DineEquity, Inc. (now Dine Brands Global, Inc.) — Q3 2011 Form 10-Q
Business and period. The filing covers the quarter and nine months ended September 30, 2011 (the company’s fiscal quarter ended October 2, 2011), compared with the corresponding 2010 periods. DineEquity operated and franchised Applebee’s and IHOP through franchise, company restaurant, rental and financing segments. At quarter-end, Applebee’s had 2,010 restaurants and IHOP had 1,532.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $264.5 million | $335.5 million | $833.0 million | $1,033.7 million |
| Gross segment profit | $100.6 million | $107.6 million | $311.6 million | $330.1 million |
| Income before taxes | $25.2 million | $20.2 million | $68.2 million | $72.3 million |
| Net income | $16.5 million | $14.3 million | $46.6 million | $48.0 million |
| Diluted EPS | $0.85 | $0.44 | $2.38 | $1.60 |
| Operating cash flow | — | — | $95.1 million | $97.5 million |
- Q3 segment profit by business: franchise $72.7 million, company restaurants $17.7 million, rental $6.6 million and financing $3.6 million. Franchise segment margin was 74.4%; company restaurant margin was 13.4%.
- At September 30, cash was $53.9 million; current assets were $265.5 million and current liabilities $219.3 million. Long-term debt, including current maturities, was approximately $1.488 billion. Financing obligations were $208.8 million and capital lease obligations approximately $152.0 million.
- Nine-month investing cash flow was positive $48.7 million, including $60.2 million of asset-sale proceeds and $20.8 million of capital expenditures. Financing used $192.2 million, principally for debt repayment and share repurchases. Cash declined $48.4 million from year-end 2010.
Material changes and drivers
- Revenue fell $71.0 million in Q3 and $200.7 million year to date, primarily because Applebee’s company-operated restaurants were refranchised. Company restaurant revenue dropped $75.3 million in Q3 and $221.3 million year to date; franchise revenue rose $5.6 million and $19.9 million, respectively. These portfolio changes make reported revenue and segment comparisons less like-for-like.
- Despite lower segment profit, Q3 net income increased year over year, supported in part by a $10.6 million reduction in interest expense. Nine-month net income decreased slightly; lower interest expense and a $21.3 million asset-disposition gain were offset by $26.9 million of impairment and closure charges, $7.9 million of debt-extinguishment losses and $4.1 million of debt-modification costs.
- Applebee’s domestic system same-restaurant sales were down 0.3% in Q3 and up 2.3% year to date. IHOP’s were down 1.5% and 2.4%, respectively. Management cited weaker guest traffic, promotions that did not produce expected traffic or repeat visits, and consumer economic uncertainty; menu pricing and higher average checks partly offset weakness.
- The company amended its credit agreement, reducing the LIBOR loan margin from 4.50% to 3.00% and increasing revolving commitments from $50 million to $75 million. No revolver borrowings remained at quarter-end; $15.7 million of letters of credit reduced availability. It repaid $110 million of term loans and repurchased $39.8 million face amount of senior notes for $43.5 million.
Outlook, risks and unusual items
- Management expects cash flow from operations, available cash and revolver capacity to meet liquidity needs for the next 12 months. At quarter-end, covenant leverage was 5.7x against a maximum of 7.5x, and cash-interest coverage was 2.3x against a minimum of 1.5x. The company reported compliance with covenants.
- The strategy is to move Applebee’s toward an approximately 98%-franchised system, reducing capital needs and cash-flow volatility. At quarter-end, it was approximately 88% franchised. Management cautioned that franchise-market conditions, financing availability and restaurant performance could delay or change transactions; refranchising may lower reported revenue and segment profit even as it reduces investment needs and debt.
- Management expected 24–28 new Applebee’s and 55–60 new IHOP restaurants in 2011. These are expectations, not guaranteed openings; development depends on financing, construction, approvals and economic conditions.
- After quarter-end, the company completed the sale of 62 of 66 Applebee’s restaurants in the Northeast market on November 2 and expected to complete the remaining four before year-end. It expected an approximately $23 million gain on the sale. A separate agreement for 17 Applebee’s restaurants was expected to close in Q1 2012.
- The $26.9 million nine-month impairment and closure charge chiefly reflected a $21.2 million fee and related costs to terminate the Lenexa, Kansas support-center sublease, plus a $4.5 million impairment charge. Most of the related $20.5 million closure liability was expected to be paid in Q4 2011.
- A nationwide Fair Labor Standards Act collective action, Gerald Fast v. Applebee’s, concerns work performed by tipped employees. The company sought U.S. Supreme Court review after an adverse appellate ruling; it said it could not estimate possible loss and had recorded no accrual. Lease guarantees had a maximum potential exposure of $214.5 million, with no material liability recorded.
- Applebee’s and IHOP same-store sales weakness, commodity and labor costs, high debt, execution and proceeds from refranchising, and the unresolved labor litigation are material investor considerations. The filing reported no material change in risk factors from the 2010 Form 10-K.
Key facts for investors to verify
- Whether the remaining Northeast and Memphis-area refranchising transactions closed as planned, and whether proceeds and the anticipated gain matched expectations.
- Subsequent Applebee’s and IHOP same-restaurant sales, traffic trends, and restaurant-level margins, separating operating trends from refranchising effects.
- Debt balances, interest expense, covenant headroom, revolver availability and the use of future asset-sale proceeds.
- Actual 2011 restaurant openings versus management’s stated ranges, and capital spending versus the approximately $26 million estimate.
- Developments in the tipped-worker lawsuit and any change to the company’s ability to estimate or accrue a loss.