Business Context and Reporting Period
Company: DineEquity, Inc. (formerly IHOP Corp.)
Filing Type: Form 10-K
Reporting Period: Fiscal year ended December 31, 2009 (53-week year ending January 3, 2010)
Business Overview: The Company operates two restaurant concepts: Applebee's Neighborhood Grill and Bar (casual dining) and International House of Pancakes (IHOP) (family dining). As of December 31, 2009, the system comprised 3,464 restaurants globally. The Company is executing a strategy to transition Applebee's from an 80% franchised system to approximately 98% franchised, similar to the IHOP model, to reduce capital investment and improve margins.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $1,414.0 million | $1,613.6 million |
| Net Income | $31.4 million | ($154.5 million) |
| Net Income Available to Common Stockholders | $9.2 million | ($169.2 million) |
| Diluted EPS | $0.55 | ($10.09) |
| Operating Cash Flow | $157.9 million | $110.8 million |
| Long-Term Debt (net of current) | $1,637.2 million | $1,853.4 million |
| Cash and Cash Equivalents | $82.3 million | $114.4 million |
| Stockholders' Equity | $69.9 million | $42.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased $199.6 million (12.4%) primarily due to the franchising of 110 Applebee's company-operated restaurants since mid-2008 and declines in same-store sales for both brands. The 53rd week in 2009 added approximately $29.2 million in revenue.
- Profitability Improvement: The Company returned to profitability with $31.4 million in net income, compared to a $154.5 million loss in 2008. This turnaround was driven by a $135.5 million reduction in impairment and closure charges and a $30.5 million increase in gains on debt extinguishment.
- Impairment Charges: Total impairment and closure charges were $105.1 million in 2009, significantly lower than the $240.6 million in 2008. The 2009 charge consisted primarily of a $93.5 million tradename impairment and $10.4 million in long-lived tangible asset impairments. No goodwill impairment was recorded in 2009.
- Debt Reduction: Long-term debt decreased by approximately $216 million due to the early retirement of $199.6 million in face value of securitized debt using excess cash flow, resulting in a $45.7 million gain.
- Segment Performance: Franchise operations profit increased 5.0% to $270.0 million. Company restaurant operations profit decreased slightly to $123.5 million, though operating margins improved to 13.9% from 11.3% due to cost controls and the sale of underperforming units.
Guidance, Outlook, and Risks
- Strategic Outlook: Management expects to continue franchising Applebee's company-operated restaurants over the next several years. Proceeds from these sales are contractually required to be used to retire long-term debt. Capital expenditures for 2010 are expected to range between $18 million and $20 million.
- Interest Expense: Interest expense is expected to decline in 2010, estimated to range from $175 million to $180 million, due to debt retirement and lower variable interest rates.
- Debt Maturity and Covenants: The Company has significant securitized debt with accelerated payment dates in December 2012 (Applebee's) and March 2012 (IHOP). The Company intends to refinance this debt prior to maturity. As of December 31, 2009, the Company was in compliance with all debt covenants, including a consolidated leverage ratio of 5.71x (maximum allowed 7.0x-7.25x) and debt service coverage ratios well above minimum thresholds.
- Key Risks:
- Economic Conditions: Continued recessionary pressures, high unemployment, and reduced consumer discretionary income may further impact same-store sales and franchisee ability to pay royalties.
- Refinancing Risk: Inability to refinance securitized debt on commercially reasonable terms before 2012/2013 could trigger rapid amortization, forcing the Company to use all excess cash flow for debt repayment.
- Franchisee Concentration: The nine largest Applebee's franchisees own 53% of all franchised Applebee's restaurants in the U.S., creating credit concentration risk.
- Legal Proceedings: The Company is defending a collective action under the Fair Labor Standards Act regarding tipped workers; no loss estimate can be made at this time.
Investor Verification Checklist
- Debt Refinancing Capability: Verify the Company's ability to refinance approximately $1.6 billion of securitized debt maturing in 2012/2013 given current credit market conditions.
- Covenant Compliance Sensitivity: Assess the sensitivity of the consolidated leverage ratio and debt service coverage ratios to potential declines in EBITDA or restaurant cash flows.
- Franchising Execution: Monitor the pace and valuation of Applebee's company-operated restaurant sales, as proceeds are critical for debt reduction and the strategy relies on achieving target valuations.
- Same-Store Sales Trends: Track same-store sales performance for both Applebee's and IHOP to gauge the impact of economic conditions on franchise royalty revenue.
- Impairment Risk: Evaluate the risk of future goodwill or intangible asset impairments if same-store sales forecasts are not met, given the thin equity cushion ($69.9 million).