DineEquity, Inc. (now Dine Brands Global, Inc.) — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2013; the fiscal third quarter ended September 29. The company operates Applebee’s and IHOP and reported that more than 99% of its restaurants were franchised.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $161.3 million | $216.3 million | $482.6 million | $691.3 million |
| Segment profit | $93.0 million | $96.4 million | $278.5 million | $303.2 million |
| Net income | $18.7 million | $60.6 million | $53.9 million | $108.9 million |
| Diluted EPS | $0.97 | $3.14 | $2.76 | $5.66 |
| Operating cash flow | Not reported for quarter | Not reported for quarter | $102.8 million | $68.1 million |
| Free cash flow (non-GAAP) | Not reported for quarter | Not reported for quarter | $98.6 million | $51.1 million |
Q3 segment profit margin was 57.7%, versus 44.6% a year earlier; the change reflects, in part, the shift from company-operated restaurant sales to franchise revenue. At September 30, cash was $95.5 million, total current assets $261.8 million and current liabilities $217.3 million. Long-term debt was $1.210 billion, including $469.6 million under the secured credit facility and $760.8 million of senior notes before a $20.7 million discount. Capital lease and financing obligations were additional liabilities. Interest expense was $25.0 million in Q3 and $75.2 million year to date.
Changes versus prior period
- Revenue fell $55.0 million in Q3 and $208.7 million year to date, primarily because Applebee’s refranchised 154 company-operated restaurants during 2012. Franchise revenue increased, but did not offset the removal of company restaurant sales.
- Net income comparisons were also affected by 2012 gains on asset dispositions: $73.7 million in Q3 and $89.6 million for the first nine months, compared with only small gains in 2013. Lower 2013 interest and G&A expenses partly offset the effects of refranchising.
- Domestic same-restaurant sales were down 0.4% at Applebee’s and up 3.6% at IHOP in Q3; for nine months they were down 0.1% and up 1.7%, respectively. Management cited lower traffic at Applebee’s and higher average checks at IHOP.
- Operating cash flow rose $34.7 million year over year for nine months. Investing cash flow was $6.0 million, compared with $135.2 million in 2012, when asset-sale proceeds were $137.4 million.
Outlook, capital allocation and risks
- For 2013, management expected 25–30 new Applebee’s franchise openings, down from its prior estimate of 40–50, and 50–60 IHOP openings. These are expectations, not guarantees; management noted that actual openings may be affected by economic conditions, franchisee compliance, construction delays, approvals and currency movements.
- Management expected approximately $7 million of capital expenditures for fiscal 2013 and said cash, operating cash flow and available revolving-credit capacity should cover anticipated needs over the next 12 months. No full-year earnings guidance was provided in the filing.
- The company declared and paid $0.75 per share quarterly dividends during the first three quarters, totaling $43.2 million, and repurchased $24.7 million of stock. A fourth-quarter $0.75 dividend was approved. The $100 million repurchase authorization had approximately $75.3 million remaining at September 30.
- The $75 million revolving facility was unused, with $10.9 million of letters of credit reducing available capacity. The company reported covenant compliance; leverage was 4.7:1 against a 7.0:1 maximum, and cash-interest coverage was 2.6:1 against a 1.75:1 minimum. The credit agreement’s covenant thresholds become more stringent over time.
- Applebee’s franchisee restaurant closures generated about $3.8 million in termination payments and fees. An IHOP franchisee bankruptcy involving 19 restaurants remained unresolved: two restaurants returned to the company, while proposed transfer of the remaining 17 was appealed and stayed.
- Potential continuing liability on assigned restaurant leases was $431.9 million; the company recorded no material liability for these guarantees. It also disclosed ordinary-course litigation and an IRS dispute over proposed assessments for tax years 2008–2010; management said reserves were adequate and anticipated the appeals process to continue into 2014.
Most important facts for investors to verify
- How the refranchising-driven revenue and earnings comparisons should be interpreted alongside franchise royalty growth and comparable-sales trends.
- Whether Applebee’s traffic and sales stabilize and IHOP’s improved comparable sales persist.
- Actual restaurant openings, closures and franchisee financial health, including outcomes of the disclosed bankruptcy cases.
- Debt covenant headroom, future refinancing terms and the company’s ability to sustain dividends and repurchases while meeting debt obligations.
- Potential outcomes of the lease guarantees, tax appeals and litigation contingencies.