would ultimately have a material adverse impact, but gave no assurance.
Important facts for investors to verify
- Whether sales recovery persists or reverses as COVID-19 restrictions and customer behavior change, particularly at IHOP.
- Franchisee liquidity, collection of deferred fees, bad-debt reserves and the number and financial effects of potential IHOP closures.
- Revolver availability, debt-service coverage, leverage, required principal payments and compliance with securitized-debt triggers.
- Whether cash and operating cash flow support management’s stated 12-month liquidity assessment and expected positive Q4 adjusted free cash flow.
- The assumptions underlying the Q2 impairment valuation and the potential for further impairment; goodwill and intangible assets remain exposed to weaker forecasts or higher discount rates.
- The corrected prior-period loss-per-share figures and the scale and timing of lease-guarantee or litigation exposure.