DineEquity, Inc. (now identified in the request as Dine Brands Global, Inc.) — 2013 Form 10-K
Business context and reporting period. The filing is by DineEquity, Inc., which operated Applebee’s and IHOP. The fiscal year contained 52 weeks and ended December 29, 2013 (referred to in the filing as December 31, 2013). This is an annual report, not a standalone fourth-quarter filing. The company had 3,631 restaurants at year-end; approximately 99% were franchised. Franchise and rental operations generated about 88% of 2013 revenue.
Financial performance and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $640.5 million | $849.9 million |
| Gross segment profit | $369.7 million | $391.9 million |
| Segment profit as a percentage of revenue | 57.7% | 46.1% |
| Income before income taxes | $110.6 million | $194.9 million |
| Net income | $72.0 million | $127.7 million |
| Diluted EPS | $3.70 | $6.63 |
| Cash flow from operating activities | $127.8 million | $52.9 million |
| Free cash flow (company-defined, non-GAAP) | $120.1 million | $29.9 million |
| Cash and cash equivalents at year-end | $106.0 million | $64.5 million |
- Revenue mix: Franchise revenue was $439.2 million, company restaurant revenue $63.4 million, rental revenue $124.8 million, and financing revenue $13.1 million.
- Margins and costs: Franchise segment profit rose to $329.5 million from $311.5 million, with a 75.0% segment margin. Company restaurant operations reported a $0.2 million segment loss, versus $41.8 million profit in 2012.
- Debt and obligations: Long-term debt carrying value was $1.208 billion, comprising $467.2 million of variable-rate term loans and $760.8 million face amount of 9.5% senior notes (net of discount). Capital lease obligations were $123.9 million and financing obligations $48.9 million. The filing also reports approximately $763.7 million of future operating lease payments.
- Liquidity: Current assets were $331.6 million and current liabilities $284.3 million. Cash included $53.2 million associated with gift card programs and IHOP advertising funds. The $75 million revolving facility had no borrowings; $10.9 million of letters of credit reduced availability.
- Shareholder returns: The company paid $3.00 per share in dividends during 2013 and repurchased 412,022 shares for $29.7 million. Total reported returns to shareholders were $87.1 million.
Material changes versus comparable periods
- Revenue fell 24.6% and net income fell 43.6% year over year. The primary driver was the completed refranchising of 154 Applebee’s company-operated restaurants in 2012: reported company restaurant sales declined, partly offset by increased royalties and franchise fees. The comparison also includes a $102.6 million gain on asset dispositions in 2012, versus a $0.2 million gain in 2013.
- Segment profit declined 5.7%, while segment profit as a percentage of revenue increased 11.6 percentage points, reflecting the higher-margin franchised mix. Franchise operations generated nearly 90% of segment profit.
- Operating cash flow increased by $74.9 million, primarily due to lower income tax payments, lower G&A and interest costs, and a favorable working-capital change; lower segment profit partly offset these effects. Free cash flow increased by $90.1 million, also benefiting from lower capital expenditures.
- Interest expense declined $14.1 million, reflecting lower average debt and a reduction in the term-loan rate after the February 2013 credit agreement amendment. G&A declined $19.6 million, partly because 2012 included a $9.1 million litigation settlement charge.
- Domestic same-restaurant sales diverged by brand: Applebee’s decreased 0.3% for 2013, its first annual decline since 2009; IHOP increased 2.4%, its first full year of growth since 2008. Customer traffic declined at both brands; higher average checks offset traffic declines.
- Applebee’s ended the year with 23 fewer restaurants, following 26 openings and 49 closures. IHOP had 38 net franchise and area-license additions.
Outlook, commentary, risks, and unusual items
- Outlook: Management expected 40–50 new IHOP restaurants and 40–50 new Applebee’s restaurants in 2014, mainly domestically, and approximately $10 million in 2014 capital expenditures, about half for information technology. The filing gives no clear consolidated revenue or EPS guidance.
- Management said cash from operations, available cash, and revolving-facility availability were expected to meet 2014 liquidity needs. It also noted that rental and financing revenue from IHOP’s legacy pre-2003 development model is expected to decline progressively as leases and receivables are repaid.
- At year-end, covenant ratios were 4.8:1 consolidated leverage versus a 7.0:1 maximum and 2.5:1 cash interest coverage versus a 1.75:1 minimum. Thresholds tighten over time. The company reported compliance with financial covenants.
- Key risks include high indebtedness and refinancing needs; pressure on restaurant traffic, franchisee health and royalty collections; intense competition; food, labor, commodity, rent and healthcare costs; dependence on franchisees, including concentration among large Applebee’s operators; lease guarantees; regulatory and litigation exposure; and information-security and business-continuity risks.
- Lease guarantees for assigned Applebee’s locations had a maximum potential exposure of $417.8 million; no material liability was recorded. An IHOP franchisee bankruptcy involving 19 restaurants remained unresolved, with appeals and a stay affecting the potential transfer of 17 locations. Management did not expect pending litigation to have a material adverse effect, but said outcomes could not be assured.
- Unusual items included $3.8 million of termination payments and fees related to 18 Applebee’s closures following a franchisee bankruptcy, and $1.3 million of credit-agreement modification costs. No goodwill or intangible-asset impairment was recorded in 2013.
- The company reported an unqualified audit opinion and effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether Applebee’s traffic and same-restaurant sales stabilize, and whether IHOP’s 2013 sales improvement persists beyond higher checks and favorable product mix.
- Franchisee financial health, including the outcome of the IHOP bankruptcy and the ability of large Applebee’s operators to fund operations, remodels and development.
- Debt service capacity and refinancing terms, covenant headroom as thresholds tighten, and the potential cost of redeeming 9.5% notes before the make-whole premium expires.
- Cash availability after considering operating needs, restricted or program-associated cash, lease commitments, guarantees, dividends and repurchases.
- Whether projected 2014 restaurant openings and capital expenditures are achieved; the filing cautions that development commitments and openings may differ.
- Year-over-year earnings comparisons should be assessed with the 2012 refranchising gains, 2013 franchise termination fees and reduced company-operated footprint in view.