1. General
These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2022.
2. Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates are made inmay include the calculation and assessment of the following: impairment of goodwill, other intangible assets and tangible assets; income taxes; allowance for doubtfulcredit losses on accounts and notes receivables; lease accounting estimates; contingencies; and stock-based compensation. On an ongoing basis, the Company evaluates its estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
3. Accounting Policies
The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements because of future adoption.when adoption is required in the future.
4. GoodwillRevenue
|
| | | | | | | | | | | |
| Applebee's Franchise Unit | | IHOP Franchise Unit | | Total |
| (In millions) |
Balance at December 31, 2016: | |
| | |
| | |
Goodwill, gross | $ | 686.7 |
| | $ | 10.8 |
| | $ | 697.5 |
|
Accumulated impairment loss | — |
| | — |
| | — |
|
Goodwill | 686.7 |
| | 10.8 |
| | 697.5 |
|
Impairment loss | (358.2 | ) | | — |
| | (358.2 | ) |
Balance at September 30, 2017: | | | | | |
Goodwill, gross | 686.7 |
| | 10.8 |
| | 697.5 |
|
Accumulated impairment loss | (358.2 | ) | | — |
| | (358.2 | ) |
Goodwill | $ | 328.5 |
| | $ | 10.8 |
| | $ | 339.2 |
|
DineEquity,Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Goodwill and Intangible AssetsRevenue (Continued)
Franchise Revenues
ChangesThe Company franchises the Applebee's Neighborhood Grill & Bar® (“Applebee's”) concept in the carrying amountAmerican full-service restaurant segment within the casual dining category of intangible assetsthe restaurant industry, the International House of Pancakes® (“IHOP”) concept in the family dining mid-scale full-service category of the restaurant industry, and the Fuzzy's Taco Shop® (“Fuzzy's”) concept in the Mexican food segment within the fast-casual dining category of the restaurant industry. The franchise arrangement for the nine months ended September 30, 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Not Subject to Amortization | | Subject to Amortization | | |
| Applebee's Tradename | | Other | | Applebee's Franchising Rights | | Leaseholds | | Total |
| (In millions) |
Balance at December 31, 2016 | $ | 652.4 |
| | $ | 2.0 |
| | $ | 109.0 |
| | $ | — |
| | $ | 763.4 |
|
Impairment | (173.4 | ) | | — |
| | — |
| | — |
| | (173.4 | ) |
Amortization expense | — |
| | — |
| | (7.5 | ) | | (0.0 | ) | | (7.5 | ) |
Additions | — |
| | 0.4 |
| | — |
| | 2.3 |
| | 2.7 |
|
Balance at September 30, 2017 | $ | 479.0 |
| | $ | 2.4 |
| | $ | 101.5 |
| | $ | 2.3 |
| | $ | 585.2 |
|
The Company evaluates its goodwill and the indefinite-lived Applebee's tradename for impairment annually in the fourth quarter of each year. In addition to the annual evaluation for impairment, goodwill and indefinite-lived intangible assets are evaluated more frequently if the Company believes indicators of impairment exist.
In the third quarter of 2017, the Company noted that the decline in the market price of the Company's common stock since December 31, 2016, which the Company had believed to be temporary, persisted throughout the first eight months of 2017 and that the favorable trend in Applebee's domestic same-restaurant sales experienced in the second quarter of 2017 did not continue into the first two months of the third quarter. The Company also noted a continuing increase in Applebee's bad debt expense and in royalties not recognized in income until paid in cash. Additionally, the Company also determined an increasing shortfall in franchisee contributions to the Applebee's national advertising fund could require a larger amount of future subsidizationbrands is documented in the form of additionala franchise agreement and, in most cases, a development agreement. The franchise arrangement between the Company as the franchisor contributionsand the franchisee as the customer requires the Company to perform various activities to support the brands that do not directly transfer goods and services to the fund than previously estimated. Based on these unfavorable developments, primarilyfranchisee, but instead represent a single performance obligation, which is the decline in the market pricetransfer of the Company's common stock,franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the respective brand’s symbolic intellectual property over the term of the license. The services provided by the Company determined that indicatorsare highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement for the brands primarily consists of impairment existed(a) initial franchise/development fees; (b) continuing franchise fees (royalties); and that an interim test(c) advertising fees. Since the Company considers the licensing of goodwillthe franchising right to be a single performance obligation, no allocation of the transaction price is required. Additionally, all domestic IHOP franchise agreements require franchisees to purchase proprietary pancake and indefinite-lived intangible assets for impairment should be performed.
waffle dry mix from the Company.
The Company performed an interim quantitative testrecognizes the primary components of impairmentthe transaction price as follows:
•Franchise and development fees are recognized as revenue ratably on a straight-line basis over the term of Applebee's goodwillthe franchise agreement commencing with the restaurant opening date. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;
•The Company is entitled to royalties and tradenameadvertising fees based on a percentage of the franchisee's gross sales as defined in the third quarterfranchise agreement. Royalty and advertising revenue are recognized when the franchisee's reported sales occur. Depending on timing within a fiscal period, the recognition of 2017. revenue results in either what is considered a contract asset (unbilled receivable) or once billed, accounts receivable, and are included in “receivables, net” on the balance sheet;
•Revenue from the sale of proprietary pancake and waffle dry mix and other proprietary products is recognized in the period in which distributors ship the franchisee's order; recognition of revenue results in an accounts receivable included in “receivables, net” on the balance sheet.
In performingdetermining the quantitative testamount and timing of goodwill,revenue from contracts with customers, the Company usedexercises significant judgment with respect to collectability of the income approach methodamount; however, the timing of valuation that included the discounted cash flow methodrecognition does not require significant judgments as well as other generally accepted valuation methodologies to determine the fair value of goodwill and intangible assets. Significant assumptions used to determine fair value under the discounted cash flow model included expected future trends in sales, operating expenses, overhead expenses, capital expenditures and changes in working capital, along with an appropriate discount rateit is based on either the Company's estimated cost of equity capital and after-tax cost of debt.
In performing the impairment reviewterm of the tradename,franchise agreement, the month of reported sales by the franchisee or the date of product shipment, none of which require estimation.
The Company used the reliefdoes not incur a significant amount of royalty method under the income approach methodcontract acquisition costs in conducting franchising activities. The Company believes its franchising arrangements do not contain a significant financing component.
Company Restaurant Revenues
Company restaurant revenues comprise retail sales at company-operated restaurants. Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant sales are reported net of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales a royalty rate and a discount rate to be appliedtaxes collected from guests that are remitted to the forecast revenue stream.
As a result of performing the quantitative test of impairment, the Company recognized an impairment of Applebee's goodwill of $358.2 million and an impairment of Applebee's tradename of $173.4 million. The Company adopted the guidance in FASB Accounting Standards Update 2017-04 on January 1, 2017; accordingly, the amount of the goodwill impairment was determined as the amount by which the carrying amount of the goodwill exceeded the fair value of the Applebee's franchise reporting unit as estimated in the impairment test. These assets are at risk of additional impairment in the future in the event of sustained downward movement in the Company's stock price, downward revisions of long-term performance assumptions or increases in the assumed long-term discount rate.
appropriate taxing authorities, with no significant judgements required.
DineEquity,Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Revenue (Continued)
The following table disaggregates franchise revenue by major type for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In thousands) |
Franchise Revenue: | | | | | | | |
Royalties | $ | 82,768 | | | $ | 78,006 | | | $ | 166,206 | | | $ | 153,248 | |
Advertising fees | 75,979 | | | 74,111 | | | 153,016 | | | 144,994 | |
Pancake and waffle dry mix sales and other | 17,150 | | | 14,077 | | | 34,412 | | | 27,008 | |
Franchise and development fees | 2,020 | | | 2,065 | | | 4,245 | | | 4,241 | |
Total franchise revenue | $ | 177,917 | | | $ | 168,259 | | | $ | 357,879 | | | $ | 329,491 | |
Accounts and other receivables from franchisees as of June 30, 2023 and December 31, 2022 were $71.0 million (net of allowance of $3.4 million) and $69.0 million (net of allowance of $1.3 million), respectively, and were included in receivables, net in the Consolidated Balance Sheets.
Changes in the Company's contract liability for deferred franchise and development fees during the six months ended June 30, 2023 were as follows:
| | | | | | | | |
| | Deferred Franchise Revenue (short- and long-term) |
| | (In thousands) |
Balance at December 31, 2022 | | $ | 49,493 | |
Recognized as revenue during the six months ended June 30, 2023 | | (4,102) | |
Fees deferred during the six months ended June 30, 2023 | | 2,371 | |
Balance at June 30, 2023 | | $ | 47,762 | |
The balance of deferred revenue as of June 30, 2023 is expected to be recognized as follows:
| | | | | |
| (In thousands) |
2023 (remaining six months) | $ | 4,199 | |
2024 | 6,471 | |
2025 | 5,712 | |
2026 | 4,876 | |
2027 | 3,969 | |
Thereafter | 22,535 | |
Total | $ | 47,762 | |
5. Current Expected Credit Losses (“CECL”)
The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself. The Company records specific reserves against account balances of franchisees deemed at-risk when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed at-risk, an allowance is recorded based on expected loss rates derived pursuant to the Company's CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.
The Company considers its portfolio segments to be the following:
Accounts Receivable (Franchise-Related)
Most of the Company’s short-term receivables due from franchisees are derived from royalty, advertising and other franchise-related fees.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
Gift Card Receivables
Gift card receivables consist primarily of amounts due from third-party vendors. Receivables related to gift card sales are subject to seasonality and usually peak around year-end as a result of the December holiday season.
Notes Receivable
Notes receivable balances primarily relate to the conversion of certain past due Applebee's franchisee accounts receivable to notes receivable, cash loans to franchisees for working capital purposes, a note receivable in connection with the sale of IHOP company restaurants, and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. A significant portion of these notes have specific reserves recorded against them amounting to $8.6 million as of June 30, 2023.
Equipment Leases Receivable
Equipment leases receivable primarily relate to IHOP franchise development activity prior to 2003 when IHOP typically leased or purchased the restaurant site, built and equipped the restaurant, then franchised the restaurant to a franchisee. Equipment lease contracts are collateralized by the equipment in the restaurant. The estimated fair value of the equipment collateralizing these lease contracts are not deemed to be significant given the very seasoned and mature nature of this portfolio. The weighted average remaining life of the Company’s equipment leases is 3.5 years as of June 30, 2023.
Real Estate Leases Receivable
Real estate leases receivable relate to IHOP franchise development activity prior to 2003. IHOP provided the financing for leasing or subleasing the site. Real estate leases at June 30, 2023, comprised 32 leases with a weighted average remaining life of 10.8 years, and relate to locations that IHOP is leasing from third parties and subleasing to franchisees.
Distributor Receivables
Receivables due from distributors are related to the sale of IHOP’s proprietary pancake and waffle dry mix to franchisees through the Company’s network of suppliers and distributors and are included as part of Other receivables.
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| (In millions) |
Accounts receivable | $ | 69.4 | | | $ | 67.5 | |
Gift card receivables | 7.1 | | | 34.6 | |
Notes receivable | 16.3 | | | 17.2 | |
Financing receivables: | | | |
Equipment leases receivable | 23.4 | | | 26.6 | |
Real estate leases receivable | 16.2 | | | 18.5 | |
Other | 6.4 | | | 5.6 | |
| 138.8 | | | 170.0 | |
Less: allowance for credit losses and notes receivable | (12.2) | | | (10.3) | |
| 126.6 | | | 159.7 | |
Less: current portion | (90.6) | | | (120.0) | |
Long-term receivables | $ | 36.0 | | | $ | 39.7 | |
The Company's primary credit quality indicator for all portfolio segments is delinquency.
Changes in the allowance for credit losses during the six months ended June 30, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Accounts Receivable | | Notes receivable, short-term | | Notes receivable, long-term | | Lease Receivables | | Equipment Notes | | Other (1) | | Total |
| (In millions) |
Balance, December 31, 2022 | $ | 1.2 | | | $ | 3.5 | | | $ | 5.3 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 10.3 | |
Bad debt (credit) expense | 1.5 | | | 1.2 | | | (0.1) | | | (0.0) | | | (0.0) | | | 0.0 | | | 2.6 | |
Advertising provision adjustment | 0.6 | | | (0.0) | | | — | | | — | | | — | | | — | | | 0.6 | |
Write-offs | — | | | (1.3) | | | — | | | (0.0) | | | — | | | (0.0) | | | (1.3) | |
| | | | | | | | | | | | | |
Balance, June 30, 2023 | $ | 3.3 | | | $ | 3.4 | | | $ | 5.2 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 12.2 | |
(1) Primarily distributor receivables, gift card receivables and credit card receivables.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
The delinquency status of receivables (other than accounts receivable, gift card receivables and distributor receivables) at June 30, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Notes receivable, short-term | | Notes receivable, long-term | | Real Estate Lease Receivable | | Equipment Notes | | Other (1) | | Total |
| (In millions) |
Current | $ | 4.3 | | | $ | 11.9 | | | $ | 16.2 | | | $ | 23.4 | | | $ | 0.0 | | | $ | 55.8 | |
30-59 days | 0.0 | | | — | | | — | | | — | | | — | | | — | |
60-89 days | 0.0 | | | — | | | — | | | — | | | — | | | — | |
90-119 days | 0.0 | | | — | | | — | | | — | | | — | | | — | |
120+ days | 0.1 | | | — | | | — | | | — | | | — | | | 0.1 | |
Total | $ | 4.4 | | | $ | 11.9 | | | $ | 16.2 | | | $ | 23.4 | | | $ | 0.0 | | | $ | 55.9 | |
(1) Primarily credit card receivables.
The year of origination of the Company's notes receivable and financing receivables is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Notes receivable, short and long-term | | Lease Receivables | | Equipment Notes | | Total |
| (In millions) |
2023 | $ | 4.7 | | | $ | — | | | $ | 0.5 | | | $ | 5.2 | |
2022 | 1.4 | | | 8.2 | | | — | | | 9.6 | |
2021 | 9.9 | | | 2.4 | | | — | | | 12.3 | |
2020 | 0.3 | | | 1.3 | | | — | | | 1.6 | |
2019 | — | | | 0.7 | | | — | | | 0.7 | |
Prior | — | | | 3.6 | | | 22.9 | | | 26.5 | |
Total | $ | 16.3 | | | $ | 16.2 | | | $ | 23.4 | | | $ | 55.9 | |
The Company does not place its financing receivables in non-accrual status.
6. Leases
The Company engages in leasing activity as both a lessee and a lessor. The Company currently leases from third parties the real property on which approximately 520 IHOP franchisee-operated restaurants and one Applebee's franchisee-operated restaurant are located; the Company (as lessor) subleases the property to the franchisees that operate those restaurants. The Company also leases property it owns to the franchisees that operate approximately 50 IHOP restaurants and one Applebee's restaurant. The Company leases from a third party the real property on which one Fuzzy's company-operated restaurant is located. The Company also leases office space for its principal corporate office in Pasadena, California and restaurant support centers in Leawood, Kansas, and Irving, Texas. The Company does not have a significant amount of non-real estate leases.
The Company's existing leases/subleases related to IHOP restaurants generally provide for an initial term of 20 to 25 years, with most having one or more five-year renewal options. Leases related to Applebee's restaurants generally have an initial term of 10 to 20 years, with renewal terms of five to 20 years. Option periods were not included in determining liabilities and right-of-use assets related to operating leases. Approximately 290 of the Company's leases met the sales levels that required variable rent payments to the Company (as lessor), based on a percentage of restaurant sales during the six months ended June 30, 2023. Approximately 40 of the leases met the sales levels that required variable rent payments by the Company (as lessee), based on a percentage of restaurant sales during the six months ended June 30, 2023.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Leases (Continued)
The Company's lease (income) cost for the three and six months ended June 30, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Finance lease cost: | | | | | | | |
Amortization of right-of-use assets | $ | 0.6 | | | $ | 1.1 | | | $ | 1.2 | | | $ | 2.2 | |
Interest on lease liabilities | 0.7 | | | 1.2 | | | 1.4 | | | 2.5 | |
Operating lease cost | 18.9 | | | 21.2 | | | 38.1 | | | 42.3 | |
Variable lease cost | 2.2 | | | 1.9 | | | 4.1 | | | 3.6 | |
Short-term lease cost | 0.0 | | 0.0 | | 0.0 | | 0.0 |
Sublease income | (27.0) | | | (26.6) | | | (56.5) | | | (53.1) | |
Lease income | $ | (4.6) | | | $ | (1.2) | | | $ | (11.7) | | | $ | (2.5) | |
Future minimum lease payments under noncancellable leases as lessee as of June 30, 2023 were as follows:
| | | | | | | | | | | |
| Finance Leases | | Operating Leases |
| (In millions) |
2023 (remaining six months) | $ | 3.8 | | | $ | 31.6 | |
2024 | 7.8 | | | 77.9 | |
2025 | 6.4 | | | 67.4 | |
2026 | 6.0 | | | 59.7 | |
2027 | 4.9 | | | 41.4 | |
Thereafter | 20.3 | | | 126.5 | |
Total minimum lease payments | 49.2 | | | 404.5 | |
Less: interest/imputed interest | (11.5) | | | (69.8) | |
Total obligations | 37.7 | | | 334.7 | |
Less: current portion | (5.9) | | | (58.7) | |
Long-term lease obligations | $ | 31.8 | | | $ | 276.0 | |
The weighted average remaining lease term as of June 30, 2023 was 6.1 years for finance leases and 6.1 years for operating leases. The weighted average discount rate as of June 30, 2023 was 9.3% for finance leases and 5.6% for operating leases.
During the three and six months ended June 30, 2023 and 2022, the Company made the following cash payments for leases:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Principal payments on finance lease obligations | $ | 1.7 | | | $ | 2.4 | | | $ | 3.6 | | | $ | 4.7 | |
Interest payments on finance lease obligations | 0.7 | | | 1.2 | | | 1.4 | | | 2.5 | |
Payments on operating leases | 20.4 | | | 22.8 | | | 41.3 | | | 45.8 | |
Variable lease payments | 2.1 | | | 1.8 | | | 4.2 | | | 3.9 | |
The Company's income from operating leases for the three and six months ended June 30, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Minimum lease payments | $ | 24.4 | | | $ | 24.0 | | | $ | 51.7 | | | $ | 47.8 | |
Variable lease income | 4.6 | | | 4.6 | | | 8.9 | | | 8.5 | |
Total operating lease income | $ | 29.0 | | | $ | 28.6 | | | $ | 60.6 | | | $ | 56.3 | |
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Leases (Continued)
Minimum payments to be received as lessor under noncancellable operating leases as of June 30, 2023 were as follows:
| | | | | |
| |
| (In millions) |
2023 (remaining six months) | $ | 52.5 | |
2024 | 97.6 | |
2025 | 85.1 | |
2026 | 70.9 | |
2027 | 53.2 | |
Thereafter | 141.3 | |
Total minimum rents receivable | $ | 500.6 | |
The Company's income from real estate leases for the three and six months ended June 30, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Interest income | $ | 0.3 | | | $ | 0.4 | | | $ | 0.6 | | | $ | 0.8 | |
Variable lease income | 0.1 | | | 0.2 | | | 0.2 | | | 0.4 | |
Selling (loss) profit | — | | | (0.1) | | | — | | | 0.4 | |
Total real estate lease income | $ | 0.4 | | | $ | 0.5 | | | $ | 0.8 | | | $ | 1.6 | |
Minimum payments to be received as lessor under noncancellable real estate leases as of June 30, 2023 were as follows:
| | | | | |
| |
| (In millions) |
2023 (remaining six months) | $ | 1.9 | |
2024 | 2.6 | |
2025 | 1.8 | |
2026 | 1.8 | |
2027 | 1.7 | |
Thereafter | 12.4 | |
Total minimum rents receivable | 22.2 | |
Less: unearned income | (6.0) | |
Total net investment in real estate leases | 16.2 | |
Less: current portion | (2.5) | |
Long-term investment in real estate leases | $ | 13.7 | |
7. Long-Term Debt
At June 30, 2023 and December 31, 2022, long-term debt consisted of the following components:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| (In millions) |
Series 2019-1 4.194% Fixed Rate Senior Secured Notes, Class A-2-I | $ | — | | | $ | 653.0 | |
Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II | 594.0 | | | 594.0 | |
Series 2022-1 Variable Funding Senior Secured Notes, Class A-1, variable interest rate of 7.70% and 7.29% at June 30, 2023 and December 31, 2022, respectively | 100.0 | | | 100.0 | |
Series 2023-1 7.824% Fixed Rate Senior Secured Notes, Class A-2 | 500.0 | | | — | |
Debt issuance costs | (10.5) | | | (5.1) | |
Long-term debt, net of debt issuance costs | 1,183.5 | | | 1,341.9 | |
Current portion of long-term debt | (100.0) | | | (100.0) | |
Long-term debt | $ | 1,083.5 | | | $ | 1,241.9 | |
On June 5, 2019, Applebee’s Funding LLC and IHOP Funding LLC (the “Co-Issuers”), each a special purpose, wholly-owned indirect subsidiary of the Company, issued two tranches of fixed rate senior secured notes, the Series 2019-1 4.194% Fixed Rate Senior Secured Notes, Class A-2-I (“2019 Class A-2-I Notes”) in an initial aggregate principal amount of $700
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
million and the Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II (“2019 Class A-2-II Notes”) in an initial aggregate principal amount of $600 million (the “2019 Class A-2-II Notes” and, together with the 2019 Class A-2-I Notes, the “2019 Class A-2 Notes”). The 2019 Class A-2 Notes were issued pursuant to an offering exempt from registration under the Securities Act of 1933, as amended.
On August 12, 2022, the Co-Issuers established a new revolving financing facility, the 2022-1 Variable Funding Senior Secured Notes, Class A-1 (the “Credit Facility”), that allows for drawings up to $325 million of variable funding notes on a revolving basis and the issuance of letters of credit. In connection with this transaction, the Co-Issuers terminated their $225 million revolving financing facility, the 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Previous Credit Facility”).
On April 17, 2023, the Co-Issuers completed a refinancing transaction and issued $500 million of Series 2023-1 7.824% Fixed Rate Senior Secured Notes, Class A-2 (the “2023 Class A-2 Notes”).The 2023 Class A-2 Notes were issued pursuant to an offering exempt from registration under the Securities Act of 1933, as amended. The Company used the net proceeds of the 2023 Class A-2 Notes to repay the entire outstanding balance of approximately $585 million of the 2019 Class A-2-I Notes and to pay fees and expenses incurred in connection with the issuance of the 2023 Class A-2 Notes. The remaining 2019 Class A-2-II Notes and the Credit Facility, together with the 2023 Class A-2 Notes are referred to collectively herein as the “Notes.” The Notes were issued in securitization transactions pursuant to which substantially all the domestic revenue-generating assets and domestic intellectual property held by the Co-Issuers and certain other special-purpose, wholly-owned indirect subsidiaries of the Company (the “Guarantors”) were pledged as collateral to secure the Notes.
The Notes were issued under a Base Indenture, dated as of September 30, 2014, amended and restated as of June 5, 2019 and further amended and restated as of April 17, 2023 (the “Base Indenture”). In addition, the 2019 Class A-2-II Notes were issued under the related Series 2019-1 Supplement to the Base Indenture, dated June 5, 2019 (the “Series 2019-1 Supplement”), among the Co-Issuers and Citibank, N.A., as the trustee (in such capacity, the “Trustee”) and securities intermediary, the Credit Facility was issued under the related Series 2022-1 Supplement to the Base Indenture, dated August 12, 2022 (“Series 2022-1 Supplement”), among the Co-Issuers and Citibank, N.A., as Trustee and securities intermediary, and the 2023 Class A-2 Notes were issued under the related Series 2023-1 Supplement to the Base Indenture, dated April 17, 2023 (the “Series 2023-1 Supplement”), among the Co-Issuers and Citibank, N.A., as Trustee and securities intermediary. The Base Indenture, Series 2019-1 Supplement, Series 2022-1 Supplement, and Series 2023-1 Supplement (collectively, the “Indenture”) will allow the Co-Issuers to issue additional series of notes in the future subject to certain conditions set forth therein.
2019 Class A-2 Notes
The 2019 Class A-2-I Notes were voluntarily repaid in full on April 17, 2023, while the 2019 Class A-2-II Notes remain outstanding as of June 30, 2023. For a description of the 2019 Class A-2-I Notes, refer to Note 8 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The legal final maturity of the 2019 Class A-2-II Notes is June 2049, but rapid amortization will apply if the 2019 Class A-2-II Notes are not repaid by June 2026 (the “2019 Class A-2-II Anticipated Repayment Date”). If the Co-Issuers have not repaid or refinanced the 2019 Class A-2-II Notes by the 2019 Class A-2-II Anticipated Repayment Date, then additional interest will accrue on the 2019 Class A-2-II Notes, as applicable, at the greater of: (A) 5.0% and (B) the amount, if any, by which the sum of the following exceeds the applicable 2019 Class A-2-II Note interest rate: (x) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on the 2019 Class A-2-II Anticipated Repayment Date of the United States Treasury Security having a term closest to 10 years plus (y) 7.64% for the 2019 Class A-2-II Notes.
While the 2019 Class A-2-II Notes are outstanding, payment of principal and interest is required to be made on the 2019 Class A-2-II Notes on a quarterly basis. The quarterly principal payment of $1.50 million on the 2019 Class A-2-II Notes may be suspended when the leverage ratio for the Company and its subsidiaries is less than or equal to 5.25x. Exceeding the leverage ratio of 5.25x does not violate any covenant related to the Notes. In general, the leverage ratio is the Company's indebtedness (as defined in the Indenture) divided by adjusted EBITDA (as defined in the Indenture) for the four preceding quarterly periods. The complete definitions of all calculation elements of the leverage ratio are contained in the Indenture.
As of June 30, 2023, the Company's leverage ratio was approximately 4.5x. As a result, quarterly principal payments on the 2019 Class A-2-II Notes of $1.50 million currently are not required.
The Company may voluntarily repay the 2019 Class A-2-II Notes at any time without any associated make-whole premium.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
2019 Class A-1 Notes
The Previous Credit Facility allowed for drawings up to $225 million of variable funding notes on a revolving basis and the issuance of letters of credit. There were no outstanding borrowings since March 2021 under the Previous Credit Facility until its termination in August 2022.
The interest rate for borrowings under the Previous Credit Facility was the three-month LIBOR rate plus 2.15% for 60% of the advances and the commercial paper funding rate of our conduit investor plus 2.15% for 40% of the advances.
2022 Class A-1 Notes
In August 2022, the Co-Issuers entered into the Credit Facility that allows for drawings up to $325 million of variable funding notes on a revolving basis and the issuance of letters of credit. The applicable interest rate under the Credit Facility depends on the type of borrowing by the Co-Issuers. The applicable interest rate for advances is generally calculated at a per annum rate equal to the commercial paper funding rate or one-, two-, three- or six-month Term SOFR Rate, in either case, plus 2.50%. The applicable interest rate for swingline advances and unreimbursed draws on outstanding letters of credit is a per annum base rate equal to the sum of (a) the greatest of (i) the Prime Rate in effect from time to time; (ii) the Federal Funds Rate in effect from time to time plus 0.50%; and (iii) Term SOFR for a one-month tenor in effect at such time plus 0.50% plus (b) 2.00%.
The legal final maturity of the Credit Facility is June 2052, but rapid amortization will apply if there are outstanding amounts under the Credit Facility after June 2027 (the “Class A-1 Renewal Date”). The Class A-1 Renewal Date may be extended at the Co-Issuers’ election for up to two successive one-year periods if certain conditions are met. If the Co-Issuers have not repaid or refinanced the Credit Facility by the Class A-1 Renewal Date (after giving effect to any extensions), then interest will accrue on the Credit Facility at a rate equal to 5.00% in addition to the regular interest rate applicable to the Credit Facility.
As of June 30, 2023, the outstanding balance of the Credit Facility was $100 million. The amount of $3.4 million was pledged against the Credit Facility for outstanding letters of credit, leaving $221.6 million of the Credit Facility available for borrowing at June 30, 2023. It is anticipated that any principal and interest on the Credit Facility outstanding will be repaid in full on or prior to the quarterly payment date in June 2027, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions. The letters of credit are used primarily to satisfy insurance-related collateral requirements. The weighted average interest rate for the period outstanding during the six months ended June 30, 2023 was 7.46%.
2023 Class A-2 Notes
The legal final maturity of the 2023 Class A-2 Notes is in March 2053, but it is anticipated that, unless repaid earlier to the extent permitted under the Indenture, the 2023 Class A-2 Notes will be repaid in June 2029 (the “2023 Class A-2 Anticipated Repayment Date”). If the Co-Issuers have not repaid or refinanced the 2023 Class A-2 Notes by the 2023 Class A-2 Anticipated Repayment Date, then additional interest will accrue on the 2023 Class A-2 Notes, as applicable, at the greater of: (A) 5.0% and (B) the amount, if any, by which the sum of the following exceeds the Series 2023-1 Class A-2 Note interest rate: (x) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on the 2023 Class A-2 Anticipated Repayment Date of the United States Treasury Security having a term closest to 10 years plus (y) 9.24% for the 2023 Class A-2 Notes.
While the 2023 Class A-2 Notes are outstanding, payment of principal and interest is required to be made on the 2023 Class A-2 Notes on a quarterly basis. The payment of principal on the 2023 Class A-2 Notes may be suspended when the leverage ratio for the Company and its subsidiaries is less than or equal to 5.25x.
As of June 30, 2023, the Company's leverage ratio was approximately 4.5x. As a result, quarterly principal payments on the 2023 Class A-2 Notes of $1.25 million currently are not required.
The Company may voluntarily repay the 2023 Class A-2 Notes at any time; however, if the 2023 Class A-2 Notes are repaid prior to certain dates, the Company would be required to pay make-whole premiums. As of June 30, 2023, the make-whole premium associated with voluntary prepayment of the 2023 Class A-2 Notes was approximately $45.1 million. The Company also would be subject to a make-whole premium in the event of a mandatory prepayment required following a Rapid Amortization Event or certain asset dispositions. The mandatory make-whole premium requirements are considered derivatives embedded in the Notes that must be bifurcated for separate valuation. The Company estimated the fair value of these derivatives to be immaterial as of June 30, 2023, based on the probability-weighted discounted cash flows associated with either event.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
Repurchase Program
On February 16, 2023, our Company's Board of Directors authorized a debt repurchase program of up to $100 million. Repurchases of the Company’s debt, if any, are expected to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption. Under the authorization, the Company may make repurchases of the Company's debt from time to time in the open market or in privately negotiated transactions upon such terms and at such prices as management may determine.
Covenants and Restrictions
The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including: (i) that the Co-Issuers maintain specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments, and the related payment of specified amounts, including specified call redemption premiums in the case of Class A-2 Notes under certain circumstances; (iii) certain indemnification payments in the event, among other things, the transfers of the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Notes are subject to customary rapid amortization events provided for in the Indenture, including events tied to failure of the Securitization Entities (as defined in the Indenture) to maintain the stated debt service coverage ratio (“DSCR”), the sum of domestic retail sales for all restaurants being below certain levels on certain measurement dates, certain manager termination events, certain events of default and the failure to repay or refinance the Class A-2 Notes on the anticipated repayment dates. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the Notes, failure of the Securitization Entities to maintain the stated DSCR, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties and certain judgments.
In general, the DSCR ratio is Net Cash Flow (as defined in the Indenture) for the four quarters preceding the calculation date divided by the total debt service payments (as defined in the Indenture) of the preceding four quarters. The complete definitions of the DSCR and all calculation elements are contained in the Indenture. Failure to maintain a prescribed DSCR can trigger a Cash Flow Sweeping Event, A Rapid Amortization Event, a Manager Termination Event or a Default Event (each as defined in the Indenture) as described below. In a Cash Flow Sweeping Event, the Trustee is required to retain 50% of excess Cash Flow (as defined in the Indenture) in a restricted account. In a Rapid Amortization Event, all excess Cash Flow is retained and used to retire principal amounts of debt. In a Manager Termination Event, the Company may be replaced as manager of the assets securitized under the Indenture. In a Default Event, the outstanding principal amount and any accrued but unpaid interest can be called to become immediately due and payable. Key DSCRs are as follows:
•DSCR less than 1.75x - Cash Flow Sweeping Event
•DSCR less than 1.20x - Rapid Amortization Event
•Interest-only DSCR less than 1.20x - Manager Termination Event
•Interest-only DSCR less than 1.10x - Default Event
The Company's DSCR for the reporting period ended June 30, 2023 was approximately 3.7x.
Debt Issuance Costs
2023 Class A-2 Notes
The Company incurred costs of approximately $8.0 million in connection with the issuance of the 2023 Class A-2 Notes. These debt issuance costs are being amortized using the effective interest method over the estimated life of the 2023 Class A-2 Notes. Amortization costs of $0.2 million were included in interest expense for the three and six months ended June 30, 2023. As of June 30, 2023, unamortized debt issuance costs of $7.8 million are reported as a direct reduction of the 2023 Series Class A-2 Notes in the Consolidated Balance Sheets.
2022 Class A-1 Notes
In August 2022, the Company incurred costs of approximately $6.3 million in connection with the issuance of the Credit Facility. These debt issuance costs are being amortized over the estimated life of the Credit Facility. Amortization of $0.3 million and $0.6 million, respectively, of these costs were included in interest expense for the three and six months ended June 30, 2023. As of June 30, 2023, unamortized debt issuance costs of $5.3 million related to the Credit Facility are classified as other non-current assets in the Consolidated Balance Sheets.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
2019 Class A-2 Notes
The Company incurred costs of approximately $12.9 million in connection with the issuance of the 2019 Class A-2 Notes. These debt issuance costs are being amortized using the effective interest method over estimated life of each tranche of the 2019 Class A-2 Notes. Amortization costs of $0.2 million and $1.1 million were included in interest expense for the three and six months ended June 30, 2023, respectively. Amortization costs of $0.1 million and $1.1 million were included in interest expense for the three and six months ended June 30, 2022, respectively. In connection with the repayment of the 2019 Class A-2-I Notes discussed above, the Company recognized as a loss on extinguishment of debt of $1.7 million, representing the related remaining unamortized debt issuance costs. As of June 30, 2023, unamortized debt issuance costs of $2.7 million are reported as a direct reduction of the 2019 Class A-2-II Notes in the Consolidated Balance Sheets.
2019 Class A-1 Notes
Amortization costs incurred in connection with the Previous Credit Facility of $0.2 million were included in interest expense for the six months ended June 30, 2022. In connection with the termination of the Previous Credit Facility in August 2022, the Company recognized as a loss on extinguishment of debt of $1.2 million, representing the remaining unamortized debt issuance costs associated with the Previous Credit Facility.
Loss (Gain) on Extinguishment of Debt
The Company purchased $67.9 million of its 2019 Class A-2-I Notes under par and recognized a $1.7 million gain on extinguishment of debt during the six months ended June 30, 2023.
In connection with the repayment of the 2019 Class A-2-I Notes, the Company recognized a loss on extinguishment of debt of $1.7 million, representing the remaining unamortized costs related to the 2019 Class A-2-I Notes.
Maturities of Long-term Debt
•The final maturity of the 2019 Class A-2 Notes is in June 2049, but it is anticipated that, unless repaid earlier, the 2019 Class A-2-II Notes will be repaid in June 2026.
•The final maturity of the 2023 Class A-2 Notes is in March 2053, but it is anticipated that, unless repaid earlier, the 2023 Class A-2 Notes will be repaid in June 2029.
•The renewal date of the Credit Facility is June 2027, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions.
•Quarterly principal payments on the 2019 Class A-2-II Notes totaling $1.50 million ($6.0 million per annum) are required if the Company's leverage ratio is greater than 5.25x.
•Quarterly principal payments on the 2023 Class A-2 Notes totaling $1.25 million ($5.0 million per annum) are required if the Company's leverage ratio is greater than 5.25x.
8. Stockholders' Equity
Deficit
Dividends
DuringDividends declared and paid per share for the ninesix months ended SeptemberJune 30, 2017,2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2023 | | 2022 | 2023 | | 2022 |
Dividends declared per common share | $ | 0.51 | | | $ | 0.51 | | $ | 1.02 | | | $ | 0.97 | |
Dividends paid per common share | $ | — | | | $ | — | | $ | 1.02 | | | $ | 0.86 | |
On December 2, 2022, the Company paid dividends on common stock of $52.3 million, representing cash dividends of $0.97 per share declared in the fourth quarter of 2016 and the first and second quarters of 2017. On August 10, 2017, the Company's Board of Directors declared a thirdfourth quarter 20172022 cash dividend of $0.97$0.51 per share of common stock. This dividend wasstock, paid on OctoberJanuary 6, 20172023 to the Company's stockholders of record atas of the close of business on September 18, 2017. The Company reported dividends payableDecember 17, 2022.
On February 21, 2023, the Board of $17.8 million at September 30, 2017.Directors declared a first quarter 2023 cash dividend of $0.51 per share of common stock, paid on March 31, 2023 to the stockholders of record as of the close of business on March 20, 2023.
On May 11, 2023, the Board of Directors declared a second quarter 2023 cash dividend of $0.51 per share of common stock, paid on July 7, 2023 to the stockholders of record as of the close of business on June 20, 2023.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. Stockholders' Deficit (Continued)
Stock Repurchase Program
In October 2015,February 2019, the Company'sCompany’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $150$200 million of DineEquitythe Company’s common stock (the “2015“2019 Repurchase Program”) on an opportunistic basis from time to time in the open market transactions andor in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The 20152019 Repurchase Program, as approved by the Board of Directors, does not require the repurchase of a specific number of shares and can be terminated at any time. A summary
On February 17, 2022, the Company's Board of Directors authorized a new share repurchase program, effective April 1, 2022, of up to $250 million (the “2022 Repurchase Program”). In connection with the approval of the 2022 Repurchase Program, the 2019 Repurchase Program terminated effective April 1, 2022.
During the six months ended June 30, 2023, the Company repurchased 212,492 shares of common stock at a cost of $14.0 million. Cumulatively, the Company repurchased 1,362,081 shares at a cost of $92.7 million under the 20152022 Repurchase Program, during the nine months ended September 30, 2017 and cumulatively, is as follows:
|
| | | | | | |
2015 Repurchase Program | Shares | | Cost of shares |
| | | (In millions) |
Repurchased during the three months ended September 30, 2017 | — |
| | $ | — |
|
Repurchased during the nine months ended September 30, 2017 | 145,786 |
| | $ | 10.0 |
|
Cumulative repurchases as of September 30, 2017 | 1,000,657 |
| | $ | 82.9 |
|
Remaining dollar value of shares that may be repurchased | n/a | | $ | 67.1 |
|
Program.
Treasury Stock
Repurchases of DineEquitythe Company's common stock are included in treasury stock at the cost of shares repurchased plus any transaction costs. Treasury stock may be re-issued when stock options are exercised, when restricted stock awards are granted and when restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is determined using the first-in, first-out (“FIFO”) method. During the ninesix months ended SeptemberJune 30, 2017,2023, the Company re-issued 273,376270,960 shares of treasury stock at a total FIFO cost of $9.8$12.9 million.
6.9. Income Taxes
The Company's effective tax rate was 6.4%24.7% for the ninesix months ended SeptemberJune 30, 20172023, as compared to 35.2%26.8% for the ninesix months ended SeptemberJune 30, 2016. The2022. The effective tax rate of 6.4% for the ninesix months ended SeptemberJune 30, 2017 (the tax benefit of $28.2 million on the pretax book loss of $444.3 million)2023 was significantly different than the statutory federal tax rate of 35% because the $358.2 million impairment of goodwill (see Note 4) is not deductible for federal income tax purposes and therefore has no associated tax benefit. The Company did recognize a tax benefit of $65.1 million as a discrete item relatedprior comparable period primarily due to the $173.4 million impairmentrecognition of Applebee's tradename.
higher excess tax benefits from stock-based compensation and lower non-deductible executive compensation.
The total gross unrecognized tax benefit as of SeptemberJune 30, 20172023 and December 31, 20162022 was $5.9$2.6 million and $3.9$2.1 million, respectively, excluding interest, penalties and related tax benefits. The Company estimates the unrecognized tax benefit as of June 30, 2023 may decrease over the upcoming 12 months by an amount up to $1.8$0.5 million related to settlements with taxing authorities and the lapse ofexpiring statutes of limitations. For the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to make a reasonably reliablereasonable estimate as to when cash settlement with a taxing authority will occur.
As of SeptemberJune 30, 2017,2023, accrued interest was $1.0$0.8 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. As of December 31, 2016,2022, accrued interest was $1.0$0.7 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of itsthe income tax provision recognized in itsthe Consolidated Statements of Comprehensive Income.
The Company files federal income tax returns and the Company or one of its subsidiaries filesfile income tax returns in various state and foreigninternational jurisdictions. With few exceptions, the Company is no longer subject to federal tax examinations by tax authorities for years before 2018 and state or non-United States tax examinations by tax authorities for years before 2011. The Internal Revenue Service commenced examination of the Company’s U.S. federal income tax return for the tax years 2011 to 2013 during the year. The examination is currently in process. The Company believes that adequate reserves have been provided relatingrelated to all matters contained in the tax periods open to examination.
DineEquity,Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7.10. Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense included in general and administrative expenses in the Consolidated Statements of Comprehensive Income:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Equity classified awards expense | $ | 3.5 | | | $ | 4.0 | | | $ | 5.3 | | | $ | 8.4 | |
Liability classified awards (credit) expense | (1.3) | | | 1.0 | | | (0.6) | | | 1.4 | |
Total stock-based compensation expense | $ | 2.2 | | | $ | 5.0 | | | $ | 4.7 | | | $ | 9.8 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
Total stock-based compensation expense: | | | | | | | |
Equity classified awards expense | $ | 1.3 |
| | $ | 2.6 |
| | $ | 9.0 |
| | $ | 8.3 |
|
Liability classified awards expense | — |
| | (0.5 | ) | | (1.1 | ) | | 0.6 |
|
Total pre-tax stock-based compensation expense | 1.3 |
| | 2.1 |
| | 7.9 |
| | 8.9 |
|
Book income tax benefit | (0.5 | ) | | (0.7 | ) | | (3.0 | ) | | (3.3 | ) |
Total stock-based compensation expense, net of tax | $ | 0.8 |
| | $ | 1.4 |
| | $ | 4.9 |
| | $ | 5.6 |
|
As of SeptemberJune 30, 2017,2023, total unrecognized compensation expense of $17.6$22.3 million related to restricted stock and restricted stock units and $3.2$3.6 million related to stock options are expected to be recognized over a weighted average period of 2.11.5 years for restricted stock and restricted stock units and 1.91.5 years for stock options.
Fair Value Assumptions
The Company granted 537,030 stock options during the nine months ended September 30, 2017 for which the fair value was estimated using a Black-Scholes option pricing model. The following table summarizes the assumptions used in the Black-Scholes model:
model for stock options granted during the six months ended June 30, 2023: |
| | | | |
Risk-free interest rate | 1.94.4 | % |
Weighted average historicalHistorical volatility | 22.970.9 | % |
Dividend yield | 7.32.7 | % |
Expected years until exercise | 4.5 |
|
Weighted average fairFair value of options granted | $4.3137.35 |
The Company granted 350,000 performance-based stock options and 175,000 performance-based restricted stock units during the three months ended September 30, 2017 for which the fair value was estimated using a Monte Carlo simulation method. The following summarizes the assumptions used in estimating the fair values:
|
| | |
Risk-free interest rate | 1.6 | % |
Weighted average historical volatility | 30.0 | % |
Dividend yield | 9.6 | % |
Expected years until exercise | 3.4 |
|
Weighted average fair value of options granted | $3.07 |
Weighted average fair value of restricted stock units granted | $10.19 |
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Stock-Based Compensation (Continued)
Equity Classified Awards - Stock Options
Stock option balances at SeptemberJune 30, 2017,2023, and activity for the ninesix months ended SeptemberJune 30, 20172023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares Under Option | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term (in Years) | | Aggregate Intrinsic Value (in Millions) |
Outstanding at December 31, 2022 | | 539,575 | | | $ | 75.65 | | | | | |
Granted | | 72,291 | | | 74.94 | | | | | |
Exercised | | (69,443) | | | 54.90 | | | | | |
Expired | | (55,879) | | | 82.17 | | | | | |
Forfeited | | (20,375) | | | 79.22 | | | | | |
Outstanding at June 30, 2023 | | 466,169 | | | 77.69 | | | 6.2 | | $ | 0.3 | |
Vested at June 30, 2023 and Expected to Vest | | 449,236 | | | 77.84 | | | 6.1 | | $ | 0.3 | |
Exercisable at June 30, 2023 | | 325,063 | | | $ | 57.61 | | | 5.1 | | $ | 0.3 | |
|
| | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in Years) | | Aggregate Intrinsic Value (in Millions) |
Outstanding at December 31, 2016 | | 701,134 |
| | $ | 80.04 |
| | | | |
|
Granted | | 887,030 |
| | 48.35 |
| | | | |
|
Exercised | | (64,916 | ) | | 40.59 |
| | | | |
|
Expired | | (58,217 | ) | | 84.43 |
| | | | |
Forfeited | | (171,847 | ) | | 65.82 |
| | | | |
|
Outstanding at September 30, 2017 | | 1,293,184 |
| | 61.98 |
| | 7.3 | | $ | 0.9 |
|
Vested at September 30, 2017 and Expected to Vest | | 1,111,610 |
| | 64.50 |
| | 7.0 | | $ | 0.6 |
|
Exercisable at September 30, 2017 | | 456,308 |
| | $ | 81.35 |
| | 3.3 | | $ | 0.0 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price of the Company’s common stock on the last trading day of the thirdsecond quarter of 20172023 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on SeptemberJune 30, 2017.2023. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock and the number of in-the-money options.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Stock-Based Compensation (Continued)
Equity Classified Awards - Restricted Stock and Restricted Stock Units
Outstanding balances as of SeptemberJune 30, 2017,2023, and activity related to restricted stock and restricted stock units for the ninesix months ended SeptemberJune 30, 20172023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares of Restricted Stock | | Weighted Average Grant Date Fair Value | | Stock-Settled Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2022 | | 355,900 | | | $ | 73.57 | | | 123,895 | | | $ | 62.11 | |
Granted | | 201,517 | | | 74.16 | | | 20,540 | | | 74.01 | |
Released | | (141,487) | | | 75.01 | | | (46,228) | | | 63.66 | |
Forfeited | | (50,180) | | | 73.05 | | | (39,294) | | | 77.23 | |
Outstanding at June 30, 2023 | | 365,750 | | | $ | 73.41 | | | 58,913 | | | $ | 54.62 | |
|
| | | | | | | | | | | | | | |
| | Restricted Stock | | Weighted Average Grant Date Fair Value | | Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2016 | | 235,472 |
| | $ | 92.81 |
| | 34,058 |
| | $ | 93.95 |
|
Granted | | 208,460 |
| | 52.08 |
| | 275,578 |
| | 22.37 |
|
Released | | (89,911 | ) | | 88.65 |
| | (12,683 | ) | | 81.63 |
|
Forfeited | | (73,409 | ) | | 79.44 |
| | — |
| | — |
|
Outstanding at September 30, 2017 | | 280,612 |
| | $ | 67.38 |
| | 296,953 |
| | $ | 28.39 |
|
Liability Classified Awards - Cash-settled Restricted Stock Units
The Company has granted cash-settled restricted stock units to certain employees in the past. These instruments were recorded as liabilities at fair value as of the respective period end.
There have been no liabilities related to cash-settled restricted stock units since the first quarter of 2022. For the six months ended June 30, 2022, an expense of$0.2 million was included as stock-based compensation expense related to cash-settled restricted stock units.
Liability Classified Awards - Long-Term Incentive Awards
The Company has granted cash long-term incentive awards (“LTIP awards”) to certain employees. Annual LTIP awards vest over a three-yearthree-year period and are determined using a multipliermultipliers from 0% to 200% of the target award based on the total stockholder return of DineEquityDine Brands Global common stock compared to the total stockholder returns of a peer group of companies. Although LTIP awards are only paid in cash, since the multiplier is based on the price of the Company's common stock, theThe awards are considered stock-based compensation in accordance with U.S. GAAP and are classified as liabilities.liabilities measured at fair value as of the respective period end. For the three months ended SeptemberJune 30, 2017, no expense was recognized. For the three months ended September 30, 2016,2023 and 2022, a credit of $0.5 million was included in total stock-based compensation expense related to LTIP awards. For the nine months ended September 30, 2017 and 2016, a credit of $1.0$1.3 million and an expense of $0.6$1.0 million, respectively, were included in total stock-based compensation expense related to LTIP awards. For the six months ended June 30, 2023 and 2022, a credit of $0.6 million and an expense of $1.3 million, respectively, was included in total stock-based compensation expense related to LTIP awards. At SeptemberJune 30, 20172023 and December 31, 2016,2022, liabilities of less than $0.1$1.5 million and liabilities of $1.2$2.1 million, respectively, related to LTIP awards werewas included as part of accrued employee compensation and benefits in the Consolidated Balance Sheets.
DineEquity,Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. Net Income per Share
8.The computation of the Company's basic and diluted net income per share is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In thousands, except per share data) |
Numerator for basic and diluted income per common share: | | | | | | | |
Net income | $ | 18,248 | | | $ | 23,962 | | | $ | 45,658 | | | $ | 48,812 | |
Less: Net income allocated to unvested participating restricted stock | (446) | | | (673) | | | (1,125) | | | (1,273) | |
Net income available to common stockholders - basic | 17,802 | | | 23,289 | | | 44,533 | | | 47,539 | |
Effect of unvested participating restricted stock in two-class calculation | — | | | 1 | | | — | | | 1 | |
Net income available to common stockholders - diluted | $ | 17,802 | | | $ | 23,290 | | | $ | 44,533 | | | $ | 47,540 | |
Denominator: | | | | | | | |
Weighted average outstanding shares of common stock - basic | 15,308 | | | 16,050 | | | 15,304 | | | 16,386 | |
Dilutive effect of stock options | 9 | | | 30 | | | 20 | | | 32 | |
Weighted average outstanding shares of common stock - diluted | 15,317 | | | 16,080 | | | 15,324 | | | 16,418 | |
Net income per common share: | | | | | | | |
Basic | $ | 1.16 | | | $ | 1.45 | | | $ | 2.91 | | | $ | 2.90 | |
Diluted | $ | 1.16 | | | $ | 1.45 | | | $ | 2.91 | | | $ | 2.90 | |
12. Segments
The Company identifies its reporting segments based on the organizational units used by management to monitor performance and make operating decisions. The Company currently has threesix operating segments: Applebee's franchise operations, IHOP franchise operations, Fuzzy's franchise operations, rental operations, financing operations, and company-operated restaurant operations. The Company has four reporting segments: franchise operations (an aggregation of Applebee’s and IHOPeach restaurant concept's franchise operations), company-operated restaurant operations, rental operations and financing operations. Prior to June 2017, the Company operated 10 IHOP restaurants and those operations were considered to be a fourth operating segment. The Company views all operating segments as reportable segments regardless of whether an operating segment exceeds 10% of consolidated revenues, segment profit or total assets.
As of SeptemberJune 30, 2017,2023, the franchise operations segment consisted of (i) 1,9451,661 restaurants operated by Applebee’s franchisees in the United States, two U.S. territories and 1413 countries outside the United States and (ii) 1,761States; 1,790 restaurants operated by IHOP franchisees and area licensees in the United States, threetwo U.S. territories and 13 countries outside the United States; and 137 restaurants operated by Fuzzy's franchisees in the United States. Franchise operations revenue consists primarily of franchise royalty revenues, franchise advertising revenue, sales of proprietary products to franchisees (primarily pancake and waffle dry mixes for the IHOP restaurants), franchise advertising fees from domestic IHOP restaurants and international restaurants of both brands andother franchise fees. Franchise operations expenses include advertising expenses from domestic IHOP restaurants and international restaurants of both brands,expense, the cost of IHOP proprietary products, bad debt expense, franchisor contributions to marketing funds, pre-opening training expenses and other franchise-related costs.
Rental operations revenue includes revenue from operating leases and interest income from direct financingreal estate leases. Rental operations expenses are costs of operating leases and interest expense from capitalfinance leases on franchisee-operated restaurants.
Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, utilities, rent and other restaurant operating costs. In June 2017,which the Company refranchised nine of ten company-operated restaurants inis the Cincinnati, Ohio market area; the one restaurant not refranchised was permanently closed. As a result, the Company no longer operates any IHOP restaurants on a permanent basis. The Company has not presented these restaurants as discontinued operations as defined by U.S. GAAP because the refranchising of nine restaurants out of a total of over 3,700 restaurants did not represent a strategic shift that had a major effect on the Company's operations.
From time to time, the Company may operate IHOP restaurants reacquired from franchisees on a temporary basis until those restaurants are refranchised. There were no IHOP restaurants under temporary operation at September 30, 2017.
lessee.
Financing operations revenue primarily consists of interest income from the financing of IHOP equipment leases and franchise fees and equipment leases and sales of equipment associated with refranchised IHOP restaurants.interest income on Applebee's notes receivable from franchisees. Financing operations expenses primarily are primarily the cost of taxes related to IHOP equipment leases.
During the three and six months ended June 30, 2023, the company restaurants segment consisted of three Fuzzy's restaurants that were acquired in December 2022 of which two were subsequently refranchised in 2023. During three and six months ended June 30, 2022, the Company operated 69 Applebee's restaurants that were refranchised in October 2022. All company-operated restaurants are located in the United States. Company-operated restaurant equipment associated with refranchised IHOPoperation revenue consists of retail sales at company operated restaurants.
Company-operated restaurant operation expenses are operating expenses such as food, beverage, labor, benefits, utilities, rent and other operating costs.
DineEquity,Dine Brand Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8.12. Segments (Continued)
Information on segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (In millions) |
Revenues from external customers: | | | | | | | | |
Franchise operations | | 177.9 | | | $ | 168.3 | | | 357.9 | | | $ | 329.5 | |
Rental operations | | 29.4 | | | 29.1 | | | 61.4 | | | 57.9 | |
Company restaurants | | 0.5 | | | 39.5 | | | 1.5 | | | 78.9 | |
Financing operations | | 0.6 | | | 0.9 | | | 1.4 | | | 1.9 | |
Total | | $ | 208.4 | | | 237.8 | | | $ | 422.2 | | | $ | 468.2 | |
| | | | | | | | |
Interest expense: | | | | | | | | |
Rental operations | | $ | 1.0 | | | $ | 1.0 | | | $ | 2.0 | | | $ | 2.2 | |
Company restaurants | | — | | | 0.8 | | | — | | | 1.6 | |
Corporate | | 17.8 | | | 15.4 | | | 32.5 | | | 30.9 | |
Total | | $ | 18.8 | | | $ | 17.2 | | | $ | 34.5 | | | $ | 34.7 | |
| | | | | | | | |
Depreciation and amortization: | | | | | | | | |
Franchise operations | | $ | 2.4 | | | $ | 2.5 | | | $ | 4.9 | | | $ | 5.0 | |
Rental operations | | 2.6 | | | 2.6 | | | 5.3 | | | 5.3 | |
Company restaurants | | 0.0 | | | 1.9 | | | 0.0 | | | 3.8 | |
Corporate | | 3.3 | | | 3.0 | | | 7.5 | | | 5.9 | |
Total | | $ | 8.4 | | | $ | 10.0 | | | $ | 17.7 | | | $ | 20.0 | |
| | | | | | | | |
Gross profit by segment: | | | | | | | | |
Franchise operations | | $ | 89.6 | | | $ | 86.0 | | | $ | 182.2 | | | $ | 169.2 | |
Rental operations | | 7.2 | | | 7.2 | | | 17.5 | | | 13.9 | |
Company restaurants | | 0.0 | | | 1.6 | | | 0.0 | | | 3.6 | |
Financing operations | | 0.5 | | | 0.9 | | | 1.2 | | | 1.7 | |
Total gross profit | | 97.3 | | | 95.7 | | | 201.0 | | | 188.4 | |
Corporate and unallocated expenses, net | | (72.9) | | | (63.2) | | | (140.4) | | | (121.8) | |
Income before income taxes | | $ | 24.4 | | | $ | 32.5 | | | $ | 60.6 | | | $ | 66.7 | |
13. Closure and Impairment Charges
Closure and impairment charges for the three and six months ended June 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Closure charges | $ | 0.4 | | | $ | 1.0 | | | $ | 0.8 | | | $ | 1.2 | |
Long-lived tangible asset impairment | 0.4 | | | 0.3 | | | 0.5 | | | 0.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total closure and impairment charges | $ | 0.8 | | | $ | 1.3 | | | $ | 1.3 | | | $ | 1.5 | |
The closure charges for the three and six months ended June 30, 2023 are related to revisions to existing closure reserves, including accretion, approximately 30 IHOP restaurants.
The closure charges for the three and six months ended June 30, 2022 are related to the establishment of or revisions to existing closure reserves for approximately 35 IHOP restaurants.
The long-lived asset impairment for the three and six months ended June 30, 2023 primarily related to technology that were developed in connection with the IHOP Flip'd initiative that was stopped. Long-lived intangible asset impairment charges for the three and six months ended June 30, 2022 related to the impairment of land and buildings for two IHOP restaurants located on sites owned by the Company.
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In millions) |
Revenues from external customers: | | |
| | |
| | | | |
Franchise operations | | $ | 112.3 |
| | $ | 119.2 |
| | $ | 351.4 |
| | $ | 366.7 |
|
Rental operations | | 30.3 |
| | 30.5 |
| | 90.9 |
| | 92.7 |
|
Company restaurants | | — |
| | 4.0 |
| | 7.5 |
| | 13.4 |
|
Financing operations | | 2.1 |
| | 2.3 |
| | 6.3 |
| | 7.0 |
|
Total | | $ | 144.7 |
| | $ | 156.0 |
| | $ | 456.0 |
| | $ | 479.8 |
|
| | | | | | | | |
Interest expense: | | |
| | |
| | | | |
Rental operations | | $ | 2.6 |
| | $ | 2.9 |
| | $ | 8.0 |
| | $ | 9.0 |
|
Company restaurants | | — |
| | 0.1 |
| | 0.2 |
| | 0.3 |
|
Corporate | | 15.4 |
| | 15.4 |
| | 46.5 |
| | 46.1 |
|
Total | | $ | 18.0 |
| | $ | 18.4 |
| | $ | 54.7 |
| | $ | 55.4 |
|
| | | | | | | | |
Depreciation and amortization: | | |
| | |
| | | | |
Franchise operations | | $ | 2.7 |
| | $ | 2.7 |
| | $ | 8.1 |
| | $ | 7.9 |
|
Rental operations | | 3.0 |
| | 3.1 |
| | 9.1 |
| | 9.4 |
|
Company restaurants | | — |
| | 0.1 |
| | 0.1 |
| | 0.3 |
|
Corporate | | 1.9 |
| | 1.5 |
| | 5.8 |
| | 5.3 |
|
Total | | $ | 7.6 |
| | $ | 7.4 |
| | $ | 23.1 |
| | $ | 22.9 |
|
| | | | | | | | |
Gross profit, by segment: | | |
| | |
| | | | |
Franchise operations | | $ | 70.5 |
| | $ | 81.9 |
| | $ | 235.7 |
| | $ | 258.7 |
|
Rental operations | | 8.0 |
| | 7.7 |
| | 23.2 |
| | 23.7 |
|
Company restaurants | | (0.0 | ) | | (0.2 | ) | | (0.3 | ) | | (0.7 | ) |
Financing operations | | 1.6 |
| | 2.3 |
| | 5.9 |
| | 6.8 |
|
Total gross profit | | 80.1 |
| | 91.7 |
| | 264.5 |
| | 288.5 |
|
Corporate and unallocated expenses, net | | (588.4 | ) | | (54.2 | ) | | (708.8 | ) | | (170.1 | ) |
(Loss) income before income tax provision | | $ | (508.3 | ) | | $ | 37.5 |
| | $ | (444.3 | ) | | $ | 118.3 |
|
DineEquity,Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Net (Loss) Income per Share
The computation of the Company's basic and diluted net (loss) income per share is as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share data) |
Numerator for basic and diluted (loss) income per common share: | |
| | |
| | | | |
Net (loss) income | $ | (451,718 | ) | | $ | 24,273 |
| | $ | (416,075 | ) | | $ | 76,645 |
|
Less: Net loss (income) allocated to unvested participating restricted stock | 8,496 |
| | (338 | ) | | 6,921 |
| | (1,103 | ) |
Net (loss) income available to common stockholders - basic | (443,222 | ) | | 23,935 |
| | (409,154 | ) | | 75,542 |
|
Effect of unvested participating restricted stock in two-class calculation | — |
| | 1 |
| | 5 |
| | 3 |
|
Net (loss) income available to common stockholders - diluted | $ | (443,222 | ) | | $ | 23,936 |
| | $ | (409,149 | ) | | $ | 75,545 |
|
Denominator: | |
| | |
| | | | |
Weighted average outstanding shares of common stock - basic | 17,742 |
| | 17,950 |
| | 17,718 |
| | 18,099 |
|
Dilutive effect of stock options | — |
| | 91 |
| | — |
| | 102 |
|
Weighted average outstanding shares of common stock - diluted | 17,742 |
| | 18,041 |
| | 17,718 |
| | 18,201 |
|
Net (loss) income per common share: | |
| | |
| | | | |
Basic | $ | (24.98 | ) | | $ | 1.33 |
| | $ | (23.09 | ) | | $ | 4.17 |
|
Diluted | $ | (24.98 | ) | | $ | 1.33 |
| | $ | (23.09 | ) | | $ | 4.15 |
|
For the three and nine months ended September 30, 2017, diluted loss per common share was computed using the weighted average number of shares outstanding during each period as the 1,000 and 11,000 shares, respectively, from common stock equivalents would have been antidilutive.
10.14. Fair Value Measurements
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required.
The Company believes the fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short duration.
The fair values of the Company's Series 2014-1 Class A-2 Notes (the “Class A-2 Notes”)long-term debt, excluding the Credit Facility, at SeptemberJune 30, 20172023 and December 31, 20162022 were as follows:
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | (In millions) |
Long-term debt, current and long-term | | $ | 1,285.2 |
| | $ | 1,274.0 |
| | $ | 1,282.7 |
| | $ | 1,286.2 |
|
| | | | | | | | | | | | | | | |
| | June 30, 2023 | December 31, 2022 |
| | (In millions) |
Face Value | | $ | 1,094.0 | | | $ | 1,247.0 | | |
Fair Value | | $ | 1,042.4 | | | $ | 1,736.9 | | |
The fair values were determined based on Level 2 inputs, including information gathered from brokers who trade in the Company’s Class A-2 Notes andlong-term debt, as well as information on notes that are similar to those of the Company.
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11.15. Commitments and Contingencies
Litigation, Claims and Disputes
The Company is subject to various lawsuits, administrative proceedings, audits and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The Company is required under U.S. GAAP to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of the Company's litigation are expensed as such fees and expenses are incurred. Management regularly assesses the Company's insurance coverage, analyzes litigation information with the Company's attorneys and evaluates the Company's loss experience in connection with pending legal proceedings. While the Company does not presently believe that any of the legal proceedings to which it is currently a party will ultimately have a material adverse impact on the Company, there can be no assurance that the Company will prevail in all the proceedings the Company is party to, or that the Company will not incur material losses from them.
Lease Guarantees
In connection with the salerefranchising of Applebee’s restaurants or previous brands to franchisees, and other parties, the Company has, in certain cases, guaranteed or has potential continuing liability for lease payments totaling $325.2$424.2 million as of SeptemberJune 30, 2017.2023. This amount represents the maximum potential liability for future payments under these leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 20172023 through 2048.2058. Excluding unexercised option periods, the Company's potential liability for future payments under these leases is $54.5$95.8 million. In the event of default, the indemnity and default clauses in the sale or assignment agreements govern the Company's ability to pursue and recover damages incurred.No material lease payment guarantee liabilities have been recorded as of September 30, 2017.
12. Allowance for Credit Losses
The Company's allowance for credit losses at September 30, 201716. Cash, Cash Equivalents and December 31, 2016 was $13.1 million and $3.1 million, respectively.
13. Restricted Cash
Cash and Cash Equivalents
The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. These cash equivalents are stated at cost which approximates market value. Cash held related to IHOP advertising funds and the Company's gift card programs is not considered to be restricted cash as there are no restrictions on the use of these funds.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. Cash, Cash Equivalents and Restricted Cash (Continued)
The components of cash and cash equivalents were as follows:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| (In millions) |
Money market funds | $ | 3.0 | | | $ | 75.0 | |
IHOP advertising funds and gift card programs | 73.5 | | | 96.7 | |
Other depository accounts | 21.5 | | | 98.0 | |
Total cash and cash equivalents | $ | 98.0 | | | $ | 269.7 | |
Current Restricted Cash
Current restricted cash of $31.3 million at September 30, 2017 primarily consisted of $23.9 million of funds required to be held in trust in connection with the Company's securitized debt and $7.0 million of funds from Applebee's franchisees pursuant to franchise agreements, usage of which was restricted to advertising activities. Current
The components of current restricted cash of $30.3 million at December 31, 2016 primarily consisted of $25.7 million of funds required to be held in trust in connection with the Company's securitized debt and $4.3 million of funds from Applebee's franchisees pursuant to franchise agreements, usage of which was restricted to advertising activities. were as follows:
| | | | | | | | | | | |
| |
| June 30, 2023 | | December 31, 2022 |
| (In millions) |
Securitized debt reserves | $ | 33.8 | | | $ | 32.4 | |
Applebee's advertising funds | 4.1 | | | 5.4 | |
Other | 1.4 | | | 1.1 | |
Total current restricted cash | $ | 39.4 | | | $ | 38.9 | |
Non-current Restricted Cash
Non-current restricted cash of $14.7was $19.5 million and $16.4 million at SeptemberJune 30, 20172023 and December 31, 20162022, respectively, and represents interest reserves required to be set aside for the duration of the Company's securitized debt.
14. Refranchising
In June 2017, the Company completed the refranchising and sale of related restaurant assets of nine company-operated IHOP restaurants in the Cincinnati, Ohio market area. As part of the transaction, the Company entered into an asset purchase agreement, nine franchise agreements and nine sublease agreements for land and buildings. The Company compared the stated rent under the sublease agreements with comparable market rents and recorded net favorable lease assets of $2.3 million in connection with the transaction. The Company also received cash of $1.1 million and a note receivable for $4.8 million. After allocating a portion of the consideration to franchise fees and derecognition of the assets sold, the Company recognized a gain of $6.2 million on the refranchising and sale during the nine months ended September 30, 2017.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking Statements
Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. The forward-looking statements contained in this report are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report.
Overview
The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes theretoreport and the MD&A contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022. Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the section of this report under the heading “Cautionary Statement Regarding Forward-Looking Statements” for more information. Except where the context indicates otherwise, the words “we,” “us,” “our,” “DineEquity”“Dine Brands Global” and the “Company” refer to DineEquity,Dine Brands Global, Inc., together with its subsidiaries that are consolidated in accordance with United States generally accepted accounting principles (“U.S. GAAP”).
Overview
Through various subsidiaries, we own and franchise the Applebee's Neighborhood Grill & Bar® (“Applebee's”) concept in the bar and grillAmerican full-service segment within the casual dining category of the restaurant industry, and the International House of Pancakes® (“IHOP”) concept in the mid-scale full-service restaurant segment within the family dining category of the restaurant industry, and the Fuzzy's Taco Shop® (“Fuzzy's”) concept in the Mexican limited-service restaurant segment within the fast-casual dining category of the restaurant industry. References herein to Applebee's®, IHOP®and IHOPFuzzy's Taco Shop® restaurants are to these twothree restaurant concepts, whether operated by franchisees, or area licensees and their sub-licensees (collectively, “area licensees”). or by us. With over 3,700almost 3,600 franchised and company-operated restaurants combined, all of which are franchised, we believe we are one of the largest full-service restaurant companies in the world. The June 19, 2017 issue of Nation's Restaurant News reported that
We identify our business segments based on the organizational units used by management to monitor performance and make operating decisions. We currently have six operating segments: Applebee's franchise operations, IHOP franchise operations, Fuzzy's franchise operations, rental operations, financing operations, and Applebee's were the largestcompany-operated restaurant systems in the family dining and casual dining categories, respectively, in terms of United States system-wide sales during 2016. This marks the tenth consecutive year our two brandsoperations. We have achieved the number one ranking in Nation's Restaurant News.
The Company currently has three operatingfour reportable segments: franchise operations (an aggregation of Applebee’s and IHOPeach restaurant concept's franchise operations), rental operations, financing operations, and financingcompany-operated restaurant operations. Prior to June 2017,
We acquired Fuzzy's in December 2022 and the Company operated 10results of its operations are included herein. However, comparative key performance indicators in the following sections only include the results of operations of Applebee's and IHOP, restaurants and those operations were considered to be a fourth operating segment. The Company views all operating segmentsunless otherwise noted, as reportable segments regardless of whether an operating segment exceeds 10% of consolidated revenues, segment profit or total assets.
prior period data is not available for Fuzzy’s.
Key Financial Results
The financial tables appearing in this MD&A present amounts in millions of dollars that are rounded from our consolidated financial statements presented in thousands of dollars. As a result, the tables may not foot or crossfoot due to rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| 2023 | | 2022 | | 2023 | | 2022 | |
| (In millions, except per share data) |
Income before income taxes | $ | 24.4 | | | $ | 32.5 | | | $ | (8.1) | | | $ | 60.6 | | | $ | 66.7 | | | $ | (6.1) | |
Income tax provision | (6.2) | | | (8.6) | | | 2.4 | | | (14.9) | | | (17.9) | | | 3.0 | |
Net income | $ | 18.2 | | | $ | 24.0 | | | $ | (5.7) | | | $ | 45.7 | | | $ | 48.8 | | | $ | (3.2) | |
| | | | | | | | | | | |
Effective tax rate | 25.3 | % | | 26.3 | % | | 1.0 | % | | 24.7 | % | | 26.8 | % | | 2.1 | % |
| | | | | | | | | | | |
Net income per diluted share | $ | 1.16 | | | $ | 1.45 | | | $ | (0.29) | | | $ | 2.91 | | | $ | 2.90 | | | $ | 0.01 | |
| | | | | % increase | | | | | | % increase |
Weighted average diluted shares | 15.3 | | | 16.1 | | | (5.0) | % | | 15.3 | | | 16.4 | | | (6.7) | % |
The effective tax rate for the three and six months ended June 30, 2023 was different than the rate of the prior comparable periods primarily due to the recognition of higher excess tax benefits from stock-based compensation and lower non-deductible executive compensation.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | (In millions, except per share data) |
(Loss) income before income taxes | | $ | (508.3 | ) | | $ | 37.5 |
| | $ | (545.8 | ) | | $ | (444.3 | ) | | $ | 118.3 |
| | $ | (562.7 | ) |
Income tax benefit (provision) | | 56.6 |
| | (13.2 | ) | | 69.8 |
| | 28.2 |
| | (41.7 | ) | | 69.9 |
|
Net (loss) income | | $ | (451.7 | ) | | $ | 24.3 |
| | $ | (476.0 | ) | | $ | (416.1 | ) | | $ | 76.6 |
| | $ | (492.7 | ) |
| | | | | | | | | | | | |
Effective tax rate | | 11.1 | % | | 35.3 | % | | (24.2 | )% | | 6.4 | % | | 35.2 | % | | (28.8 | )% |
| | | | | | | | | | | | |
| | | | | | % increase (decrease) | | | | | | % increase (decrease) |
Net (loss) income per diluted share | | $ | (24.98 | ) | | $ | 1.33 |
| | n.m | | $ | (23.09 | ) | | $ | 4.15 |
| | n.m. |
Weighted average shares | | 17.7 |
| | 18.0 |
| | (1.7 | )% | | 17.7 |
| | 18.2 |
| | (2.7 | )% |
n.m. - percentage change is not meaningful
The following sets forthtable highlights the significant reasons forprimary components of the decreasesdecrease in our income before income taxes between each offor the three and ninesix months ended SeptemberJune 30, 2017 and2023, compared to our income before income taxes for the respective comparable periods of 2016:prior period (in millions):
| | | | | | | | |
| Favorable (Unfavorable) Variance |
| Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 |
Increase in gross profit: | | |
Applebee's franchise operations | $ | — | | $ | 0.9 | |
IHOP franchise operations | 0.2 | | 5.4 | |
Fuzzy's franchise operations | 3.4 | | 6.8 | |
Company restaurant operations | (1.6) | | (3.6) | |
Rental and financing operations | (0.4) | | 3.1 | |
Total increase in gross profit | 1.6 | | 12.6 | |
Increase in general and administrative ("G&A") expenses | (3.8) | | (13.3) | |
Interest expense, net | (2.4) | | (1.6) | |
Loss on disposition of assets | (2.3) | | (3.6) | |
Other | (1.3) | | (0.0) | |
Decrease in income before income taxes | $ | (8.1) | | $ | (6.1) | |
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| | (In millions) | |
Impairment of Applebee's goodwill and tradename | | $ | (531.6 | ) | | | | $ | (531.6 | ) | |
Decrease in gross profit: | | | | | | | |
Applebee's franchise operations | | (10.8 | ) | | | | (23.4 | ) | |
All other operations | | (0.8 | ) | | | | (0.6 | ) | |
Total gross profit decrease | | (11.6 | ) | | | | (24.0 | ) | |
Increase in General and Administrative (“G&A”) expenses: | | | | | | | |
Executive separation costs | | — |
| | | | (8.8 | ) | |
All other G&A | | (2.0 | ) | | | | (5.0 | ) | |
Total G&A increase | | (2.0 | ) | | | | (13.8 | ) | |
Gain on disposition of assets | | 0.1 |
| | | | 7.1 |
| |
Other | | (0.7 | ) | | | | (0.4 | ) | |
Decrease in income before income taxes | | $ | (545.8 | ) | | | | $ | (562.7 | ) | |
We performed an interim quantitative test of impairment of Applebee's goodwill and tradename duringIncome before income taxes for the three and six months ended SeptemberJune 30, 2017. As2023 decreased compared to the comparable prior periods primarily due to the increase in G&A expenses and loss on disposition of assets primarily related to the stopping of our IHOP Flip'd initiative, partially offset by the increase in revenue from franchise operations including our recently acquired Fuzzy's Taco Shop® brand.
Increases in commodity, labor and other restaurant operating costs experienced at restaurants owned and operated by our franchisees could impact us to the extent our franchisees are adversely impacted by a resultsustained decline in their operating margins. At company operated restaurants, increases in commodity, labor and other restaurant operating costs impact us directly.
See “Consolidated Results of performing this test, we recognized an impairmentOperations - Comparison of Applebee's goodwill of $358.2 milliontheThree and an impairment of Applebee's tradename of $173.4 million. See below under the heading “Significant Known Events, Trends or Uncertainties Impacting or Expecting to Impact Comparisons of Reported or Future Results - Impairment of Applebee's GoodwillSix Months Ended June 30, 2023 and Tradename”2022” for additional discussion of these impairments.
Our effective tax rate (“ETR”) was significantly different than the federal statutory rate of 35% for the three and nine months ended September 30, 2017, as compared to the respective periods of the prior year. The primary reason for the difference is the impairment of Applebee's goodwill noted above is not a deductible expense for federal income tax purposes so we received no tax benefit from this expense. We did recognize a deferred tax benefit of approximately $65 million related to the impairment of Applebee's tradename.
changes shown above.
Key Performance Indicators
In evaluating the performance of each restaurant concept, we consider the key performance indicators to be the system-wide sales percentage change, the percentage change in domestic system-wide same-restaurant sales (“compdomestic same-restaurant sales”) and, net franchise restaurant development.development and the change in effective restaurants. Changes in both compdomestic same-restaurant sales and in the number of Applebee's and IHOP franchise restaurants will impact our system-wide retail sales that drive franchise royalty revenues. Restaurant development also impacts franchise revenues in the form of initial franchise fees and, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix. As noted above, the comparative key performance indicators in the following sections only include the results of operations of Applebee's and IHOP, unless otherwise noted, as prior period data is not available for Fuzzy’s.
An overview of theseOur key performance indicators for the three and ninesix months ended SeptemberJune 30, 2017 is2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2023 | | June 30, 2023 |
| Applebee's | | IHOP | | Applebee's | | IHOP |
Sales percentage (decrease) increase in reported retail sales - 2023 vs. 2022 | (1.5) | % | | 4.6 | % | | 2.0 | % | | 7.8 | % |
% (decrease) increase in domestic system-wide same-restaurant sales - 2023 vs. 2022 | (1.0) | % | | 2.1 | % | | 2.5 | % | | 5.3 | % |
Net franchise restaurant (reduction) increase (1) | (12) | | | — | | | (17) | | | 9 | |
Net (decrease) increase in total effective restaurants (2) | (11) | | | 34 | | | (7) | | | 32 | |
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| Applebee's | | IHOP | | Applebee's | | IHOP |
Sales percentage decrease | (9.7 | )% | | (0.7 | )% | | (8.6 | )% | | (0.1 | )% |
% decrease in domestic system-wide same-restaurant sales | (7.7 | )% | | (3.2 | )% | | (7.3 | )% | | (2.5 | )% |
Net franchise restaurant (reduction) development (1) | (23 | ) | | 9 |
| | (71 | ) | | 29 |
|
(1)Franchise and area license restaurant openings,closings, net of closings
The Applebee's sales percentage decrease foropenings, during the three and ninesix months ended SeptemberJune 30, 2017 was due to2023 and 2022.
(2) Change in the combined effectsweighted average number of declines in comp salesfranchise, area license and restaurant closures. The smaller IHOP sales percentage decrease forcompany-operated restaurants open during the three and ninesix months ended SeptemberJune 30, 2017 was due2023, compared to declinesthe weighted average number of those open during the same periods of 2022.
The change in comp sales that were partially offset bytotal effective restaurants for each brand reflects both permanent closures, net restaurant development.of openings, over the past 12 months as well as the weighted effect of restaurants temporarily closed during each period.
Detailed information on each of these key performance indicators is presented under the captions “Restaurant Data,” “Domestic Same-Restaurant Sales” and “Restaurant Development Activity” that follow.
Domestic Same-Restaurant Sales
Applebee’s system-wide domestic system-wide same-restaurant sales decreased 7.7%1.0% for the three months ended SeptemberJune 30, 20172023 and increased 2.5% for the six months ended June 30, 2023 as compared to the same periods of 2022. The slight decrease for the three months ended June 30, 2023 was primarily due to a decrease in traffic, offset by an increase in average check. The increase for the six months ended June 30, 2023 was primarily due to an increase in average check resulting from the same period in 2016. Most of the decrease resulted fromsuccessful promotional food offerings and menu price increases by franchisees, offset by a decline in customer traffic, as well as a small decrease in average customer check. For the nine months ended September 30, 2017, Applebee’s domestic system-wide same-restauranttraffic.
| | | | | | | | | | | | | | | | | | | | | | | |
Applebee's Off-Premise Sales Data | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Off-premise sales (in millions) (1) | $ | 244.6 | | | $ | 281.6 | | | $ | 508.2 | | | $ | 578.7 | |
% sales mix | 22.6 | % | | 25.6 | % | | 22.9 | % | | 26.6 | % |
(1) Primarily to-go, delivery and catering sales decreased 7.3% from the same period in 2016. This decrease also resulted primarily from a decline in customer traffic as well as a small decrease in average customer check.
for comparable 2023 and 2022 restaurants.
Based on data from Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), Applebee's same-restaurant sales for the three and six months ended June 30, 2023 underperformed the casual dining segment of the restaurant industry also experienced an overall decrease in(excluding Applebee's) during the same periods of 2023.
IHOP's system-wide domestic same-restaurant sales during both the three and nine months ended September 30, 2017. The casual dining decreases in both periods were due to declines in customer traffic that were partially offset by an increase in average customer check. For both the three and nine months ended September 30, 2017, Applebee's declines in traffic and same-restaurant sales were substantially larger than those experienced by the overall casual dining segment. However, the 150 basis point decline in Applebee's same-restaurant sales from the second to the third quarter of 2017 was the same as that of the overall casual dining segment.
We believe the differential between Applebee's performance and that of the casual dining segment is due in large part to tactical initiatives previously implemented by Applebee's that did not generate desired results and to the inconsistent quality of operations across the Applebee's system. We engaged third-party consultants during the first half of 2017 to assess the continued decline in Applebee's traffic and same-restaurant sales and to provide actionable recommendations to stabilize the decline. We expect to incur approximately $10 million of costs related to these stabilization initiatives in 2017, of which approximately $8 million was incurred during the nine months ended September 30, 2017. We also contributed $4 million to
the Applebee's National Advertising Fund (the “Applebee's NAF”) in the third quarter of 2017 to help mitigate the decline in franchisee contributions to the Applebee's NAF that are based on a percentage of restaurant sales. We expect to contribute an additional $4 million to the Applebee's NAF in the fourth quarter of 2017. We may consider additional contributions in future periods as well.
Some of the stabilization actions we are implementing relate to brand repositioning and operational improvements that will take place over the next 12 to 18 months. Shorter-term actions, such as improving the quality of the customer experience across the Applebee's system, have shown improvement as the number of restaurants receiving the lowest of our internal ratings has declined since the end of 2016.
As discussed under the heading “Financial Results - Franchise Operations,” Applebee's has experienced a decrease in royalty revenue because of the decline in same-restaurant sales that is primarily due to a decline in customer traffic. The decline in same-restaurant sales has adversely impacted some of our franchisees' financial health, resulting in increases in our bad debt expense and in our royalties not recognized as revenue until paid in cash (“cash-basis royalties”). A franchisee that represents approximately 5% of Applebee's domestic system-wide sales is exhibiting a higher level of financial difficulty than other franchisees. We are addressing all franchisees' financial health through a collaborative effort between ourselves, a third-party advisor and franchisee representatives. We are considering various forms of assistance to franchisees, such as restaurant closures, assessing franchisee debt arrangements, temporary forbearance on payment obligations, extensions of credit and other support programs. To date, the assistance provided primarily has been the approved closures of non-viable restaurants. Any additional assistance to franchisees may entail incremental costs.
IHOP’s domestic system-wide same-restaurant sales decreased 3.2%increased 2.1% for the three months ended SeptemberJune 30, 2017 from2023 and 5.3% for the six months ended June 30, 2023 as compared to the same period in 2016.periods of 2022. The decrease resulted from a decline in customer traffic thatimprovement was partially offset bydue to an increase in average customer check.check, offset by a decrease in traffic. The declineincrease in IHOP's quarter-over-quarter customer traffic has grown progressively larger during the first three quarters of 2017. The decline in traffic peaked in the middle of the third quarter and lessened towards the end of the third quarter. For the nine months ended September 30, 2017, IHOP’s domestic system-wide same-restaurant sales decreased 2.5% from the same period in 2016. That decreaseaverage check was alsoprimarily due to a decline in customer traffic that was partially offset by an increase in average customer check. We believe the decreasemenu prices as well as a general increase in customer traffic during the threeconsumer spending due to larger party sizes and nine months ended September 30, 2017 was due in part to softness in our dinner daypart as the result of advertising promotions that did not drivegreater spending per person.
| | | | | | | | | | | | | | | | | | | | | | | |
IHOP Off-Premise Sales Data | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Off-premise sales (in millions) (1) | $ | 156.2 | | | $ | 154.6 | | | $ | 317.4 | | | $ | 317.3 | |
% sales mix | 20.7 | % | | 21.3 | % | | 21.2 | % | | 22.9 | % |
(1) Primarily to-go, delivery and catering sales for comparable 2023 and traffic as anticipated.
2022 restaurants.
Based on data from Black Box, IHOP's increase in same-restaurant sales for the three and six months ended June 30, 2023 underperformed the family dining segment of the restaurant industry experienced a decrease in same-restaurant sales(excluding IHOP) during the three and nine months ended September 30, 2017, compared to the same periods of the prior year, due to a decrease in customer traffic that was partially offset by an increase in average customer check. The IHOP declines in customer traffic and same-restaurant sales were larger than those experienced by the overall family dining segment for the three and nine months ended September 30, 2017. IHOP's increase in average customer check was smaller than that of the overall family dining segment for the three months ended September 30, 2017, whereas IHOP's increase in average customer check was larger than that of the overall family dining segment for the nine months ended September 30, 2017.
2023.
Restaurant Data
The following table sets forth the number of “Effective Restaurants” in the Applebee’s and IHOP systems and information regarding the percentage change in sales at those restaurants compared to the same periods inperiod of the prior year. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company and, as such, the percentage change in sales at Effective Restaurants is based on non-GAAP sales data. However, we believe that presentation of this information is useful in analyzing our revenues because franchisees and area licensees pay us royalties and advertising fees that are based on a percentage of their sales, and, where applicable, rental payments under leases that partially may be based on a percentage of their sales. Management also uses this information to make decisions about plans for future development of additional restaurants as well as evaluation of current operations.
| | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
— |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2023 | | 2022 | | 2023 | | 2022 |
Applebee's Restaurant Data | Applebee's Restaurant Data | | (Unaudited) | Applebee's Restaurant Data | (Unaudited) |
Effective Restaurants(a) | | |
| | |
| | |
| | |
| |
Global Effective Restaurants(a) | | Global Effective Restaurants(a) | | | | | | | |
Franchise | Franchise | | 1,953 |
| | 2,028 |
| | 1,981 |
| | 2,029 |
| Franchise | 1,662 | | | 1,604 | | | 1,667 | | | 1,605 | |
Company | | Company | — | | | 69 | | | — | | | 69 | |
Total | | Total | 1,662 | | | 1,673 | | | 1,667 | | | 1,674 | |
System-wide(b) | System-wide(b) | | |
| | |
| | |
| | |
| System-wide(b) | | | | | | | |
Sales percentage change(c) | | (9.7 | )% | | (5.1 | )% | | (8.6 | )% | | (4.5 | )% | |
Domestic sales percentage change(c) | | Domestic sales percentage change(c) | (1.5) | % | | 1.4 | % | | 2.0 | % | | 7.2 | % |
Domestic same-restaurant sales percentage change(d) | Domestic same-restaurant sales percentage change(d) | | (7.7 | )% | | (5.2 | )% | | (7.3 | )% | | (4.4 | )% | Domestic same-restaurant sales percentage change(d) | (1.0) | % | | 1.8 | % | | 2.5 | % | | 7.6 | % |
Franchise(b) | Franchise(b) | | |
| | |
| | |
| | |
| Franchise(b) | | | | | | | |
Sales percentage change(c) | | (9.7 | )% | | (4.9 | )% | | (8.6 | )% | | (3.7 | )% | |
Domestic sales percentage change(c) | | Domestic sales percentage change(c) | 2.1 | % | | 1.3 | % | | 5.8 | % | | 7.3 | % |
Domestic same-restaurant sales percentage change(d) | Domestic same-restaurant sales percentage change(d) | | (7.7 | )% | | (5.2 | )% | | (7.3 | )% | | (4.4 | )% | Domestic same-restaurant sales percentage change(d) | (1.0) | % | | 1.7 | % | | 2.5 | % | | 7.6 | % |
Average weekly domestic unit sales (in thousands) | Average weekly domestic unit sales (in thousands) | | $ | 40.9 |
| | $ | 43.5 |
| | $ | 43.5 |
| | $ | 46.2 |
| Average weekly domestic unit sales (in thousands) | $ | 54.3 | | | $ | 55.1 | | | $ | 55.6 | | | $ | 54.5 | |
| | | | | | | | | | |
IHOP Restaurant Data | IHOP Restaurant Data | | |
| | |
| | |
| | |
| IHOP Restaurant Data | | | | | | | |
| | | | | | | | | |
Effective Restaurants(a) | | |
| | |
| | |
| | |
| |
Global Effective Restaurants(a) | | Global Effective Restaurants(a) | | | | | | | |
Franchise | Franchise | | 1,586 |
| | 1,521 |
| | 1,568 |
| | 1,512 |
| Franchise | 1,628 | | | 1,593 | | | 1,622 | | | 1,590 | |
Area license | Area license | | 162 |
| | 167 |
| | 165 |
| | 165 |
| Area license | 155 | | | 156 | | | 156 | | | 156 | |
Company | | — |
| | 10 |
| | 6 |
| | 11 |
| |
Total | Total | | 1,748 |
| | 1,698 |
| | 1,739 |
| | 1,688 |
| Total | 1,783 | | | 1,749 | | | 1,778 | | | 1,746 | |
| | | | | | | | | |
System-wide(b) | System-wide(b) | | |
| | |
| | |
| | |
| System-wide(b) | | | | | | | |
Sales percentage change(c) | Sales percentage change(c) | | (0.7 | )% | | 1.3 | % | | (0.1 | )% | | 2.0 | % | Sales percentage change(c) | 4.6 | % | | 5.7 | % | | 7.8 | % | | 12.1 | % |
Domestic same-restaurant sales percentage change(d) | | (3.2 | )% | | (0.1 | )% | | (2.5 | )% | | 0.5 | % | |
Domestic same-restaurant sales percentage change, including area license restaurants(d) | | Domestic same-restaurant sales percentage change, including area license restaurants(d) | 2.1 | % | | 3.6 | % | | 5.3 | % | | 10.1 | % |
Franchise(b) | Franchise(b) | | |
| | |
| | |
| | |
| Franchise(b) | | | | | | | |
Sales percentage change(c) | Sales percentage change(c) | | 0.3 | % | | 1.4 | % | | 0.5 | % | | 2.2 | % | Sales percentage change(c) | 5.0 | % | | 5.6 | % | | 8.1 | % | | 12.3 | % |
Domestic same-restaurant sales percentage change(d) | Domestic same-restaurant sales percentage change(d) | | (3.2 | )% | | (0.1 | )% | | (2.5 | )% | | 0.5 | % | Domestic same-restaurant sales percentage change(d) | 2.2 | % | | 3.6 | % | | 5.4 | % | | 10.4 | % |
Average weekly domestic unit sales (in thousands) | | $ | 35.7 |
| | $ | 37.1 |
| | $ | 36.3 |
| | $ | 37.5 |
| |
Average weekly unit sales (in thousands) | | Average weekly unit sales (in thousands) | $ | 38.9 | | | $ | 37.9 | | | $ | 38.5 | | | $ | 36.4 | |
Area License(b) | Area License(b) | | |
| | |
| | |
| | |
| Area License(b) | | | | | | | |
Sales percentage change(c) | Sales percentage change(c) | | (5.7 | )% | | 2.4 | % | | (3.6 | )% | | 1.1 | % | Sales percentage change(c) | 0.9 | % | | 6.2 | % | | 5.5 | % | | 10.0 | % |
(a) “Effective Restaurants” are the weighted average number of restaurants open in each fiscal period, adjusted to account for restaurants open for only a portion of the period. Information is presented for all Effective Restaurants in the Applebee’s and IHOP systems, which consist of restaurants owned by
franchisees and area licensees as well as those owned by the Company. Effective Restaurants do not include units operated as ghost kitchens (small kitchens with no store-front presence, used to fill off-premise orders).
(b) “System-wide sales” are retail sales at Applebee’s restaurants operated by franchisees and IHOP restaurants operated by franchisees and area licensees, as reported to the Company, in addition to retail sales at company-operated Applebee's restaurants. System-wide sales do not include retail sales of ghost kitchens. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. An increase in franchisees' reported sales will result in a corresponding increase in our royalty revenue, while a decrease in franchisees' reported sales will result in a corresponding decrease in our royalty revenue. Unaudited reported sales for Applebee's domestic franchise restaurants, Applebee's company-operated restaurants, IHOP franchise restaurants and IHOP area license restaurants were as follows: | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | Six Months Ended June 30, |
| Three months ended September 30, | | Nine months ended September 30, | | 2023 | | 2022 | 2023 | | 2022 |
| 2017 | | 2016 | | 2017 | | 2016 | |
Reported sales (In millions) | (Unaudited) | |
| |
| | |
| | | | | |
Reported sales (in millions) | | Reported sales (in millions) | (Unaudited) |
Applebee's domestic franchise restaurant sales | $ | 956.5 |
| | $ | 1,058.9 |
| | $ | 3,092.3 |
| | $ | 3,382.1 |
| Applebee's domestic franchise restaurant sales | $ | 1,099.3 | | | $ | 1,076.7 | | $ | 2,255.4 | | | $ | 2,131.7 | |
Applebee's company-operated restaurants | | Applebee's company-operated restaurants | — | | | 39.5 | | — | | | 78.9 | |
IHOP franchise restaurant sales | 736.9 |
| | 734.3 |
| | 2,220.3 |
| | 2,208.6 |
| IHOP franchise restaurant sales | 822.7 | | | 783.8 | | 1,624.9 | | | 1,503.5 | |
IHOP area license restaurant sales | 67.0 |
| | 71.0 |
| | 208.7 |
| | 216.5 |
| IHOP area license restaurant sales | 76.0 | | | 75.3 | | 153.8 | | | 145.8 | |
Total | $ | 1,760.4 |
| | $ | 1,864.2 |
| | $ | 5,521.3 |
| | $ | 5,807.2 |
| Total | $ | 1,998.0 | | | $ | 1,975.3 | | $ | 4,034.1 | | | $ | 3,859.9 | |
(c) “Sales percentage change” reflects, for each category of restaurants, the percentage change in sales in any given fiscal period compared to the prior fiscal period for all restaurants in that category.
(d) “Domestic same-restaurant sales percentage change” reflects the percentage change in sales in any given fiscal period, compared to the same weeks in the prior fiscal period, for domestic restaurants that have been operated throughoutduring both fiscal periods that are being compared and have been open for at least 18 months. Because of new restaurant openings and restaurant closures, the domestic restaurants open throughout both fiscal periods being compared may be different from period to period. Domestic same-restaurant
| | | | | | | | | | | | | | | | | | | | |
Restaurant Development Activity | Three Months Ended June 30, | Six Months Ended June 30, |
| 2023 | | 2022 | 2023 | | 2022 |
Applebee's | (Unaudited) |
Summary - beginning of period: | | | | | | |
Franchise | 1,673 | | | 1,606 | | 1,678 | | | 1,611 | |
Company | — | | | 69 | | — | | | 69 | |
Beginning of period | 1,673 | | | 1,675 | | 1,678 | | | 1,680 | |
| | | | | | |
Franchise restaurants opened: | | | | | | |
Domestic | 1 | | | 1 | | 1 | | | 2 | |
International | 1 | | | — | | 3 | | | — | |
Total franchise restaurants opened | 2 | | | 1 | | 4 | | | 2 | |
Franchise restaurants permanently closed: | | | | | | |
Domestic | (10) | | | (2) | | (16) | | | (6) | |
International | (4) | | | (1) | | (5) | | | (3) | |
Total franchise restaurants permanently closed | (14) | | | (3) | | (21) | | | (9) | |
Net franchise restaurant reduction | (12) | | | (2) | | (17) | | | (7) | |
| | | | | | |
| | | | | | |
| | | | | | |
Summary - end of period: | | | | | | |
Franchise | 1,661 | | | 1,604 | | 1,661 | | | 1,604 | |
Company | — | | | 69 | | — | | | 69 | |
Total Applebee's restaurants, end of period | 1,661 | | | 1,673 | | 1,661 | | | 1,673 | |
Domestic | 1,554 | | | 1,574 | | 1,554 | | | 1,574 | |
International | 107 | | | 99 | | 107 | | | 99 | |
| | | | | | | | | | | | | | | | | | | | |
Restaurant Development Activity (continued) | Three Months Ended June 30, | Six Months Ended June 30, |
| 2023 | | 2022 | 2023 | | 2022 |
IHOP | | | | | | |
Summary - beginning of period: | | | | | | |
Franchise | 1,633 | | | 1,600 | | 1,625 | | | 1,595 | |
Area license | 157 | | | 156 | | 156 | | | 156 | |
| | | | | | |
Total IHOP restaurants, beginning of period | 1,790 | | | 1,756 | | 1,781 | | | 1,751 | |
| | | | | | |
Franchise/area license restaurants opened: | | | | | | |
Domestic franchise | 9 | | | 8 | | 22 | | | 15 | |
Domestic area license | — | | | — | | 2 | | | 1 | |
International franchise | 2 | | | 5 | | 6 | | | 7 | |
| | | | | | |
Total franchise/area license restaurants opened | 11 | | | 13 | | 30 | | | 23 | |
Franchise/area license restaurants permanently closed: | | | | | | |
Domestic franchise | (10) | | | (4) | | (18) | | | (7) | |
Domestic area license | (1) | | | — | | (2) | | | (1) | |
International franchise | — | | | (1) | | (1) | | | (2) | |
| | | | | | |
Total franchise/area license restaurants permanently closed | (11) | | | (5) | | (21) | | | (10) | |
Net franchise/area license restaurant additions | — | | | 8 | | 9 | | | 13 | |
Refranchised by the Company | — | | | — | | — | | | — | |
Franchise restaurants reacquired by the Company | — | | | — | | — | | | — | |
Net increase in franchise/area license restaurants | — | | | 8 | | 9 | | | 13 | |
| | | | | | |
Summary - end of period: | | | | | | |
Franchise | 1,634 | | | 1,608 | | 1,634 | | | 1,608 | |
Area license | 156 | | | 156 | | 156 | | | 156 | |
Company | — | | | — | | — | | | — | |
Total IHOP restaurants, end of period | 1,790 | | | 1,764 | | 1,790 | | | 1,764 | |
Domestic | 1,681 | | | 1,665 | | 1,681 | | | 1,665 | |
International | 109 | | | 99 | | 109 | | | 99 | |
As of June 30, 2023, 47 franchise groups operated 137 Fuzzy's restaurants in 18 states within the United States and we had one company-owned restaurant in Texas, totaling 138 restaurants. Fuzzy's average weekly sales percentage change doesfor the three and six months ended June 30, 2023 were $33,685 and $32,136, respectively.
The restaurant counts and activity presented above do not include data onone domestic Applebee's ghost kitchen (small kitchens with no store-front presence, used to fill off-premise orders), 12 international Applebee's ghost kitchens and 41 international IHOP area licenseghost kitchens.
The closures presented in the tables above represent permanent closures of restaurants. Temporary closures, which can occur for a variety of reasons, are not reflected as reductions in this table and are included in the summary counts at the beginning and end of each period shown. Temporary closures are reflected in the weighted calculation of Effective Restaurants presented in the preceding Restaurant Data table.
|
| | | | | | | | | | | |
Restaurant Development Activity | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Applebee's | (Unaudited) |
Beginning of period | 1,968 |
| | 2,027 |
| | 2,016 |
| | 2,033 |
|
| | | | | | | |
Franchise restaurants opened: | |
| | |
| | | | |
Domestic | 2 |
| | 6 |
| | 7 |
| | 13 |
|
International | 2 |
| | 3 |
| | 6 |
| | 7 |
|
Total franchise restaurants opened | 4 |
| | 9 |
| | 13 |
| | 20 |
|
Franchise restaurants closed: | |
| | |
| | | | |
Domestic | (22 | ) | | (8 | ) | | (74 | ) | | (20 | ) |
International | (5 | ) | | (1 | ) | | (10 | ) | | (6 | ) |
Total franchise restaurants closed | (27 | ) | | (9 | ) | | (84 | ) | | (26 | ) |
Net franchise restaurant reduction | (23 | ) | | — |
| | (71 | ) | | (6 | ) |
| | | | | | | |
Total Applebee's restaurants, end of period | 1,945 |
| | 2,027 |
| | 1,945 |
| | 2,027 |
|
Domestic | 1,791 |
| | 1,871 |
| | 1,791 |
| | 1,871 |
|
International | 154 |
| | 156 |
| | 154 |
| | 156 |
|
|
| | | | | | | | | | | |
IHOP | |
| | |
| | | | |
Summary - beginning of period: | | | | | | | |
Franchise | 1,586 |
| | 1,519 |
| | 1,556 |
| | 1,507 |
|
Area license | 166 |
| | 166 |
| | 167 |
| | 165 |
|
Company | — |
| | 10 |
| | 10 |
| | 11 |
|
Total IHOP restaurants, beginning of period | 1,752 |
| | 1,695 |
| | 1,733 |
| | 1,683 |
|
| | | | | | | |
Franchise/area license restaurants opened: | | | | | | | |
Domestic franchise | 11 |
| | 7 |
| | 31 |
| | 26 |
|
Domestic area license | 1 |
| | 1 |
| | 1 |
| | 3 |
|
International franchise | 6 |
| | 8 |
| | 18 |
| | 11 |
|
Total franchise/area license restaurants opened | 18 |
| | 17 |
| | 50 |
| | 24 |
|
Franchise/area license restaurants closed: | |
| | |
| | | | |
Domestic franchise | (2 | ) | | (2 | ) | | (11 | ) | | (10 | ) |
Domestic area license | (1 | ) | | — |
| | (2 | ) | | (1 | ) |
International franchise | (5 | ) | | — |
| | (7 | ) | | (3 | ) |
International area license | (1 | ) | | — |
| | (1 | ) | | — |
|
Total franchise/area license restaurants closed | (9 | ) | | (2 | ) | | (21 | ) | | (14 | ) |
Net franchise/area license restaurant development | 9 |
| | 15 |
| | 29 |
| | 10 |
|
Refranchised from Company restaurants | — |
| | — |
| | 9 |
| | 1 |
|
Net franchise/area license restaurant additions | 9 |
| | 14 |
| | 38 |
| | 27 |
|
| | | | | | | |
Summary - end of period: | | | | | | | |
Franchise | 1,596 |
| | 1,532 |
| | 1,596 |
| | 1,532 |
|
Area license | 165 |
| | 167 |
| | 165 |
| | 167 |
|
Company(a) | — |
| | 10 |
| | — |
| | 10 |
|
Total IHOP restaurants, end of period | 1,761 |
| | 1,709 |
| | 1,761 |
| | 1,709 |
|
Domestic | 1,655 |
| | 1,622 |
| | 1,655 |
| | 1,622 |
|
International | 106 |
| | 87 |
| | 106 |
| | 87 |
|
(a)DuringClosures of restaurants adversely impact our system-wide retail sales that drive our franchise royalty revenues as well as, in the nine months ended September 30, 2017, nine company-operatedcase of IHOP restaurants, were refranchisedsales of proprietary pancake and one was permanently closed.
Forwaffle dry mix. Further, with certain restaurants, we own or lease the full year of 2017, we expect Applebee's franchiseesunderlying property and sublease it to develop between 20 and 30 new restaurants globally, most of which are expected tothe applicable franchisee. Thus, our rental income also could be international openings. As part of a detailed system-wide analysis to optimize the health of the franchisee system, we anticipate the closing of between 105 to 135 Applebee's restaurants globally for the full year of 2017. The anticipated net decline in the number of Applebee's restaurants will result in a decrease in Applebee's royalty revenues. IHOP franchisees are projected to develop between 80 and 95 new IHOP restaurants globally for the full year of 2017, most of which are expected to be domestic openings. We expect the closing of between 25 and 30 IHOP restaurants from natural attrition in 2017.
The actual number of openings may differ from both our expectations and development commitments. Historically, the actual number of restaurants developed in any given year has been less than the total number committed to be developedadversely affected due to various factors, including economic conditions and franchisee noncompliance with development agreements. The timingthe loss of new restaurant openings also may be affected by various factors including weather-related andsuch income, as well as our obligation to make rental or other construction delays, difficulties in obtaining timely regulatory approvals and the impactpayments for such properties.
CONSOLIDATED RESULTS OF OPERATIONS
Comparison of the Three and NineSix Months EndedSeptember June 30, 20172023 and 2016
Significant Known Events, Trends or Uncertainties Impacting or Expecting to Impact Comparisons of Reported or Future Results
Impairment of Applebee's Goodwill and Tradename
We performed a quantitative test for impairment of Applebee's goodwill and tradename as of October 31, 2016, the annual testing date. We identified no impairments as a result of performing these quantitative assessments, however, we did note that the fair value of the Applebee's Franchise Reporting Unit exceeded the carrying value of the unit by 9% and therefore considered the unit to be at risk of impairment.
In the third quarter of 2017, we noted that the decline in the market price of our common stock since December 31, 2016, which we had believed to be temporary, persisted throughout the first eight months of 2017 and that the favorable trend in Applebee's domestic same-restaurant sales experienced in the second quarter of 2017 did not continue into the first two months of the third quarter. We also noted a continuing increase in Applebee's bad debt expense and in royalties not recognized in income until paid in cash. Additionally, we also determined an increasing shortfall in franchisee contributions to the Applebee's national advertising fund could require a larger amount of future subsidization in the form of additional franchisor contributions to the fund than previously estimated. Based on these unfavorable developments, primarily the decline in the market price of our common stock, we determined that indicators of impairment existed and that an interim test of goodwill and indefinite-lived intangible assets for impairment should be performed.
As a result of performing the interim quantitative test, we recognized an impairment of Applebee's goodwill of $358.2 million and an impairment of Applebee's tradename of $173.4 million. After the impairments, the balances of goodwill and the tradename intangible asset allocated to the Applebee's franchise unit as of September 30, 2017 were $328.5 million and $479.0 million, respectively.
We adopted the guidance in FASB Accounting Standards Update 2017-04 on January 1, 2017; accordingly, the amount of the goodwill impairment was determined as the amount by which the carrying amount of the goodwill exceeded the fair value of the Applebee's franchise reporting unit that was estimated in the quantitative test. These assets are at risk of additional impairment in the future in the event of sustained downward movement in the Company's stock price, downward revisions of long-term performance assumptions or increases in the assumed long-term discount rate.
See additional discussion of these impairments under the heading “Financial Results - Impairment and Closure Charges.”
Executive Separation Costs
On February 17, 2017, we announced the resignation of our former Chairman and Chief Executive Officer (the “former CEO”), effective March 1, 2017. In accordance with terms of the Separation Agreement and General Release filed as Exhibit 10.1 to Form 8-K filed on February 17, 2017, we recorded approximately $5.9 million for severance, separation pay and ancillary costs in the first quarter of 2017. All stock options and restricted stock awards held by the former CEO that were unvested at the time of the announcement became vested in connection with the separation. We recorded a charge of approximately $2.9 million related to the accelerated vesting of the equity awards in the first quarter of 2017. Total costs of $8.8 million related to the separation were included in G&A expenses for the nine months ended September 30, 2017, all of which were incurred in the first quarter of 2017.
2022
Financial Results
| | Revenue | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance | Revenue | Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2023 | | 2022 | | 2023 | | 2022 | |
| | (In millions) | | (In millions) |
Franchise operations | | $ | 112.3 |
| | $ | 119.2 |
| | $ | (6.9 | ) | | $ | 351.4 |
| | $ | 366.7 |
| | $ | (15.3 | ) | Franchise operations | $ | 177.9 | | | $ | 168.3 | | | $ | 9.6 | | | $ | 357.9 | | | $ | 329.5 | | | $ | 28.4 | |
Rental operations | | 30.3 |
| | 30.5 |
| | (0.2 | ) | | 90.9 |
| | 92.7 |
| | (1.8 | ) | Rental operations | 29.4 | | | 29.1 | | | 0.3 | | | 61.4 | | | 57.9 | | | 3.5 | |
Company restaurant operations | | — |
| | 4.0 |
| | (4.0 | ) | | 7.5 |
| | 13.4 |
| | (5.9 | ) | Company restaurant operations | 0.5 | | | 39.5 | | | (39.0) | | | 1.5 | | | 78.9 | | | (77.4) | |
Financing operations | | 2.1 |
| | 2.3 |
| | (0.2 | ) | | 6.3 |
| | 7.0 |
| | (0.7 | ) | Financing operations | 0.6 | | | 0.9 | | | (0.3) | | | 1.4 | | | 1.9 | | | (0.5) | |
Total revenue | | $ | 144.7 |
| | $ | 156.0 |
| | $ | (11.3 | ) | | $ | 456.1 |
| | $ | 479.8 |
| | $ | (23.7 | ) | Total revenue | $ | 208.4 | | | $ | 237.8 | | | $ | (29.4) | | | $ | 422.2 | | | $ | 468.2 | | | $ | (46.0) | |
Change vs. prior period | | (7.3 | )% | | | | | | (5.0 | )% | | | | | Change vs. prior period | (12.4) | % | | | | | | (9.8) | % | | | | |
Total revenue for the three and six months ended SeptemberJune 30, 20172023 decreased compared with the same period of the prior year, primarily due to a decrease in revenue from Applebee's franchise restaurants and the refranchising of nine IHOP company-operated restaurants and closure of one IHOP company-operated restaurant in June 2017. Additional reasons for the decline in revenue include the impact of a 3.2% decrease in IHOP domestic same-restaurant sales on royalty and rental revenue and the expected progressive decline in interest revenue from rental and financing operations as receivable balances are repaid. These unfavorable factors were partially offset by IHOP franchisee restaurant development over the past twelve months.
Total revenue for the nine months ended September 30, 2017 decreased compared with the same period of the prior year, primarily due to the same factors discussed for the three-month period above. Additional reasons for the decline in revenue include the impact of a 2.5% decrease in IHOP domestic same-restaurant sales on royalty and rental revenue and the expected progressive decline in interest revenue from rental and financing operations as receivable balances are repaid. These unfavorable factors were partially offset by IHOP franchisee restaurant development over the past twelve months.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit (Loss) | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | | 2017 | | 2016 | |
| | (In millions) |
Franchise operations | | $ | 70.5 |
| | $ | 81.9 |
| | $ | (11.4 | ) | | $ | 235.7 |
| | $ | 258.7 |
| | $ | (23.0 | ) |
Rental operations | | 8.0 |
| | 7.7 |
| | 0.3 |
| | 23.2 |
| | 23.7 |
| | (0.5 | ) |
Company restaurant operations | | (0.0 | ) | | (0.2 | ) | | 0.2 |
| | (0.3 | ) | | (0.7 | ) | | 0.4 |
|
Financing operations | | 1.6 |
| | 2.3 |
| | (0.7 | ) | | 5.9 |
| | 6.8 |
| | (0.9 | ) |
Total gross profit | | $ | 80.1 |
| | $ | 91.7 |
| | $ | (11.6 | ) | | $ | 264.5 |
| | $ | 288.5 |
| | $ | (24.0 | ) |
Change vs. prior period | | (12.6 | )% | | | | | | (8.3 | )% | | | | |
Total gross profit for the three and nine months ended September 30, 2017 declined compared with the same periods of the prior year, primarily due to the decreasesdecrease in company restaurant operations as a result of refranchising of Applebee's company-operated restaurants, partially offset by increases in Applebee's and IHOP franchise operations revenue and the inclusion of Fuzzy's franchise operations revenue. Smaller changes in rental and financing revenues are discussed in the sections that follow.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| 2023 | | 2022 | | | 2023 | | 2022 | |
| (In millions) |
Franchise operations | $ | 89.6 | | | $ | 86.0 | | | $ | 3.6 | | | $ | 182.2 | | | $ | 169.2 | | | $ | 13.0 | |
Rental operations | 7.2 | | | 7.2 | | | 0.0 | | | 17.5 | | | 13.9 | | | 3.6 | |
Company restaurant operations | 0.0 | | | 1.6 | | | (1.6) | | | 0.0 | | | 3.6 | | | (3.6) | |
Financing operations | 0.5 | | | 0.9 | | | (0.4) | | | 1.2 | | | 1.7 | | | (0.5) | |
Total gross profit | $ | 97.3 | | | $ | 95.7 | | | $ | 1.6 | | | $ | 201.0 | | | $ | 188.4 | | | $ | 12.5 | |
Change vs. prior period | 1.7 | % | | | | | | 6.6 | % | | | | |
Total gross profit for the three and six months ended June 30, 2023 increased compared with the same periods of the prior year, primarily due to the increased revenue from franchise operations, an increase inpartially offset by the refranchising of Applebee's bad debt expense and the expected progressive decline in interest revenue from financing operations.company-operated restaurants.
| | | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance | | Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
Franchise Operations | | 2017 | | 2016 | | 2017 | | 2016 | | Franchise Operations | | 2023 | | 2022 | | 2023 | | 2022 | |
| | (In millions, except number of restaurants) | | | (In millions, except number of restaurants) |
Effective Franchise Restaurants:(1) | | | | | | | | | | | | | Effective Franchise Restaurants:(1) | |
Applebee’s | | 1,953 |
| | 2,028 |
| | (75 | ) | | 1,981 |
| | 2,029 |
| | (48 | ) | Applebee’s | | 1,662 | | | 1,604 | | | 58 | | | 1,667 | | | 1,605 | | | 62 | |
IHOP | | 1,748 |
| | 1,688 |
| | 60 |
| | 1,733 |
| | 1,677 |
| | 56 |
| IHOP | | 1,783 | | | 1,749 | | | 34 | | | 1,778 | | | 1,746 | | | 32 | |
Franchise Revenues: | | |
| | |
| | |
| | |
| | | | | Franchise Revenues: | | | | | | | |
Applebee’s | | $ | 39.4 |
| | $ | 45.7 |
| | $ | (6.3 | ) | | $ | 129.3 |
| | $ | 144.7 |
| | $ | (15.4 | ) | |
IHOP | | 44.9 |
| | 45.8 |
| | (0.9 | ) | | 137.7 |
| | 138.3 |
| | (0.6 | ) | |
Advertising | | 28.0 |
| | 27.7 |
| | 0.3 |
| | 84.4 |
| | 83.7 |
| | 0.7 |
| |
Applebee’s franchise fees | | Applebee’s franchise fees | | $ | 44.4 | | | $ | 43.9 | | | $ | 0.5 | | | $ | 90.0 | | | $ | 88.0 | | | $ | 2.0 | |
IHOP franchise fees | | IHOP franchise fees | | 54.0 | | | 50.3 | | | 3.7 | | | 107.7 | | | 96.5 | | | 11.2 | |
Advertising fees | | Advertising fees | | 76.0 | | | 74.1 | | | 1.9 | | | 153.0 | | | 145.0 | | | 8.0 | |
Fuzzy's franchise fees | | Fuzzy's franchise fees | | 3.6 | | | — | | | 3.6 | | | 7.2 | | | — | | | 7.2 | |
Total franchise revenues | | 112.3 |
| | 119.2 |
| | (6.9 | ) | | 351.4 |
| | 366.7 |
| | (15.3 | ) | Total franchise revenues | | 178.0 | | | 168.3 | | | 9.7 | | | 357.9 | | | 329.5 | | | 28.4 | |
Franchise Expenses: | | |
| | |
| | |
| | | | | | | Franchise Expenses: | | | | | | | |
Applebee’s | | 8.7 |
| | 4.2 |
| | (4.5 | ) | | 15.3 |
| | 7.3 |
| | (8.0 | ) | Applebee’s | | 1.2 | | | 0.7 | | | (0.5) | | | 2.7 | | | 1.6 | | | (1.1) | |
IHOP | | 5.1 |
| | 5.4 |
| | 0.3 |
| | 16.0 |
| | 17.0 |
| | 1.0 |
| IHOP | | 10.9 | | | 7.4 | | | (3.5) | | | 19.5 | | | 13.7 | | | (5.8) | |
Advertising | | 28.0 |
| | 27.7 |
| | (0.3 | ) | | 84.4 |
| | 83.7 |
| | (0.7 | ) | |
Advertising expenses | | Advertising expenses | | 76.0 | | | 74.1 | | | (1.9) | | | 153.0 | | | 145.0 | | | (8.0) | |
Fuzzy's | | Fuzzy's | | 0.2 | | | — | | | (0.2) | | | 0.4 | | | — | | | (0.4) | |
Total franchise expenses | | 41.8 |
| | 37.3 |
| | (4.5 | ) | | 115.7 |
| | 108.0 |
| | (7.7 | ) | Total franchise expenses | | 88.3 | | | 82.3 | | | (6.0) | | | 175.6 | | | 160.3 | | | (15.3) | |
Franchise Gross Profit: | | |
| | |
| | |
| | | | | �� | | Franchise Gross Profit: | | | | | | | |
Applebee’s | | 30.7 |
| | 41.5 |
| | (10.8 | ) | | 114.0 |
| | 137.4 |
| | (23.4 | ) | Applebee’s | | 43.2 | | | 43.2 | | | 0.0 | | | 87.3 | | | 86.4 | | | 0.9 | |
IHOP | | 39.8 |
| | 40.4 |
| | (0.6 | ) | | 121.7 |
| | 121.3 |
| | 0.4 |
| IHOP | | 43.0 | | | 42.8 | | | 0.2 | | | 88.2 | | | 82.8 | | | 5.4 | |
Fuzzy's | | Fuzzy's | | 3.4 | | | — | | | 3.4 | | | 6.8 | | | — | | | 6.8 | |
Total franchise gross profit | | $ | 70.5 |
| | $ | 81.9 |
| | $ | (11.4 | ) | | $ | 235.7 |
| | $ | 258.7 |
| | $ | (23.0 | ) | Total franchise gross profit | | $ | 89.6 | | | $ | 86.0 | | | $ | 3.6 | | | $ | 182.3 | | | $ | 169.2 | | | $ | 13.1 | |
Gross profit as % of revenue (2) | | 62.8 | % | | 68.7 | % | | | | 67.1 | % | | 70.5 | % | | | |
Gross profit as % of franchise revenue (2) | | Gross profit as % of franchise revenue (2) | | 50.4 | % | | 51.1 | % | | | | 50.9 | % | | 51.3 | % | | |
Gross profit as % of franchise fees (2)(3) | | Gross profit as % of franchise fees (2)(3) | | 87.9 | % | | 91.3 | % | | 89.0 | % | | 91.7 | % | |
_____________________________________________________
(1) Effective Franchise Restaurants are the weighted average number of franchise and area license restaurants open in each fiscal period, adjusted to account for restaurants open for only a portion of the period.
(2) Percentages calculated on actual amounts, not rounded amounts presented above.
(3) From time to time, advertising fee revenue may be different from advertising expenses in a given accounting period. Over the long term, advertising activity should not generate gross profit or loss.
Applebee’s
Applebee's franchise fee revenue for the three months ended SeptemberJune 30, 2017 declined 13.8%2023 increased 1.2% as compared to the same period of the prior year. Approximately $2.9 million of the decline was due to a 7.7% decrease in domestic same-restaurant sales. Additional factors contributing to the revenue decline were an increase of $1.7 million in cash-basis royalties and a $1.2 million decrease in royalties due to the net closure of franchise restaurants.
Applebee’s franchise revenue for the nine months ended September 30, 2017 declined 10.6% compared to the same period of the prior year. Approximately $9.3 million of the decline was due to a 7.3% decrease in domestic same-restaurant sales. Additional factors contributing to the revenue decline were a $2.7 million increase in cash-basis royalties, a $2.4 million decrease in royalties due to the net closure of franchise restaurants and a $0.8 million decrease in termination fees. We do not expect to receive any termination fees from approved closures of restaurants in 2017.
The increases in Applebee's franchise expenses for the three and nine months ended September 30, 2017 compared with the same periods of the prior year were primarily due to increases in bad debt expense of $2.9 million and $6.4 million, respectively, as well as an increase of $1.5 million in franchisor contributions to the Applebee's national advertising fund which impacted both periods. The Company contributed $4.0 million to the Applebee's national advertising fund in the third quarter of 2017 compared to a contribution of $2.5 million in the third quarter of 2016.
IHOP franchise revenue for the three months ended September 30, 2017 decreased compared to the same period of the prior year, primarily due to a $1.0$0.5 million decreaseincrease in salesApplebee's international revenue, $0.3 million in termination fees offset by the unfavorable impact on royalties of pancake and waffle dry mix and a 3.2%1.0% decrease in domestic same-restaurant sales. These unfavorable items were partially offset byApplebee's franchise fee revenue for the six months ended June 30, 2023 increased 2.3% as compared with the same period of the prior year primarily due to the favorable impact on royalties of a 3.6%2.5% increase in Effective Franchise Restaurants due to net restaurant developmentdomestic same-restaurant sales and an increase in franchisetermination fees.
Applebee's franchise expenses for the three and six months ended June 30, 2023 increased $0.5 million and $1.1 million, respectively, compared with the same periods of the prior year primarily due to an increase in bad debt and other operating expenses.
IHOPIHOP's franchise fee revenue for the ninethree and six months ended SeptemberJune 30, 2017 decreased2023 increased 7.4% and 11.6%, respectively, as compared with the same periods of the prior year, primarily due to favorable domestic same-restaurant sales which resulted in higher sales of proprietary products (primarily pancake and waffle dry mix) and increased royalties.
IHOP's franchise expenses for the three and six months ended June 30, 2023 increased $3.5 million and $5.8 million, respectively, as compared with same periods of the prior year, primarily due to an increase in cost of proprietary products (primarily pancake and waffle dry mix) and an increase in bad debt expense.
Advertising revenue and expense by brand for the three and six months ended June 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Increase | | Six Months Ended June 30, | | Increase |
| 2023 | | 2022 | | | 2023 | | 2022 | |
| (In millions) |
Advertising Revenues and Expenses: | | | | | | | | | | | |
Applebee’s | $ | 45.6 | | | $ | 45.3 | | | $ | 0.3 | | | $ | 92.7 | | | $ | 89.8 | | | $ | 2.9 | |
IHOP | 29.4 | | | 28.8 | | | 0.6 | | | 58.3 | | | 55.2 | | | 3.1 | |
Fuzzy's | 1.0 | | | — | | | 1.0 | | | 2.0 | | | — | | | 2.0 | |
Total advertising revenues and expenses | $ | 76.0 | | | $ | 74.1 | | | $ | 1.9 | | | $ | 153.0 | | | $ | 145.0 | | | $ | 8.0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Applebee’s advertising revenue and expense for the three months ended June 30, 2023 increased slightly compared to the same period of the prior year, primarily due to a $1.8 million decreasean increase in saleseffective restaurants from the refranchising of pancake and waffle dry mix and a 2.5%69 Company owned restaurants in October 2022. This was partially offset by the 1.0% decrease in domestic franchise same-restaurant sales. These unfavorable items were partially offset by a 3.3% increase in Effective Franchise Restaurants due to net restaurant development, a $0.7 million increase in international royalties and an increase in franchise fees.
The decreases in IHOP franchise expenses for the three and nine months ended September 30, 2017 compared with the same periods of the prior year were primarily due to decreases in purchases of pancake and waffle dry mix partially offset by increased Company contributions to marketing funds of $0.2 million and $0.6 million, respectively.
Advertising contributions designated for IHOP’s national advertising fund and local marketing and advertising cooperatives, as well as advertising contributions from international franchise restaurants of both brands, are recognized as revenue and expense of franchise operations. However, due to differences in the administration of the Applebee’s marketing fund, contributions to Applebee's domestic marketing fund are not recognized as franchise revenue and expense. Advertising revenue and expense for the three and nine months ended SeptemberJune 30, 20172023 increased slightly compared to the same periodsperiod of the prior year, primarily due to increased contributions from internationalthe 2.1% increase in domestic franchise restaurants of both brands. The impact onsame-restaurant sales.
Applebee's and IHOP's advertising revenue and expense of the increase in the number of IHOP restaurants was partially offset by the decrease in IHOP domestic same-restaurant sales.
Gross profit as a percentage of revenue declined for the three and ninesix months ended SeptemberJune 30, 20172023 increased 3.2% and 5.7%, respectively, compared to the same respective periodsperiod of the prior year primarily becausedue to the increase in their respective domestic franchise same-restaurant sales.
It is our accounting policy to recognize any deficiency in advertising fee revenue compared to advertising expenditure or any recovery of a previously recognized deficiency in advertising fee revenue compared to advertising expenditure in the decrease in Applebee's domestic same-restaurant sales and increases in cash-basis royalties and bad debt expense. We expect that gross profitfourth quarter of franchise operations for the remainder of 2017 will continue to be adversely impacted by Applebee's restaurant closures and increases in Applebee's bad debt expense and cash-basis royalties.our fiscal year.
| | Rental Operations | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance | Rental Operations | Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2023 | | 2022 | | 2023 | | 2022 | |
| | (In millions) | | (In millions) |
Rental revenues | | $ | 30.3 |
| | $ | 30.5 |
| | $ | (0.2 | ) | | $ | 90.9 |
| | $ | 92.7 |
| | $ | (1.8 | ) | Rental revenues | $ | 29.4 | | | $ | 29.1 | | | $ | 0.3 | | | $ | 61.4 | | | $ | 57.9 | | | $ | 3.5 | |
| Rental expenses | | 22.3 |
| | 22.8 |
| | 0.5 |
| | 67.7 |
| | 69.0 |
| | 1.3 |
| Rental expenses | 22.2 | | | 21.8 | | | (0.4) | | | 43.9 | | | 44.0 | | | 0.1 | |
Rental operations gross profit | | $ | 8.0 |
| | $ | 7.7 |
| | $ | 0.3 |
| | $ | 23.2 |
| | $ | 23.7 |
| | $ | (0.5 | ) | Rental operations gross profit | $ | 7.2 | | | $ | 7.2 | | | $ | (0.1) | | | $ | 17.5 | | | $ | 13.9 | | | $ | 3.6 | |
Gross profit as % of revenue (1) | | 26.3 | % | | 25.4 | % | | | | 25.5 | % | | 25.6 | % | | | Gross profit as % of revenue (1) | 24.4 | % | | 24.9 | % | | | | 28.5 | % | | 24.0 | % | | |
(1) Percentages calculated on actual amounts, not rounded amounts presented above.
Rental operations relate primarily to IHOP franchise restaurants. Rental income includes sublease revenue from operating leases and interest income from direct financingreal estate leases. Rental expenses are costs of prime operating leases and interest expense on prime capital leases on certain franchise restaurants.
finance leases.
Rental segment revenue for the three months ended SeptemberJune 30, 2017 was lower than2023 increased from the same period of the prior year, primarily due to the expected progressive decline of $0.3 millionoperating lease renewals and extensions and an increase in interestvariable sublease income, such as direct financing leases are repaid.common area maintenance payments received from franchisees and remitted to landlords. Rental segment revenueexpenses for the ninethree months ended SeptemberJune 30, 2017 was lower than2023 increased as compared to the same period of the prior year, primarily due to a $1.2 million decreasean increase in rental income based on a percentage of franchisees' retail sales andlease-related expenses consistent with the expected progressive decline of $0.9 millionincrease in interestvariable sublease income as direct financing leases are repaid.
well as due to operating lease and renewals.
Rental segment expenses decreasedoperations gross profit for the three and ninesix months ended SeptemberJune 30, 20172023 increased as compared to the same periodsperiod of the prior year, primarily becausedue to lease buyouts and operating lease renewals and extensions.
Company Restaurant Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| 2023 | | 2022 | | | 2023 | | 2022 | |
| | | | | | | | | | | |
Effective Restaurants | 1 | | | 69 | | | (68) | | | 2 | | | 69 | | | (67) | |
| (In millions) |
Applebee's company restaurant sales (1) | $ | — | | | $ | 39.5 | | | $ | (39.5) | | | $ | — | | | $ | 78.9 | | | $ | (78.9) | |
Applebee's company restaurant expenses (1) | — | | | 37.9 | | | 37.9 | | | — | | | 75.3 | | | 75.3 | |
Fuzzy's company restaurant sales (2) | 0.5 | | | — | | | 0.5 | | | 1.5 | | | — | | | 1.5 | |
Fuzzy's company restaurant expenses (2) | 0.5 | | | — | | | (0.5) | | | 1.5 | | | — | | | (1.5) | |
Company restaurant gross profit | $ | — | | | $ | 1.6 | | | $ | (76.4) | | | $ | — | | | $ | 3.6 | | | $ | (151.2) | |
Gross profit as % of revenue (3) | 9.3 | % | | 4.1 | % | | | | 1.4 | % | | 4.6 | % | | |
(1) Related to 69 Applebee's company-operated restaurants that were still operating through October 2022.
(2) Related to three Fuzzy's company-operated restaurants that were acquired in December 2022 of which two restaurants were refranchised in April 2023.
(3) Percentages calculated on actual amounts, not rounded amounts presented above.
Applebee's company restaurant gross profit for the three and six months ended June 30, 2023 decreased 100% compared to the same period of 2022, due to the refranchising of the expected progressive declinescompany-operated restaurants in interest expense as capital lease obligations are repaidOctober 2022.
For the three and six months ended June 30, 2023, company restaurant operations included Fuzzy's restaurants, following the acquisition of Fuzzy's in depreciation as assets age.December 2022 of which two restaurants were refranchised in April 2023.
Company segment restaurant expenses may include costs associated with reacquired restaurants in the process of being refranchised. There were no reacquired restaurants expenses during the six months ended June 30, 2023.
Financing Operations
Financing revenues primarily consist of interest income from the financing of IHOP equipment leases and franchise fees as well as sales of equipment associated with refranchised IHOP restaurants.interest income on Applebee's notes receivable from franchisees. Financing expenses are the cost of any restauranttaxes related to IHOP equipment sold associated with refranchised IHOP restaurants.leases.
The decrease in financingFinancing revenue for the three and nine months ended September 30, 2017 was primarily due to the expected progressive declines of $0.2 million and $0.6 million, respectively, in interest revenue as note balances are repaid. The decrease in financing gross profit for the three and ninesix months ended SeptemberJune 30, 2017 was primarily due to costs associated with the sale of equipment related to refranchised IHOP restaurants as well as the declines in interest revenue.
Company Restaurant Operations
Effective June 19, 2017, we refranchised nine of our ten company-operated IHOP restaurants in the Cincinnati, Ohio market area; the one restaurant not refranchised was closed. As a result, we no longer operate any IHOP restaurants on a permanent basis. We did not consider these restaurants to be “discontinued operations” as defined by U.S. GAAP because the refranchising of nine restaurants out of a total of over 3,700 restaurants did not represent a strategic shift that had a major effect on our
operations. From time to time, we may continue to operate IHOP restaurants reacquired from franchisees on a temporary basis until those restaurants are refranchised. There were no IHOP restaurants under temporary operation as of September 30, 2017.
Company restaurant revenues and expenses decreased for the three and nine months ended September 30, 20172023 declined compared to the same period of the prior year, primarily because we did not operate any company restaurants after June 19, 2017 and we did not operate any reacquired restaurants during the first nine months of 2017, whereas we did operate one reacquired restaurant during the first nine months of 2016. Gross profit for the three and nine months ended September 30, 2017 improved slightly because the temporary operation of reacquired restaurants typically resultsdue to progressive decline in a small loss.interest income as note balances are repaid.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
G&A Expenses | Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| 2023 | | 2022 | | | 2023 | | 2022 | |
| (In millions) |
Total G&A expenses | $ | 47.8 | | | $ | 44.1 | | | $ | (3.8) | | | $ | 98.9 | | | $ | 85.6 | | | $ | (13.3) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
G&A Expenses | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | | 2017 | | 2016 | |
| | (In millions) |
| | $ | 38.0 |
| | $ | 36.0 |
| | $ | (2.0 | ) | | $ | 125.7 |
| | $ | 111.9 |
| | $ | (13.8 | ) |
The increase in G&A expenses for the three months ended SeptemberJune 30, 20172023 increased 8.6% compared to the same period of the prior year, was primarily due to the stopping of our IHOP Flip'd initiative as well as increases in professional services and software maintenance expenses partially offset by a $1.9 million increasedecrease in personnel-related costs. IncreasesIncluded in costs of software, depreciation and professional services were offset by lower costs of travel and conferences. The increase in personnel-related costs is primarily due to higher costs of severance and an increase in salary and benefits related to the hiring of several senior management positions over the past twelve months, partially offset by lower costs of stock-based compensation.
The increase intotal G&A expenses for the ninethree months ended SeptemberJune 30, 20172023 was $1.2 million of expense related to Fuzzy's, which was acquired in December 2022.
G&A expenses for the six months ended June 30, 2023 increased 15.6% compared to the same period of the prior year, was primarily due to charges of $8.8 million related to the executive separation costs discussed under “Events Impacting Comparability of Financial Information.” The additional increase in G&A of $5.0 million was due to a $5.4 million increaseincreases in professional services, and a $2.5 million increase in personnel-related costs, partially offset by a $2.0 million decrease in travel and conference costs and a decrease of $1.1 million in recruiting and relocation costs.
The increase in professional services was due primarily to our utilization of third-party consultants related to the Applebee's stabilization initiatives discussed under “Domestic Same-restaurant Sales - Applebee's.” The increase in personnel-related costs was primarily due to an increase in salary and benefits related to the hiring of several senior management positions over the past twelve months, an increase in severance costs and a decrease in certain employment-related incentive credits because of our reduction of personnel in the state of Missouri, partially offset by lower costs of stock-based compensation. The decrease in travel and conference costs was primarily due to the timing of our brands' franchisee conferences that will take place in the fourth quarter of 2017 as compared to taking place in the third quarter of 2016. The decrease in recruiting, relocationsoftware maintenance and occupancy expenses related to costs incurred as a result of the relocation of personnel and functions in 2016 that did not recur in 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Impairment and Closure Charges | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | | 2017 | | 2016 | |
| | (In millions) |
Impairment of goodwill | | $ | 358.2 |
| | $ | — |
| | $ | (358.2 | ) | | $ | 358.2 |
| | $ | — |
| | $ | (358.2 | ) |
Impairment of tradename | | 173.4 |
| | — |
| | (173.4 | ) | | 173.4 |
| | — |
| | (173.4 | ) |
Other impairment and closure costs | | 0.9 |
| | 0.2 |
| | (0.7 | ) | | 3.8 |
| | 4.0 |
| | 0.2 |
|
| | $ | 532.5 |
| | $ | 0.2 |
| | $ | (532.3 | ) | | $ | 535.4 |
| | $ | 4.0 |
| | $ | (531.4 | ) |
As discussed above under the heading “Significant Known Events, Trends or Uncertainties Impacting or Expecting to Impact Comparisons of Reported or Future Results - Impairment of Applebee's Goodwill and Tradename,” we performed an interim quantitative test for impairment of Applebee's goodwill and tradename during the third quarter of 2017 and recorded an impairment to goodwill of $358.2 million and an impairment to the Applebee's tradename of $173.4 million.
In determining the fair value of the Applebee's franchise reporting unit, we used the income approach method of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologiesthe stopping of our IHOP Flip'd initiative. Included in total G&A expenses for the six months ended June 30, 2023 was $3.1 million of expense related to determine the fair valueFuzzy's, which was acquired in December 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Income and Expense Items
| Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| 2023 | | 2022 | | | 2023 | | 2022 | |
| (In millions) |
Interest expense, net | $ | 17.8 | | | $ | 15.4 | | | $ | (2.4) | | | $ | 32.5 | | | $ | 30.9 | | | $ | (1.6) | |
Loss on extinguishment of debt | 1.7 | | | — | | | (1.7) | | | — | | | — | | | (2.1) | |
Closure and impairment charges | 0.8 | | | 1.3 | | | 0.5 | | | 1.3 | | | 1.5 | | | 0.2 | |
Amortization of intangible assets | 2.7 | | | 2.7 | | | — | | | 5.5 | | | 5.3 | | | (0.2) | |
Loss (gain) on disposition of assets | 2.0 | | | (0.2) | | | (2.2) | | | 2.1 | | | (1.5) | | | (3.6) | |
Total | $ | 25.1 | | | $ | 19.1 | | | $ | (5.8) | | | $ | 41.4 | | | $ | 36.1 | | | $ | (7.3) | |
Loss on extinguishment of debt and intangible assets. Significant assumptions made by management in estimating fair value under the discounted cash flow model include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working capital, along with an appropriate discount rate based on our estimated cost of equity capital and after-tax cost of debt.
In determining the fair value of the Applebee's tradename, we used the relief of royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate and a discount rate to be applied to the forecast revenue stream.
interest expense, net
The assumptions used in bothCompany repaid the discounted cash flow method and the reliefentire outstanding balance of royalty method are determined by the Company based on historical results, trends and anticipated growth resulting from specific development initiatives planned to be implemented over the time horizon covered by the Company's projections. The most impactful assumptions are the discount rate and the forecast change in system-wide sales (due to a combinationapproximately $585.1 million of changes in same-restaurant sales and in net restaurant development) that impact our royalty revenues.
There is an inherent degree of uncertainty in preparing any forecast of future results. The projections used in performing the impairment testsits 2019 Class A-2 Notes during the three months ended SeptemberJune 30, 2017, reflected an increase in system-wide sales2023 and recognized a $1.7 million loss on extinguishment of debt from estimated full-year 2017 amounts, in progressively larger increments, over the time period covered by the projections. System-wide sales are dependent to a significant extent on national, regional and local economic conditions, and, to a lesser extent, on global economic conditions, particularly those conditions affecting the demographicswrite-off of the guests that frequently patronize Applebee's restaurants. Accordingly, there arerelated remaining issuance costs. This loss was offset by a number$1.7 million gain on extinguishment of potential events that could reasonably be expected to negatively affectdebt from the forecastpurchase of system-wide sales, including a decrease in customers' disposable income available for discretionary spending (because$67.9 million of circumstances such as job losses, credit constraints, higher housing costs, increased tax rates, energy costs, interest rates or other costs) or a decrease inits 2019 Class A-2 Notes under par during the perceived wealth of customers (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions). As a result, our business could experience a decline in sales and/or customer traffic as potential customers choose lower-cost alternatives (such as quick-service restaurants) or other alternatives to dining out. Additionally, negative trends in the availability of credit and in expenses such as interest rates and the cost of construction materials could affect our franchisees' ability to maintain and remodel existing restaurants. Any decreases in customer traffic or average customer check due to these or other reasons could reduce gross sales at franchise restaurants, resulting in lower royalty and other payments from franchisees. This could reduce the profitability of franchise restaurants, potentially impacting the ability of franchisees to make royalty payments owed to us when due (which could adversely impact our current cash flow from franchise operations) and negatively impacting franchisees’ ability to develop new restaurants (which could adversely impact our future cash flows from franchise operations).
Other impairment and closure charges for the threesix months ended SeptemberJune 30, 2017 and 2016 were not significant. For the nine months ended September 30, 2017, other impairment and closure costs of $3.8 million primarily comprised $2.2 million of costs related to the closure of one company-operated IHOP restaurant in the Cincinnati, Ohio market area. There were no other individually significant charges.
For the nine months ended September 30, 2016, other impairment and closure costs are primarily comprised of $2.5 million of lease termination costs related to the reduction of our space requirements in Kansas City, Missouri, approximately $1.0 million of impairment charges and $0.5 million of closure charges. The largest individually significant impairment charge of $0.6 million related to one IHOP company-operated restaurant. The closure charges related to adjustments for IHOP and Applebee's restaurants closed in periods prior to September 30, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(Gain) Loss on Disposition of Assets | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | | 2017 | | 2016 | |
| | (In millions) |
| | $ | (0.0 | ) | | $ | 0.1 |
| | $ | 0.1 |
| | $ | (6.4 | ) | | $ | 0.7 |
| | $ | 7.1 |
|
In June 2017, we completed the refranchising and sale of related restaurant assets of nine company-operated IHOP restaurants in the Cincinnati, Ohio market area. As part of the transaction, we entered into an asset purchase agreement, nine franchise agreements and nine sublease agreements for land and buildings. The Company compared the stated rent under the sublease agreements with comparable market rents and recorded net favorable lease assets of $2.3 million in related to the transaction. The Company also received cash of $1.1 million and a note receivable for $4.8 million. After allocating a portion of the consideration to franchise fees and derecognition of the assets sold, we recognized a gain of $6.2 million on the refranchising and sale during the nine months ended September 30, 2017. There were no other individually significant asset dispositions in either of the comparative periods presented above.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Other Expense and Income Items | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | | 2017 | | 2016 | |
| | (In millions) |
Interest expense | | $ | 15.4 |
| | $ | 15.4 |
| | $ | 0.0 |
| | $ | 46.5 |
| | $ | 46.1 |
| | $ | (0.4 | ) |
Amortization of intangible assets | | 2.5 |
| | 2.5 |
| | (0.0 | ) | | 7.5 |
| | 7.5 |
| | (0.0 | ) |
Total | | $ | 17.9 |
| | $ | 17.9 |
| | $ | 0.0 |
| | $ | 54.0 |
| | $ | 53.6 |
| | $ | (0.4 | ) |
2023.
Interest expense, and amortization of intangible assetsnet for the three and ninesix months ended SeptemberJune 30, 2017 were consistent with2023 increased compared to the same periods of the prior year.comparative periods primarily due to the increase in outstanding debt balance and interest rate on our Credit Facility partially offset by the increase in interest income from improved yields.
Loss (gain) on disposition of assets
The loss on disposition of assets for the three and six months ended June 30, 2023 primarily related to the disposition of certain IHOP Flip'd assets. The gain on disposition of assets for the three and six months ended June 30, 2022 primarily related to the sale of land and buildings for three IHOP restaurants located on sites owned by us and termination of an IHOP restaurant lease. | | Income Taxes | | Three months ended September 30, | | Favorable (Unfavorable) Variance | | Nine months ended September 30, | | Favorable (Unfavorable) Variance | Income Taxes | Three Months Ended June 30, | | Favorable (Unfavorable) Variance | | Six Months Ended June 30, | | Favorable (Unfavorable) Variance |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2023 | | 2022 | | 2023 | | 2022 | |
| | (In millions) | | (In millions) |
Income tax (benefit) provision | | $ | (56.6 | ) | | $ | 13.2 |
| | $ | 69.8 |
| | $ | (28.2 | ) | | $ | 41.7 |
| | $ | 69.9 |
| |
Income before income taxes | | Income before income taxes | $ | 24.4 | | | $ | 32.5 | | | $ | (8.1) | | | $ | 60.6 | | | $ | 66.7 | | | $ | (6.1) | |
Income tax provision | | Income tax provision | $ | 6.2 | | | $ | 8.6 | | | $ | 2.4 | | | $ | 14.9 | | | $ | 17.9 | | | $ | 3.0 | |
Effective tax rate | | 11.1 | % | | 35.3 | % | | 24.2 | % | | 6.4 | % | | 35.2 | % | | 28.8 | % | Effective tax rate | 25.3 | % | | 26.3 | % | | 1.0 | % | | 24.7 | % | | 26.8 | % | | 2.1 | % |
From time to time, we also repurchase shares owned and tendered by employees to satisfy tax withholding obligations on the vesting of restricted stock awards. Shares are deemed purchased at the closing price of our common stock on the vesting date. See Part II, Item 2 for detail on all sharethis stock repurchase activity during the third quarter of 2017.