DineEquity, Inc. (now identified in the request as Dine Brands Global) — FY 2012 Form 10-K
Business context and reporting period. The filing is DineEquity, Inc.’s annual report for the 52-week fiscal year ended December 30, 2012 (reported for convenience as December 31). The company owned, franchised and operated Applebee’s and IHOP. In 2012 it completed the refranchising of 154 Applebee’s restaurants, reaching a roughly 99%-franchised system; year-end system totals were 2,034 Applebee’s and 1,581 IHOP restaurants.
Financial and operating results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $849.9 million | $1,075.2 million |
| Gross segment profit | $391.9 million | $407.6 million |
| Income before taxes | $194.9 million | $105.0 million |
| Net income | $127.7 million | $75.2 million |
| Diluted EPS | $6.63 | $3.89 |
| Cash from operations | $52.9 million | $121.7 million |
| Free cash flow (company-defined, non-GAAP) | $48.2 million | $108.5 million |
| Cash and cash equivalents at year-end | $64.5 million | $60.7 million |
| Long-term debt, less current maturities | $1,202.1 million | $1,411.4 million |
Revenue fell 20.9%, primarily because refranchising reduced company-operated restaurant sales. The decline in segment profit reflected foregone profit from refranchised restaurants and weaker IHOP same-store sales, partly offset by higher franchise profit. Net income rose substantially, but FY 2012 included a $102.6 million gain on asset dispositions, chiefly Applebee’s refranchising; results also included $5.6 million of debt-extinguishment loss, $4.2 million of impairment and closure charges, and a $67.2 million income-tax provision.
Domestic system-wide same-restaurant sales increased 1.2% at Applebee’s and decreased 1.6% at IHOP. Operating cash flow and free cash flow each declined by about 55%, reflecting higher cash taxes—partly related to refranchising gains—and lower segment profit, partly offset by lower cash interest. Interest expense was $114.3 million, down from $132.7 million. Current assets were $294.5 million and current liabilities $267.8 million at year-end.
Material changes and notable items
- Long-term debt declined by $209.3 million on the balance sheet year over year. The company repaid $210.5 million of term loans and repurchased $5.0 million face amount of Senior Notes during 2012; refranchising also released the company from $111.5 million of financing obligations.
- Applebee’s franchise operations profit rose to $180.4 million from $166.4 million, while company restaurant operations profit fell to $41.8 million from $72.6 million as company-operated locations were sold.
- The $9.1 million settlement of the Gerald Fast employment action was paid in 2012. The case was dismissed after court approval.
- Goodwill was $697.5 million and other intangible assets were $806.1 million—together about 62% of total assets. No goodwill or intangible-asset impairment was recorded in 2012.
Outlook, risks and contingencies
- Management expected franchisees to open 40–50 Applebee’s and 50–60 IHOP restaurants in 2013, and forecast company capital expenditures of approximately $8–10 million. Openings depend on economic conditions, franchisee financing, construction and approvals.
- Management estimated that 2012 restructuring and staff reductions would generate annualized savings of approximately $10–12 million, while severance costs exceeded savings during 2012.
- The company said operating cash flow, available cash and revolving-facility availability should be adequate for 2013 liquidity needs. A February 2013 credit amendment lowered borrowing costs and changed excess-cash-flow repayment and restricted-payment terms; the company estimated about $1.2 million of 2013 debt-modification costs.
- At year-end, the company reported a 4.6:1 consolidated leverage ratio and a 2.5:1 cash interest coverage ratio. Debt included $472.0 million of variable-rate term loans and $760.8 million of 9.5% Senior Notes due 2018. The filing identifies substantial leverage, refinancing needs, and restrictive covenants as risks.
- Other significant exposures included maximum potential lease guarantees of $448.5 million (with no material liability recorded), $137.5 million of purchase commitments, and $9.6 million of food-purchase guarantees. The company also cited franchisee credit and concentration risks, commodity and labor costs, competition, consumer spending, food safety, regulation, cyber incidents, and potential future impairment charges.
- After year-end, the board approved a $0.75-per-share dividend and a stock repurchase authorization of up to $100 million. These were subsequent events, not 2012 dividends or repurchases.
Most important facts for investors to verify
- How much of the reported earnings increase came from the $102.6 million asset-disposition gain, and what ongoing earnings and cash-flow profile replaces company-operated restaurant profits?
- Whether Applebee’s sales growth can persist and IHOP can reverse its same-store sales decline, while franchisees fund planned openings and remodels.
- Debt maturities, covenant headroom, variable-rate exposure, and the effect of the February 2013 amendment on required repayments and permitted shareholder distributions.
- The quality and collectability of franchisee receivables and the potential cash exposure from lease guarantees and other commitments.
- Management’s impairment assumptions for goodwill and intangible assets. Ernst & Young issued unqualified opinions on the financial statements and internal controls.