Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion provides an analysis of our results of operations and reasons for material changes for 2020 as compared to 2019 and should be read together with the financial statements included in this Annual Report on Form 10-K. For a detailed discussion of year-to-year comparisons between fiscal 2019 and fiscal 2018, please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 24, 2020.
The financial tables appearing in Management's Discussion and Analysis 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 cross foot due to rounding.
The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter, the Company's predecessor began developing and franchising additional restaurants. The Company was incorporated under the laws of the State of Delaware in 1976 with the name IHOP Corp. In November 2007, the Company completed the acquisition of Applebee's International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the Company was changed to DineEquity, Inc. and on February 20, 2018, the name of the Company was changed to Dine Brands Global, Inc.SM (“Dine Brands Global,” “we” or “our”). Through various subsidiaries (see Exhibit 21, Subsidiaries of Dine Brands Global, Inc.), we own, franchise and operate the Applebee's Neighborhood Grill + Bar® (“Applebee's”) concept in the bar and grill segment within the casual dining category of the restaurant industry and we own and franchise the International House of Pancakes® (“IHOP”) concept in the family dining category of the restaurant industry. References herein to Applebee's® and IHOP® restaurants are to these two concepts, whether operated by franchisees, area licensees or us.
Domestically, IHOP restaurants are in all 50 states and the District of Columbia, while Applebee's restaurants are located in every state except Hawaii. Internationally, IHOP restaurants are in two United States territories and nine countries; Applebee's restaurants are in two United States territories and 11 countries. With over 3,400 restaurants combined, the substantial majority of which are franchised, we believe we are one of the largest full-service restaurant companies in the world. The June 15, 2020 issue of Nation's Restaurant News reported that IHOP and Applebee's were the largest restaurant systems in the family dining and casual dining categories, respectively, in terms of United States system-wide sales during 2019.
We have a 52/53 week fiscal year ending on the Sunday nearest to December 31 of each year. For convenience, in this annual report on Form 10-K, we refer to all fiscal years as ending on December 31 and all interim fiscal quarters as ending on March 31, June 30 and September 30 of the respective fiscal year. There were 53 calendar weeks in our 2020 fiscal year ended January 3, 2021 and our fiscal 2020 fourth quarter contained 14 calendar weeks. There were 52 calendar weeks in our 2019 and 2018 fiscal years that ended on December 29, 2019 and December 30, 2018, respectively.
COVID-19 Pandemic
In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a novel strain of coronavirus, designated “COVID-19.” Initially, federal, state, local and international governments reacted to the COVID-19 pandemic by encouraging or requiring social distancing, instituting shelter-in-place orders, and requiring, in varying degrees, reduced operating hours, restaurant dine-in and/or indoor dining limitations, capacity limitations or other restrictions that largely limited restaurants to off-premise sales (take-out and delivery) in the early months of the pandemic. Over the course of 2020, certain of these restrictions on indoor dining were relaxed as incidents of infection from the initial outbreak declined, but many of the restrictions were reinstituted as incidents of infection surged. The nature, degree and duration of the restrictions varied by individual geographic area.
Since the onset of the pandemic in March 2020, we have taken numerous actions to mitigate the effects of the COVID-19 pandemic on the Company, its operations and its franchisees, as discussed below:
•We drew down a total of $220 million from our revolving credit facility. Including approximately $3 million in letters of credit, $223 million of the total $225 million available under our revolving facility has been utilized. We had no immediate need for additional liquidity, but in light of then-current market conditions and uncertainty related to the COVID-19 pandemic, we drew on the revolving facility to maximize our financial flexibility. We plan to repay the $220 million drawn on the revolving credit facility in the month of March 2021.
•We have stopped repurchasing our common stock and our Board of Directors did not declare a dividend for the second, third and fourth quarters of 2020. We will reevaluate our capital allocation strategy as industry conditions improve and normal restaurant operations resume, in consideration of our current and forecast earnings, financial condition, cash requirements and other factors. Prior to taking these actions, we used cash totaling $53.8 million for dividends and stock repurchases in 2020 as compared to using cash of $156.6 million for dividends and stock repurchases in 2019.
•We voluntarily increased the interest reserve set aside for our securitized debt, from the required $16.4 million to $32.8 million. We also voluntarily accelerated the funding of interest on our securitized debt with the redirection of cash receipts within the securitization structure. As of the date of this report, the interest payments on long-term debt due March 5, 2021 and June 5, 2021 have been fully funded.
•We have reduced discretionary costs, limited new hiring and significantly reduced the use of independent contractors. At the outset of the pandemic, we temporarily furloughed certain team members across various functional groups in our restaurant support centers and company-operated restaurants and curtailed the hours of substantially all of the hourly restaurant associates at our company-operated restaurants. Most hourly restaurant associates at our company-operated restaurants returned to work following re-opening of those restaurants, and there were no team members from the restaurant support centers remaining on furlough as of December 31, 2020. Our General & Administrative (“G&A”) expenses for the year ended December 31, 2020 were $18.0 million lower than the prior year.
•We offered Applebee's franchisees the opportunity to defer payment of their royalty, advertising and other fees, primarily for the months of March and April. A total of 30 franchisees representing 94% of Applebee’s restaurants have deferred payments totaling $33.4 million. Repayment of deferred amounts, scheduled over up to nine months, began in the third quarter of 2020. As of December 31, 2020, the outstanding balance was approximately $13.7 million, with five franchisees having repaid their deferred balances in full.
•We offered IHOP franchisees the opportunity to defer their royalty, advertising, equipment rent and sublease rent payments, primarily for the months of March and April. Initially, 193 franchisees representing 58% of IHOP restaurants deferred payments totaling $24.1 million. Including subsequent deferrals made on a case-by case basis, the deferral program totaled $27.4 million. Repayment of deferred amounts, scheduled over up to 36 weeks, began in the third quarter of 2020. In certain instances, repayments were temporarily paused for up to 60 days. As of December 31, 2020, the outstanding balance was approximately $15.4 million, with 56 franchisees having repaid their deferred balances in full.
•We received rent deferrals and abatements on properties we lease of approximately $11 million, primarily related to rent deferrals for properties on which IHOP restaurants are located. As of December 31, 2020, the deferred rent balance was approximately $5 million, the significant majority of which is due to be paid in 2021.
•We allowed franchisees to defer their development obligations for up to 15 months and we allowed franchisees to defer their 2020 unit remodel obligations until the end of 2022.
•We have worked with our franchisees to offer a limited menu and to modify their operating hours in a manner that optimizes the functionality of their restaurants. Our expectation is restaurants will return to normal operating hours as sales return to pre-pandemic levels.
•We hired external consultants to work with franchisees in assessing their financial health and to better understand performance variability. We began this process in the third quarter of 2020 working closely with key franchise leaders.
In March 2020, in light of the COVID-19 pandemic, Standard & Poor's (“S&P”) placed the Company on “credit watch-negative” with respect to its 2019 Class A-2 Notes. In September 2020, S&P removed the Company from the credit watch and reaffirmed the BBB rating of the 2019 Class A-2 Notes.
The significance of the impacts of the COVID-19 pandemic resulted in our performing impairment assessments of our long-lived assets, goodwill and other intangible assets. As a result of these assessments, we recorded impairment charges of $123.7 million in the second fiscal quarter of 2020. See “Consolidated Results of Operations - Fiscal 2020, 2019 and 2018 - Impairment and Closure Costs” for further discussion of the impairments. Additional impairment and closure charges of $8.1 million were recorded during the fourth fiscal quarter of 2020, primarily related to closure of IHOP restaurants.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. Among the various provisions in the CARES Act, the Company is utilizing the payroll tax deferrals and has claimed an Employee Retention Credit. As of December 31, 2020, the Company has deferred the payment of $3.1 million of payroll taxes, of which 50% is due to be paid by December 31, 2021 and the remaining 50% is due to be paid by December 31, 2022. The Company also has claimed an Employee Retention Credit of $0.6 million as of December 31, 2020. The Company did not receive any form of loan pursuant the Paycheck Protection Program established under the CARES Act. Other than the deferrals and credits noted above, the Company did not receive financial aid pursuant to assistance programs offered by the federal government related to the COVID-19 pandemic.
The severity of the continued impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, how long the pandemic will last, whether/when recurrences of the virus may arise, what restrictions on restaurant operations may be enacted or re-enacted, the availability and acceptance of vaccines, the timing and extent of customer re-engagement with the Company's brands and, in general, what short- and long-term impact on consumer discretionary spending the COVID-19 pandemic might have on the Company and the restaurant industry as a whole, all of which are uncertain and cannot be predicted.
Overview of 2020 Performance
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 (“domestic same-restaurant sales”), net franchise restaurant development/reduction and the change in total effective restaurants. Changes in both domestic same-restaurant sales and in the number of Applebee's and IHOP restaurants will impact our system-wide retail sales that drive franchise royalty revenues. Net franchise restaurant development/reduction 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 and, where applicable, rental payments under leases that partially may be based on a percentage of their sales.
An overview of our key performance indicators for the year ended December 31, 2020 is as follows:
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Applebee's
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IHOP
|
|
|
|
|
System-wide sales percentage decrease
|
(24.1)
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%
|
|
(34.9)
|
%
|
Domestic system-wide same-restaurant sales percentage decrease
|
(22.4)
|
%
|
|
(32.8)
|
%
|
Net franchise restaurant reduction (1)
|
(76)
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|
|
(69)
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|
Net decrease in total effective restaurants (2)
|
(122)
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|
|
(133)
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|
________________________________________
(1) Franchise and area license restaurant closings, net of openings, during the year ended December 31, 2020.
(2) Change in the weighted average number of franchise, area license and company-operated restaurants open during the year ended December 31, 2020, compared to the weighted average number of those open during the same period of 2019.
The Applebee's and IHOP sales percentage decreases for the year ended December 31, 2020 were due to a decrease in domestic same-restaurant sales primarily as a result of the effects of COVID-19, as well as a decrease in total effective restaurants. The decrease in total effective restaurants for each brand reflects both a net reduction in franchise restaurants due to permanent closures, net of openings, and the weighted effect of restaurants temporarily closed during the course of the year ended December 31, 2020.
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Financial Summary
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Favorable
(Unfavorable) Variance
|
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2020
|
|
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2019
|
|
|
(In millions, except per share amounts)
|
(Loss) income before income taxes
|
|
$
|
(108.6)
|
|
|
$
|
(247.0)
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|
|
$
|
138.4
|
|
Income tax benefit (provision)
|
|
4.6
|
|
|
38.7
|
|
|
(34.1)
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|
Net (loss) income
|
|
$
|
(104.0)
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|
|
$
|
(208.3)
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|
|
$
|
104.3
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|
|
|
|
|
|
|
|
|
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|
|
Variance
|
|
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Effective tax rate
|
|
4.2
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%
|
|
20.4
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%
|
|
24.6
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%
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Net (loss) income per diluted share
|
|
$
|
(6.43)
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|
$
|
(12.28)
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|
|
$
|
5.85
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|
Weighted average diluted shares outstanding
|
|
16.2
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|
|
(1.0)
|
|
|
17.2
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|
Income before income taxes for the year ended December 31, 2020 decreased $247.0 million compared to the year ended December 31, 2019. The primary reasons for the decrease are summarized as follows:
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(In millions)
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Decrease in gross profit:
|
|
Franchise operations
|
$
|
(107.9)
|
|
Company operations
|
(11.5)
|
|
All other operations
|
(14.7)
|
|
Total gross profit decrease
|
(134.1)
|
|
Increase in impairment and closure charges
|
(131.1)
|
|
Decrease in G&A expenses
|
18.0
|
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All other
|
0.2
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|
Decrease in income before income taxes
|
$
|
(247.0)
|
|
Each of these material changes resulted in some manner from impacts of the COVID-19 pandemic. Revenues and cash flows of our franchise, company-operated restaurant and rental operations were significantly affected by the varying degrees of limitations imposed on restaurant operations throughout the majority of 2020. The impacts of the pandemic were considered a potential indicator of impairment which required interim tests of impairment of our goodwill, intangible assets and long-lived assets that resulted in impairment charges of $123.7 million recorded in the second quarter of 2020. To partially mitigate the impact on cash flow, management undertook actions to reduce G&A, such as the furloughing of employees noted above.
Our 2020 effective tax rate of 4.2% applied to pretax book loss was significantly different than the statutory Federal income tax rate of 21% primarily because a $92.2 million impairment of goodwill incurred in the second quarter is not deductible for income tax purposes and therefore has no associated tax benefit. See Note 16 - Income Taxes, of the Notes to the Consolidated Financial Statements for a reconciliation between our effective rate and the statutory Federal income tax rate.
Restaurant Data - System-wide Sales and Domestic Same-Restaurant Sales
The following table sets forth for each of the past three years 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 in the prior two years. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company and, as such, the percentage changes in sales presented below are 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 generally 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 future plans for the development of additional restaurants as well as evaluation of current operations.
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Applebee's
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|
Year Ended December 31,
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Global Effective Restaurants:(a)
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2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
|
1,624
|
|
|
1,745
|
|
|
1,883
|
|
Company
|
68
|
|
|
69
|
|
|
3
|
|
Total
|
1,692
|
|
|
1,814
|
|
|
1,886
|
|
System-wide:(b)
|
|
|
|
|
|
Domestic sales percentage change(c)
|
(24.1)
|
%
|
|
(3.0)
|
%
|
|
2.3
|
%
|
Domestic same-restaurant sales percentage change(d)
|
(22.4)
|
%
|
|
(0.7)
|
%
|
|
5.0
|
%
|
Franchise:(b)
|
|
|
|
|
|
Domestic sales percentage change(c) (e)
|
(24.3)
|
%
|
|
(5.9)
|
%
|
|
2.1
|
%
|
Domestic same-restaurant sales percentage change(d)
|
(22.6)
|
%
|
|
(0.7)
|
%
|
|
4.9
|
%
|
Domestic average weekly unit sales (in thousands)
|
$
|
37.1
|
|
|
$
|
47.3
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|
|
$
|
46.7
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|
IHOP
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Year Ended December 31,
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|
2020
|
|
2019
|
|
2018
|
Global Effective Restaurants:(a)
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|
|
|
|
|
Franchise
|
1,532
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|
|
1,663
|
|
|
1,633
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|
Area license
|
155
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|
|
157
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|
|
162
|
|
|
|
|
|
|
|
Total
|
1,687
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|
|
1,820
|
|
|
1,795
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|
System-wide:(b)
|
|
|
|
|
|
Sales percentage change(c)
|
(34.9)
|
%
|
|
2.2
|
%
|
|
3.9
|
%
|
Domestic same-restaurant sales percentage change(d) (f)
|
(32.8)
|
%
|
|
1.1
|
%
|
|
1.5
|
%
|
|
|
|
|
|
|
Franchise:(b)
|
|
|
|
|
|
Sales percentage change(c)
|
(35.0)
|
%
|
|
2.2
|
%
|
|
4.4
|
%
|
Domestic same-restaurant sales percentage change(d)
|
(32.8)
|
%
|
|
1.0
|
%
|
|
1.5
|
%
|
Average weekly unit sales (in thousands)
|
$
|
25.4
|
|
|
$
|
36.7
|
|
|
$
|
36.6
|
|
|
|
|
|
|
|
Area License:(b)
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|
|
|
|
|
IHOP sales percentage change(c)
|
(34.2)
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%
|
|
2.7
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%
|
|
0.5
|
%
|
_________________________________
(a)“Global Effective Restaurants” are the weighted average number of restaurants open in a given 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, domestic and international, which includes restaurants owned by franchisees and area licensees as well as those owned by the Company.
(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 restaurants. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. An increase or decrease in franchisees' reported sales will result in a corresponding increase or decrease in our royalty revenue. ales at company-operated restaurants and unaudited reported sales for Applebee's domestic franchise restaurants, IHOP franchise restaurants and IHOP area license restaurants for the years ended December 31, 2020, 2019 and 2018 and were as follows:
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
Reported sales
|
2020
|
|
2019
|
|
2018
|
|
(In millions)
|
Applebee's domestic franchise restaurant sales
|
$
|
2,993.0
|
|
|
$
|
3,954.3
|
|
|
$
|
4,204.1
|
|
Applebee's company-operated restaurants
|
108.0
|
|
|
131.2
|
|
|
7.1
|
|
IHOP franchise restaurant sales
|
2,063.6
|
|
|
3,174.2
|
|
|
3,106.7
|
|
IHOP area license restaurant sales
|
190.5
|
|
|
289.5
|
|
|
282.0
|
|
|
|
|
|
|
|
Total
|
$
|
5,355.1
|
|
|
$
|
7,549.2
|
|
|
$
|
7,599.9
|
|
(c)“Sales percentage change” reflects, for each category of restaurants, the percentage change in sales in any given fiscal year compared to the prior fiscal year for all restaurants in that category.
(d)“Domestic same-restaurant sales change” reflects the percentage change in sales in any given fiscal year, compared to the same weeks in the prior year, for domestic restaurants that have been operated throughout both fiscal years 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 the fiscal years being compared may be different from year to year.
(e)The Applebee's franchise sales percentage change for 2019 was impacted by the acquisition of 69 franchise restaurants in December 2018 now reported as company-operated.
(f)IHOP system-wide same-restaurant sales data includes area license restaurants beginning in 2019
Domestic Same-Restaurant Sales Trends
Applebee’s domestic same-restaurant sales decreased 17.6% for the three months ended December 31, 2020 from the same period in 2019. The decrease primarily was due to a significant decline in customer traffic as a result of the effects of COVID-19, partially offset by an increase in average check. Applebee's same-restaurant sales for the fourth quarter of 2020 outperformed the casual dining segment of the restaurant industry. Based on data from Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), the casual dining segment of the restaurant industry experienced a decrease in same-restaurant sales during the fourth quarter of 2020 resulting from a large decline in customer traffic that was somewhat offset by an increase in average customer check. The primary reason for the performance differential between Applebee's and the casual dining segment during the fourth quarter of 2020 was the increase in average customer check, as Applebee's increase in average customer check was larger than that of the casual dining segment.
For the year ended December 31, 2020, Applebee’s domestic same-restaurant sales decreased 22.4%. This decrease for the full year 2020 was due to a significant decline in customer traffic as a result of the effects of COVID-19, partially offset by an increase in average check. Applebee's same-restaurant sales for the year ended December 31, 2020 underperformed the casual dining segment of the restaurant industry. Based on data from Black Box, the casual dining segment experienced a decrease in same-restaurant sales due to a decline in customer traffic that was slightly offset by an increase in average customer check. The primary reason for the performance differential between Applebee's and the casual dining segment for the year ended December 31, 2020 was the decrease in traffic, as Applebee's decrease in traffic was larger than that of the casual dining segment.
Applebee’s system-wide domestic same-restaurant sales had significant variability over the course of fiscal 2020. This variability was due to several factors. Restrictions on indoor dining were relaxed after the incidents of infection from the initial outbreak of COVID-19 declined, but the restrictions were reinstituted in varying degrees during the fourth quarter of 2020 as incidents of the virus surged in individual geographic areas. Another factor was the Company's return to national media advertising in July 2020 after having temporarily discontinued its national advertising programs in March 2020. Other factors were the resilience of the consumers' desire to patronize restaurants as dine-in restrictions were lifted and the retention of off-premise sales.
As shown in the following table, prior to the large-scale initiation of restrictions on restaurant operations, Applebee's began 2020 with positive domestic same-restaurant sales. For the first 10 weeks of the first quarter of fiscal 2020, Applebee's domestic same-restaurant sales increased 3.2%, primarily due to an increase in customer traffic as well as an increase in average customer check. During March and April, virtually all Applebee's restaurants were limited to off-premise sales or were temporarily closed. After reaching a low point in same-restaurant sales in April 2020, Applebee's experienced progressive improvement in same-restaurant sales for the months of May through October 2020. However, as incidents of the virus surged in the fourth quarter and restrictions on restaurant operations were reinstituted, the trend of improvement in same-restaurant sales reversed for the months of November and December.
The following table reflects the impact of restaurant dine-in restrictions on Applebee's domestic restaurant operations by month since dine-in restrictions were first instituted:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant Status
|
Status as of 2020 Fiscal Month Ended
|
|
Mar
|
|
Apr
|
|
May
|
|
June
|
|
July
|
|
Aug
|
|
Sept
|
|
Oct
|
|
Nov
|
|
Dec
|
Dining rooms open*
|
4
|
|
|
46
|
|
|
815
|
|
|
1,522
|
|
1,505
|
|
1,558
|
|
1,595
|
|
1,597
|
|
1,297
|
|
1,276
|
|
Limited to off-premise sales
|
1,402
|
|
|
1,397
|
|
|
761
|
|
|
70
|
|
94
|
|
37
|
|
3
|
|
1
|
|
294
|
|
315
|
|
Temporarily closed
|
251
|
|
|
208
|
|
|
71
|
|
|
41
|
|
31
|
|
24
|
|
16
|
|
12
|
|
12
|
|
9
|
|
Total
|
1,657
|
|
|
1,651
|
|
|
1,647
|
|
|
1,633
|
|
1,630
|
|
1,619
|
|
1,614
|
|
1,610
|
|
1,603
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* In most instances, limited to 50% capacity or less and/or reduced operating hours
While Applebee's off-premise sales as a percentage of Applebee's total sales have declined from the April 2020 peak as restrictions on in-restaurant dining were relaxed, off-premise sales as a percentage of Applebee's total sales have increased compared to pre-pandemic levels.
Off-premise sales as % total Applebee's domestic sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Fiscal Month Ended
|
Jan
|
|
Feb
|
|
Mar
|
|
Apr
|
|
May
|
|
June
|
|
July
|
|
Aug
|
|
Sept
|
|
Oct
|
|
Nov
|
|
Dec
|
13.1
|
%
|
|
14.4
|
%
|
|
22.2
|
%
|
|
99.8
|
%
|
|
76.4
|
%
|
|
40.2
|
%
|
|
38.0
|
%
|
|
34.9
|
%
|
|
31.7
|
%
|
|
30.1
|
%
|
|
34.5
|
%
|
|
44.8
|
%
|
* Same-restaurant sales data includes area license restaurants beginning in 2019
IHOP’s domestic same-restaurant sales decreased 30.1% for the three months ended December 31, 2020 from the same period in 2019. The decrease primarily was due to a significant decline in customer traffic as a result of the effects of COVID-19, as well as a slight decrease in average check. IHOP's same-restaurant sales for the fourth quarter of 2020 underperformed the family dining segment of the restaurant industry. Based on data from Black Box, the family dining segment of the restaurant industry experienced a decrease in same-restaurant sales during the fourth quarter of 2020 resulting from a large decline in customer traffic that was partially offset by an increase in average customer check. The primary reason for the performance differential between IHOP and the family dining segment during the fourth quarter of 2020 was the change in average customer check, as IHOP experienced a small decrease in average customer check while the family dining segment reported an increase in average check. The breakfast category, in general, has experienced larger transaction declines than other dayparts.
For the year ended December 31, 2020, IHOP's domestic same-restaurant sales decreased 32.8% due to a significant decline in customer traffic as a result of the effects of COVID-19, partially offset by a slight increase in average check. IHOP's same-restaurant sales for the fourth quarter of 2020 underperformed the family dining segment of the restaurant industry. Based on data from Black Box, for the full year of 2020, the family dining segment experienced a decrease in same-restaurant sales resulting from a large decline in customer traffic that was partially offset by an increase in average customer check. The reason for the performance differential between IHOP and the family dining segment during 2020 was the change in average check as IHOP experienced a smaller increase in average customer check than the family dining segment, partially offset by a smaller decrease in traffic.
IHOP’s system-wide domestic same-restaurant sales had significant variability over the course of fiscal 2020. This variability was due to several factors. Restrictions on indoor dining were relaxed as incidents of infection from the initial outbreak of COVID-19 declined, but the restrictions were reinstituted in varying degrees during the fourth quarter of 2020 as incidents of infection from the virus surged in individual geographic areas. Another factor was the Company's return to national media advertising in July 2020 after having temporarily discontinued its national advertising programs in March 2020. Other factors were the resilience of the consumers' desire to patronize restaurants as dine-in restrictions were lifted and the retention of off-premise sales.
As shown in the following table, prior to the large-scale initiation of restrictions on restaurant operations, IHOP began 2020 with positive domestic same-restaurant sales for the month of January. For the first 10 weeks of the first quarter of fiscal 2020, IHOP's domestic same-restaurant sales decreased 0.6%. During March and April, the significant majority of IHOP restaurants were limited to off-premise sales or were temporarily closed. After reaching a low point in same-restaurant sales in April 2020, IHOP experienced progressive improvement in same-restaurant sales for the months of May through September 2020. However, as incidents of the virus surged in the fourth quarter and restrictions on restaurant operations were reinstituted, the trend of improvement in same-restaurant sales reversed for the months of October, November and December.
The following table reflects the impact of restaurant dine-in restrictions on IHOP's domestic restaurant operations by month since dine-in restrictions were first instituted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant Status
|
Status as of 2020 Fiscal Month Ended
|
|
Mar
|
|
Apr
|
|
May
|
|
June
|
|
July
|
|
Aug
|
|
Sept
|
|
Oct
|
|
Nov
|
|
Dec
|
Dining rooms open*
|
204
|
|
|
3
|
|
|
925
|
|
|
1,485
|
|
1,321
|
|
1,349
|
|
1,425
|
|
1,543
|
|
1,332
|
|
1,174
|
Limited to off-premise sales
|
1,158
|
|
|
1,334
|
|
|
593
|
|
|
76
|
|
244
|
|
234
|
|
167
|
|
71
|
|
294
|
|
446
|
Temporarily closed
|
347
|
|
|
366
|
|
|
182
|
|
|
134
|
|
128
|
|
99
|
|
91
|
|
74
|
|
62
|
|
50
|
Total
|
1,709
|
|
|
1,703
|
|
|
1,700
|
|
|
1,695
|
|
1,693
|
|
1,682
|
|
1,683
|
|
1,688
|
|
1,688
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* In most instances, limited to 50% capacity or less and/or reduced operating hours
While IHOP off-premise sales as a percentage of IHOP total sales have declined from the April 2020 peak as restrictions on in-restaurant dining were relaxed, off-premise sales as a percentage of IHOP total sales have increased compared to pre-pandemic levels.
Off-premise sales as % total IHOP domestic sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Fiscal Month Ended
|
Jan
|
|
Feb
|
|
Mar
|
|
Apr
|
|
May
|
|
June
|
|
July
|
|
Aug
|
|
Sept
|
|
Oct
|
|
Nov
|
|
Dec
|
9.7
|
%
|
|
10.4
|
%
|
|
17.0
|
%
|
|
94.7
|
%
|
|
68.8
|
%
|
|
35.8
|
%
|
|
35.0
|
%
|
|
32.5
|
%
|
|
30.6
|
%
|
|
29.5
|
%
|
|
30.2
|
%
|
|
38.4
|
%
|
Net Franchise Restaurant Development
The total number of Applebee's restaurants open at December 31, 2020 declined 4.3% from the number open at December 31, 2019, as franchisees opened six new restaurants but closed 82 restaurants. The total number of IHOP restaurants open at December 31, 2020 decreased 3.7% from the number open at December 31, 2019, as IHOP franchisees and area licensees opened 27 restaurants in 2020 but closed 96 restaurants.
Internationally, franchisees of both brands opened 11 restaurants and closed 51, a net decrease of 40 international restaurants. This international development activity is included in the total activity for each brand cited above.
In response to the impact of the COVID-19 pandemic on our franchisees, we allowed our franchisees to defer their development obligations for up to 15 months.
Restaurant closures can occur for a variety of reasons that may differ for each restaurant and for each franchisee. Closures generally fall into one of two categories: restaurants in older locations whose retail, residential and traffic demographics have changed unfavorably over time, and restaurants with non-viable unit economics. Our franchisees are independent businesses and their decisions to close restaurants, both temporarily and permanently, can be impacted by numerous factors that are outside of our control, including but not limited to, the impact of COVID-19 on individual franchisees as well as franchisees' agreements with their lenders and landlords.
The following tables present Applebee's and IHOP restaurant development and franchising activity over the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Applebee's Restaurant Development Activity
|
|
|
|
|
|
|
|
|
|
|
|
Summary - beginning of period:
|
|
|
|
|
|
Franchise
|
1,718
|
|
|
1,768
|
|
|
1,936
|
|
Company restaurants (a)
|
69
|
|
|
69
|
|
|
—
|
|
Total Applebee's restaurants, beginning of period
|
1,787
|
|
|
1,837
|
|
|
1,936
|
|
Domestic
|
1,665
|
|
|
1,693
|
|
|
1,782
|
|
International
|
122
|
|
|
144
|
|
|
154
|
|
|
|
|
|
|
|
Franchise restaurants opened:
|
|
|
|
|
|
Domestic
|
3
|
|
|
1
|
|
|
2
|
|
International
|
3
|
|
|
2
|
|
|
5
|
|
Total franchise restaurants opened
|
6
|
|
|
3
|
|
|
7
|
|
Franchise restaurants closed:
|
|
|
|
|
|
Domestic
|
(68)
|
|
|
(29)
|
|
|
(91)
|
|
International
|
(14)
|
|
|
(24)
|
|
|
(15)
|
|
Total franchise restaurants closed
|
(82)
|
|
|
(53)
|
|
|
(106)
|
|
Net franchise restaurant reduction
|
(76)
|
|
|
(50)
|
|
|
(99)
|
|
Franchise restaurants acquired by the Company (a)
|
—
|
|
|
—
|
|
|
(69)
|
|
Net franchise restaurant decrease
|
(76)
|
|
|
(50)
|
|
|
(168)
|
|
|
|
|
|
|
|
Summary - end of period:
|
|
|
|
|
|
Franchise
|
1,642
|
|
|
1,718
|
|
|
1,768
|
|
Company restaurants (a)
|
69
|
|
|
69
|
|
|
69
|
|
Total Applebee's restaurants, end of period
|
1,711
|
|
|
1,787
|
|
|
1,837
|
|
Domestic
|
1,600
|
|
|
1,665
|
|
|
1,693
|
|
International
|
111
|
|
|
122
|
|
|
144
|
|
% Decrease in total Applebee's restaurants from prior year
|
(4.3)
|
%
|
|
(2.7)
|
%
|
|
(5.1)
|
%
|
____________________________________________________________________________________________________________
(a) In December 2018, the Company acquired 69 Applebee's restaurants from a former franchisee.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
IHOP Restaurant Development Activity
|
|
|
|
|
|
|
|
|
|
|
|
Summary - beginning of period:
|
|
|
|
|
|
Franchise
|
1,680
|
|
|
1,669
|
|
|
1,622
|
|
Area license
|
161
|
|
|
162
|
|
|
164
|
|
|
|
|
|
|
|
Total IHOP restaurants, beginning of period
|
1,841
|
|
|
1,831
|
|
|
1,786
|
|
Domestic
|
1,710
|
|
|
1,705
|
|
|
1,671
|
|
International
|
131
|
|
|
126
|
|
|
115
|
|
|
|
|
|
|
|
Franchise/area license restaurants opened:
|
|
|
|
|
|
Domestic franchise
|
16
|
|
|
33
|
|
|
51
|
|
Domestic area license
|
3
|
|
|
5
|
|
|
3
|
|
International franchise
|
8
|
|
|
13
|
|
|
17
|
|
|
|
|
|
|
|
Total franchise/area license restaurants opened
|
27
|
|
|
51
|
|
|
71
|
|
Franchise/area license restaurants closed:
|
|
|
|
|
|
Domestic franchise
|
(56)
|
|
|
(27)
|
|
|
(15)
|
|
Domestic area license
|
(3)
|
|
|
(6)
|
|
|
(5)
|
|
International franchise
|
(34)
|
|
|
(8)
|
|
|
(6)
|
|
International area license
|
(3)
|
|
|
—
|
|
|
—
|
|
Total franchise/area license restaurants closed
|
(96)
|
|
|
(41)
|
|
|
(26)
|
|
Net franchise/area license restaurant (reduction) development
|
(69)
|
|
|
10
|
|
|
45
|
|
Refranchised from Company restaurants
|
—
|
|
|
—
|
|
|
1
|
|
Franchise restaurants reacquired by the Company
|
(3)
|
|
|
—
|
|
|
(1)
|
|
Net franchise/area license restaurant (reductions) additions
|
(72)
|
|
|
10
|
|
|
45
|
|
|
|
|
|
|
|
Summary - end of period:
|
|
|
|
|
|
Franchise
|
1,611
|
|
|
1,680
|
|
|
1,669
|
|
Area license
|
158
|
|
|
161
|
|
|
162
|
|
Company
|
3
|
|
|
—
|
|
|
—
|
|
Total IHOP restaurants, end of period
|
1,772
|
|
|
1,841
|
|
|
1,831
|
|
Domestic
|
1,670
|
|
|
1,710
|
|
|
1,705
|
|
International
|
102
|
|
|
131
|
|
|
126
|
|
% (Decrease) increase in total IHOP restaurants from prior year
|
(3.7)
|
%
|
|
0.5
|
%
|
|
2.5
|
%
|
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 these tables and temporarily closed restaurants are included in the summary counts at the beginning and end of each period shown. However, temporary closures are reflected in the weighted calculation of Effective Restaurants presented in the preceding Restaurant Data tables.
As previously disclosed, we and certain of our IHOP franchisees evaluated the long-term viability of certain IHOP restaurants in light of individual restaurant-level economics impacted by the COVID-19 pandemic. When we began the evaluation process, we expected it could result in the closure of up to 100 restaurants over the next six months. The evaluation process been completed. As of December 31, 2020, we closed 14 restaurants in the fourth quarter of 2020 and, while the final extent and timing of additional closures remains subject to change, we currently anticipate the completion of the evaluation process could result in the closure of up to 27 additional IHOP restaurants. We have recorded costs of approximately $13.5 million related to these 41 restaurants during the fourth quarter of 2020, primarily charges for impairment and provisions for bad debt and deferred rent.
Closures of Applebee's and IHOP restaurants adversely impact our system-wide retail sales that drive our franchise royalty revenues as well as, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix. Further, with certain restaurants, we own or lease the underlying property and sublease it to the applicable franchisee. Thus, our rental income also could be adversely affected due to our obligation to make rental or other payments for such properties.
Consolidated Results of Operations - Fiscal 2020, 2019 and 2018
The tables in the following section of this Form 10-K present information from our Consolidated Statements of Comprehensive (Loss) Income for our 2020, 2019 and 2018 fiscal years. A detailed discussion of year-to-year comparisons between fiscal 2020 and fiscal 2019 can be found below. For a detailed discussion of year-to-year comparisons between fiscal 2019 and fiscal 2018, please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Additional Events Impacting Comparability of Financial Information
53rd week in Fiscal 2020
Our fiscal year ends on the Sunday nearest to December 31 of each year. Every five or six years, our fiscal year contains 53 calendar weeks. Our 2020 fiscal year contained 53 calendar weeks, whereas fiscal 2019 and 2018 each contained 52 calendar weeks. The estimated impact of the 53rd week on fiscal 2020 results of operations was additional revenue of $14.4 million, additional gross profit of $4.7 million and a decrease in loss before income taxes of $2.2 million. Our fiscal 2021 will contain 52 calendar weeks.
Loss on Extinguishment of Debt
As discussed under Liquidity and Capital Resources of the Company - Long-term Debt, we refinanced our long-term debt in 2019 and recognized a loss on extinguishment of debt of $8.3 million. There was no similar transaction in 2020.
Financial Review
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
Revenue
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Franchise operations
|
|
$
|
469.5
|
|
|
$
|
(181.7)
|
|
|
$
|
651.2
|
|
|
$
|
7.3
|
|
|
$
|
643.9
|
|
Company restaurant operations
|
|
108.1
|
|
|
(23.1)
|
|
|
131.2
|
|
|
124.1
|
|
|
7.1
|
|
Rental operations
|
|
105.9
|
|
|
(14.8)
|
|
|
120.7
|
|
|
(1.2)
|
|
|
121.9
|
|
Financing operations
|
|
5.8
|
|
|
(1.3)
|
|
|
7.1
|
|
|
(0.9)
|
|
|
8.0
|
|
Total revenue
|
|
$
|
689.3
|
|
|
$
|
(220.9)
|
|
|
$
|
910.2
|
|
|
$
|
129.3
|
|
|
$
|
780.9
|
|
(Decrease) increase vs. prior year
|
|
(24.3)
|
%
|
|
|
|
16.6
|
%
|
|
|
|
6.7
|
%
|
Our 2020 total revenue decreased $220.9 million compared to 2019. The decrease in franchise and company restaurant operations revenues primarily was due to a significant decline in customer traffic at our restaurants resulting from measures put in place by various jurisdictions of local, state, national and international governmental entities to mitigate the spread of the COVID-19 virus, as well as changes in consumer behavior resulting therefrom. Rental operations revenue was also impacted by COVID-19 effects, primarily due to a decline in rent paid based on a percentage of franchisees' retail sales. Interest income from financing operations was not impacted significantly by the COVID-19 pandemic, with the expected progressive decline due to repayments of outstanding balances. Total revenue was favorably impacted by approximately $14.4 million due to a 53rd week in fiscal 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
Gross Profit (Loss)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Franchise operations
|
|
$
|
230.5
|
|
|
$
|
(107.9)
|
|
|
$
|
338.4
|
|
|
$
|
25.1
|
|
|
$
|
313.3
|
|
Company restaurant operations
|
|
(3.5)
|
|
|
(11.5)
|
|
|
8.0
|
|
|
6.8
|
|
|
1.2
|
|
Rental operations
|
|
16.4
|
|
|
(13.5)
|
|
|
29.9
|
|
|
(1.3)
|
|
|
31.2
|
|
Financing operations
|
|
5.3
|
|
|
(1.2)
|
|
|
6.5
|
|
|
(0.9)
|
|
|
7.4
|
|
Total gross profit
|
|
$
|
248.7
|
|
|
$
|
(134.1)
|
|
|
$
|
382.8
|
|
|
$
|
29.7
|
|
|
$
|
353.1
|
|
(Decrease) increase vs. prior year
|
|
(35.0)
|
%
|
|
|
|
8.4
|
%
|
|
|
|
4.2
|
%
|
Our 2020 total gross profit decreased $134.1 million compared to 2019, primarily due to the revenue declines related to the pandemic as cited above as well a $13.1 million increase in bad debt expense. Total gross profit was favorably impacted by approximately $4.7 million due to a 53rd week in fiscal 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Operations
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions, except number of restaurants)
|
Effective Franchise Restaurants:(1)
|
|
|
|
|
|
|
|
|
|
|
Applebee’s
|
|
1,624
|
|
(121)
|
|
1,745
|
|
(138)
|
|
1,883
|
IHOP
|
|
1,687
|
|
(133)
|
|
1,820
|
|
25
|
|
1,795
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Revenues:
|
|
|
|
|
|
|
|
|
|
|
Applebee's
|
|
$
|
124.8
|
|
|
$
|
(38.8)
|
|
|
$
|
163.6
|
|
|
$
|
(13.0)
|
|
|
$
|
176.6
|
|
IHOP
|
|
143.2
|
|
|
(61.4)
|
|
|
204.6
|
|
|
5.6
|
|
|
199.0
|
|
Advertising
|
|
201.5
|
|
|
(81.5)
|
|
|
283.0
|
|
|
14.7
|
|
|
268.3
|
|
Total franchise revenues
|
|
469.5
|
|
|
(181.7)
|
|
|
651.2
|
|
|
7.3
|
|
|
643.9
|
|
Franchise Expenses:
|
|
|
|
|
|
|
|
|
|
|
Applebee’s
|
|
7.0
|
|
|
(2.7)
|
|
|
4.3
|
|
|
30.8
|
|
|
35.1
|
|
IHOP
|
|
30.0
|
|
|
(3.3)
|
|
|
26.7
|
|
|
(0.8)
|
|
|
25.9
|
|
Advertising
|
|
202.0
|
|
|
79.8
|
|
|
281.8
|
|
|
(12.2)
|
|
|
269.6
|
|
Total franchise expenses
|
|
239.0
|
|
|
73.8
|
|
|
312.8
|
|
|
17.8
|
|
|
330.6
|
|
Franchise Segment Profit:
|
|
|
|
|
|
|
|
|
|
|
Applebee’s
|
|
117.8
|
|
|
(41.5)
|
|
|
159.3
|
|
|
17.8
|
|
|
141.5
|
|
IHOP
|
|
113.2
|
|
|
(64.7)
|
|
|
177.9
|
|
|
4.8
|
|
|
173.1
|
|
Advertising
|
|
(0.5)
|
|
|
(1.7)
|
|
|
1.2
|
|
|
2.5
|
|
|
(1.3)
|
|
Total franchise segment profit
|
|
$
|
230.5
|
|
|
$
|
(107.9)
|
|
|
$
|
338.4
|
|
|
$
|
25.1
|
|
|
$
|
313.3
|
|
Gross profit as % of total revenue
|
|
49.1
|
%
|
|
|
|
52.0
|
%
|
|
|
|
48.7
|
%
|
Gross profit as % of franchise fees (2)
|
|
86.2
|
%
|
|
|
|
91.6
|
%
|
|
|
|
83.8
|
%
|
____________________________________________________________________________________________
(1) Effective Franchise Restaurants are the weighted average number of franchise and area license restaurants open in a given fiscal period, adjusted to account for franchise and area license restaurants open for only a portion of the period.
(2) Total franchise revenue excluding advertising
Our total franchise revenue decreased $181.7 million in 2020 compared to 2019, due to changes in the following components:
•Applebee's franchise revenue decreased 23.7% compared to 2019. Approximately $32.9 million of the decline was due to a decrease of 22.6% in domestic franchise same-restaurant sales primarily caused by the adverse impact on customer traffic of COVID-19-related mitigation measures and changes in consumer behavior. Additionally, revenue decreased $3.8 million due to permanent domestic restaurant closures and $3.2 million due to temporary domestic restaurant closures. Applebee's international revenues declined $3.1 million, primarily due to a decline in same-restaurant sales as well as a $0.6 million decrease due to temporary closures and a $0.2 million due to permanent restaurant closures. These unfavorable changes were partially offset by additional revenue from the 53rd week of approximately $2.4 million, a decrease in domestic delivery credits that reduce royalty revenue and an increase in international franchise fees.
•IHOP franchise revenue decreased 30.0% compared to 2019, primarily due to lower royalty and pancake and waffle dry mix revenues resulting from a 32.8% decrease in domestic franchise same-restaurant sales primarily caused by the adverse impact on customer traffic of COVID-19-related mitigation measures and changes in consumer behavior. Additionally, revenue decreased $7.5 million due to temporary domestic restaurant closures. IHOP's international revenues declined $4.4 million, due primarily to a decline in same-restaurant sales as well as a $0.5 million decrease due to temporary and permanent restaurant closures. These unfavorable changes were partially offset by additional revenue from the 53rd week of approximately $3.0 million, as well as by a $3.5 million increase in franchise fees (primarily termination and forfeited franchise fees). and a decrease in domestic delivery credits that reduce royalty revenue.
•Advertising revenue decreased $81.5 million compared to 2019, as discussed by brand below.
Our 2020 total franchise expenses decreased $73.8 million compared to 2019, due to changes in the following components:
•Applebee's franchise expenses increased $2.7 million, primarily due to a $3.5 million increase in bad debt expense. Bad debt expense for 2020 was $3.3 million as compared to a bad debt recovery of $0.2 million in 2019.
•IHOP franchise expenses increased $3.3 million, primarily due to a $9.6 million increase in bad debt expense, partially offset by a decrease in purchases of pancake and waffle dry mix. IHOP bad debt expense for 2020 was $9.4 million compared to a bad debt recovery of $0.2 million in 2019. Bad debt expense for 2020 included $2.9 million related to the restaurant closures discussed above under IHOP Restaurant Development Activity.
•Advertising expenses decreased $79.8 million, due to a corresponding decrease in advertising revenue, partially offset by the net change in advertising deficit between 2020 and 2019, as discussed below.
Gross profit as a percentage of total revenue decreased in 2020 compared to 2019, primarily because of the $13.1 million increase in bad debt expense.
Advertising revenue and expense by brand for fiscal 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Advertising Revenues:
|
|
|
|
|
|
|
|
|
|
|
Applebee's
|
|
$
|
124.8
|
|
|
$
|
(40.7)
|
|
|
$
|
165.5
|
|
|
$
|
12.5
|
|
|
153.0
|
|
IHOP
|
|
76.7
|
|
|
(40.8)
|
|
|
117.5
|
|
|
2.2
|
|
|
115.3
|
|
Total advertising revenues
|
|
$
|
201.5
|
|
|
(81.5)
|
|
|
$
|
283.0
|
|
|
14.7
|
|
|
$
|
268.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Expenses:
|
|
|
|
|
|
|
|
|
|
|
Applebee’s
|
|
$
|
124.8
|
|
|
$
|
40.8
|
|
|
$
|
165.6
|
|
|
$
|
(12.6)
|
|
|
$
|
153.0
|
|
IHOP
|
|
77.2
|
|
|
39.0
|
|
|
116.2
|
|
|
0.4
|
|
|
116.6
|
|
Total advertising expenses
|
|
$
|
202.0
|
|
|
$
|
79.8
|
|
|
$
|
281.8
|
|
|
$
|
(12.2)
|
|
|
$
|
269.6
|
|
Applebee's advertising revenue and expense for 2020 decreased 24.6% compared to 2019, primarily due to the decrease of 22.6% in domestic franchise same-restaurant sales, as well as a $4.3 million decrease due to permanent domestic restaurant closures and a $3.5 million decrease due to temporary domestic restaurant closures. These unfavorable changes were partially offset by additional revenue from the 53rd week of approximately $2.6 million. IHOP's advertising revenue and expense for 2020 decreased by 34.7% and 33.6%, respectively, compared to 2019, primarily due to the decrease of 32.8% in domestic franchise same-restaurant sales, as well as a decrease due to temporary and permanent restaurant closures. These unfavorable changes were partially offset by additional revenue from the 53rd week of approximately $1.6 million.
It is our accounting policy to recognize any deficiency in advertising fee revenue compared to advertising expenditure, or recovery of a previously recognized deficiency in advertising fee revenue compared to advertising expenditure, in the fourth quarter of our fiscal year. In 2020, international marketing expenditures exceeded revenues by approximately $0.5 million. In 2019, IHOP advertising revenue exceeded advertising expenditures by $1.3 million, due to the recovery of a deficit that previously had been recognized in 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Operations
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Rental revenues
|
|
$
|
105.9
|
|
|
$
|
(14.8)
|
|
|
$
|
120.7
|
|
|
$
|
(1.2)
|
|
|
$
|
121.9
|
|
Rental expenses
|
|
89.5
|
|
|
1.3
|
|
|
90.8
|
|
|
(0.1)
|
|
|
90.7
|
|
Rental operations segment profit
|
|
$
|
16.4
|
|
|
$
|
(13.5)
|
|
|
$
|
29.9
|
|
|
$
|
(1.3)
|
|
|
$
|
31.2
|
|
Gross profit as % of revenue
|
|
15.5
|
%
|
|
|
|
24.8
|
%
|
|
|
|
25.6
|
%
|
Rental operations relate primarily to IHOP franchise restaurants that were developed under the Previous IHOP Business Model described under Item 1. - Business. Rental income includes revenue from operating leases and interest income from direct financing leases. Rental expenses are costs of prime operating leases and interest expense on prime finance leases on certain franchise restaurants.
Rental segment revenue decreased in 2020 as compared to 2019, primarily due to a $7.4 million decrease in rental income based on a percentage of franchisees' retail sales, a $2.9 million decrease in base rent due to restaurant closures and lease buy-outs and a progressive decline of $1.6 million in interest income as direct financing leases were repaid. These unfavorable changes were partially offset by additional revenue from the 53rd week of approximately $2.0 million. Rental segment expenses for 2020 decreased compared to the same period of the prior year primarily due to a $1.8 million decrease in rent paid based on a percentage of franchisees' retail sales, $1.4 million decrease in interest expense as finance lease obligations are repaid and a $1.1 million decrease in depreciation expense, partially offset by a $3.4 million provision for losses related to the restaurant closures discussed above under IHOP Restaurant Development Activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Operations
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Financing revenues
|
|
$
|
5.8
|
|
|
$
|
(1.3)
|
|
|
$
|
7.1
|
|
|
$
|
(0.9)
|
|
|
$
|
8.0
|
|
Financing expenses
|
|
0.5
|
|
|
0.1
|
|
|
0.6
|
|
|
0.0
|
|
|
0.6
|
|
Financing operations segment profit
|
|
$
|
5.3
|
|
|
$
|
(1.2)
|
|
|
$
|
6.5
|
|
|
$
|
(0.9)
|
|
|
$
|
7.4
|
|
Gross profit as % of revenue
|
|
90.9
|
%
|
|
|
|
91.9
|
%
|
|
|
|
92.5
|
%
|
Financing operations relate primarily to IHOP franchise restaurants that were developed under the Previous IHOP Business Model described under Item 1. - Business. Financing operations revenue primarily consists of interest income from the financing of IHOP franchise fees and equipment leases, as well as from several notes receivable from Applebee's franchisees. We also may sell equipment associated with IHOP franchise restaurants we have reacquired when those restaurants are subsequently refranchised to a new franchisee. Financing expenses are primarily the cost of the restaurant equipment sold.
Financing revenues decreased $1.3 million in 2020 compared to 2019. The change was due to a $1.1 million decrease in IHOP interest income due to the decline in interest income from the financing of franchise fees and equipment leases as note balances were repaid as well as a decrease in interest income on Applebee's notes from franchisees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Operations
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions, except number of restaurants)
|
Effective Company Restaurants:
|
|
|
|
|
|
|
|
|
|
|
Applebee’s
|
|
68
|
|
|
(1)
|
|
|
69
|
|
|
66
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant sales(1)
|
|
$
|
108.1
|
|
|
$
|
(23.1)
|
|
|
$
|
131.2
|
|
|
$
|
124.1
|
|
|
$
|
7.1
|
|
Company restaurant expenses(1)
|
|
109.7
|
|
|
13.5
|
|
|
123.2
|
|
|
(117.3)
|
|
|
5.9
|
|
IHOP restaurant expenses(2)
|
|
1.9
|
|
|
(1.9)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Company restaurant segment profit (loss)
|
|
$
|
(3.5)
|
|
|
$
|
(11.5)
|
|
|
$
|
8.0
|
|
|
$
|
6.8
|
|
|
$
|
1.2
|
|
Gross (loss) profit as % of revenue(3)
|
|
(1.5)
|
%
|
|
|
|
6.1
|
%
|
|
|
|
17.1
|
%
|
___________________________________________________________________________________________________
(1) Related to 69 Applebee's company-operated restaurants.
(2) Costs associated with IHOP restaurants in the process of being refranchised.
(3) Calculated for Applebee's company-operated restaurants only. Percentages calculated on actual amounts, not rounded amounts presented above.
In December 2018, we acquired 69 Applebee's restaurants in North Carolina and South Carolina from a former Applebee's franchisee. The slight decrease in effective restaurants for 2020 reflects the temporary closure of seven restaurants for a short period of time in April 2020 in compliance with state and local COVID-19-related mitigation measures. The restaurants were limited to off-premise sales at several points during the year. Due in large part to these restrictions, same-restaurant sales decreased 19.1% for 2020 compared to 2019. The comparison of gross profit for Applebee's company-operated restaurants as a percentage of revenue for 2020 as compared to 2019 was adversely impacted by the COVID-19-related operating constraints described above. These unfavorable impacts were partially offset by additional revenue and gross profit from the 53rd week of approximately $2.6 million and $0.2 million, respectively.
In addition, Company segment restaurant expenses for 2020 include approximately $1.9 million of costs associated with certain IHOP restaurants while in the process of being refranchised. From time to time, we have operated IHOP restaurants reacquired from franchisees on a temporary basis until those restaurants are refranchised and we may reacquire both IHOP and Applebee's restaurants on a temporary basis in the future. There were three such IHOP restaurants under temporary operation at December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
G&A expenses
|
|
$
|
144.8
|
|
|
$
|
18.0
|
|
|
$
|
162.8
|
|
|
$
|
3.9
|
|
|
$
|
166.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses for 2020 decreased 11.1% compared to 2019, primarily due to a $13.0 million decrease in personnel-related costs, a $5.6 million decrease in travel costs and a $0.9 million decrease in consumer research, partially offset by a $1.0 million increase in depreciation primarily related to capitalized software projects. The decline in personnel-related costs was primarily due to lower costs of salaries and benefits, related in large part to the furloughing of approximately one-third of team members across various functional groups in our restaurant support centers for approximately six months, as well as lower costs of equity-based and other incentive compensation. G&A expenses for 2020 included approximately $1.2 million of costs due to the 53rd week. Included in total G&A expenses for 2020 were $4.3 million of expenses related to company-operated restaurants, as compared to $5.3 million in 2019. The decrease primarily was due to lower personnel-related costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment and Closure Costs
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Impairment of goodwill
|
|
$
|
92.2
|
|
|
$
|
(92.2)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impairment of tradename
|
|
11.0
|
|
|
(11.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-lived asset impairment
|
|
22.3
|
|
|
(22.3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Impairment of reacquired franchise rights
|
|
3.3
|
|
|
(3.3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Impairment of favorable leasehold intangible
|
|
0.8
|
|
|
(0.8)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Closure costs
|
|
3.0
|
|
|
(1.5)
|
|
|
1.5
|
|
|
0.6
|
|
|
2.1
|
|
Total
|
|
$
|
132.6
|
|
|
$
|
(131.1)
|
|
|
$
|
1.5
|
|
|
$
|
0.6
|
|
|
$
|
2.1
|
|
The Company evaluates its goodwill and the indefinite-lived Applebee's tradename for impairment annually in the fourth quarter of each year or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. Definite-lived intangible assets and long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows.
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly spreading
outbreak of COVID-19. In the second quarter of 2020, we noted that our common stock had recovered less of its early March 2020 (pre-pandemic) market value than the overall U.S. stock market had recovered. We also assessed several months of data as to the impact of the COVID-19 pandemic on our operations and, in turn, assessed the impact that might have on the risk premium incorporated into the discount rate. Based on these developments, we performed an interim quantitative test of goodwill and indefinite-lived intangible assets for impairment in the second quarter of 2020. In determining fair value, the Company utilized valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The fair value technique used in this instance is classified as Level 3, where unobservable inputs are used when little or no market data is available.
In performing the quantitative test for impairment of goodwill, we used the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of goodwill. 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, incorporating a risk premium deemed appropriate in light of current conditions. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.
In performing the impairment review of the 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.
As a result of performing the quantitative test of impairment, the Company recognized an impairment of Applebee's goodwill of $92.2 million and an impairment of Applebee's tradename of $11.0 million in the second quarter of 2020.
The majority of the impairment was due to an increase in the assessed risk premium incorporated in the discount rate. 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, increases in the assumed long-term discount rate or an increase in the corporate tax rate.
We performed our annual test of goodwill and intangible assets for impairment on a qualitative basis in the fourth quarter of 2020. In performing that analysis we considered, among other things, the market value of our stock, absolute and relative to peers, and the Company's operating performance compared to forecast results that had been used in performing the impairment analyses during the second quarter of 2020 discussed above. We concluded there were no indicators of additional impairment subsequent to the second quarter of 2020 and therefore, a quantitative test of impairment was not necessary in the fourth quarter of 2020.
The long-lived asset impairment of $22.3 million related to 29 Applebee's company-operated restaurants and 41 IHOP franchisee-operated restaurants for which the carrying amount exceeded the undiscounted cash flows The impairment recorded represented the difference between the carrying value and the estimated fair value. Approximately $15.1 million of the total impairment related to operating lease right-of-use assets that had been recorded in 2019 upon adoption of new accounting guidance for leases codified in Accounting Standards Topic 842, while $7.2 million related to impairments of land, building, leasehold improvements and finance leases. The impairments by individual property varied in amount, ranging from the largest single-property impairment of $1.3 million to less than $5,000.
An impairment of $3.3 million was recognized related to the reacquired franchise rights intangible asset recorded in the purchase price allocation of the December 2018 acquisition of 69 Applebee's restaurants from a former franchisee.
Approximately $1.6 million of the $3.0 million of closure charges for the year ended December 31, 2020 related to seven IHOP restaurants closed during 2020, with the remainder primarily related to adjustments to the reserve for IHOP and Applebee's restaurants closed prior to 2020. Approximately $0.5 million of the $1.5 million of closure charges for the year ended December 31, 2019 related to two IHOP and one Applebee's restaurant closed during 2019, with the remainder primarily related to adjustments to the reserve for IHOP and Applebee's restaurants closed prior to 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expense Items
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Interest expense, net
|
|
$
|
66.9
|
|
|
$
|
(6.5)
|
|
|
$
|
60.4
|
|
|
$
|
1.3
|
|
|
$
|
61.7
|
|
Amortization of intangible assets
|
|
10.9
|
|
|
0.8
|
|
|
11.7
|
|
|
(1.6)
|
|
|
10.1
|
|
Loss (gain) on disposition of assets
|
|
2.1
|
|
|
(2.4)
|
|
|
(0.3)
|
|
|
(0.3)
|
|
|
(0.6)
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
8.3
|
|
|
8.3
|
|
|
(8.3)
|
|
|
—
|
|
Debt refinancing costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
|
2.5
|
|
Total
|
|
$
|
79.9
|
|
|
$
|
0.2
|
|
|
$
|
80.1
|
|
|
$
|
(6.4)
|
|
|
$
|
73.7
|
|
Interest Expense, Net
Interest expense, net increased $6.5 million in 2020 compared to 2019, primarily due to increased interest expense on $220.0 million borrowed under our Revolver in March 2020 and additional interest of approximately $1.2 million due to the 53rd week in 2020. See “Liquidity and Capital Resources” for additional discussion related to the Revolver borrowing.
Amortization of Intangible Assets
Amortization of intangible assets primarily relates to franchising rights arising from the November 2007 acquisition of Applebee's and reacquired franchise rights arising from the December 2018 acquisition of 69 Applebee's restaurants from a former franchisee. Amortization expense decreased $0.8 million in 2020 as compared to 2019 due to the impairment of reacquired franchise rights noted above. See Note 7 - Other Intangible Assets, of the Notes to the Consolidated Financial Statements for additional information.
Loss (Gain) on Disposition of Assets
The loss on disposition of assets for 2020 primarily related to termination of 12 IHOP restaurant leases and the disposition of capitalized software no longer in use. There were no individually significant gains or losses on disposition of assets during 2019 or 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit (Provision)
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Income tax benefit (provision)
|
|
$
|
4.6
|
|
|
$
|
38.7
|
|
|
$
|
(34.1)
|
|
|
$
|
(3.9)
|
|
|
$
|
(30.2)
|
|
Effective tax rate
|
|
4.2
|
%
|
|
20.4
|
%
|
|
24.6
|
%
|
|
2.8
|
%
|
|
27.4
|
%
|
The income tax provision will vary from period to period for two primary reasons: a change in pretax book income and a change in the effective tax rate. Changes in our pretax book income between 2020 and 2019 are addressed in the preceding sections of “Consolidated Results of Operations - Fiscal 2020, 2019 and 2018.”
The 2020 effective tax rate of 4.2% applied to pretax book loss was significantly different than the statutory Federal income tax rate of 21% primarily because of the $92.2 million impairment of goodwill incurred in the second quarter, which is not deductible for income tax purposes and therefore has no associated tax benefit. See Note 16 - Income Taxes, of the Notes to the Consolidated Financial Statements for a reconciliation between our effective rate and the statutory Federal income tax rate.
The 2019 effective tax rate of 24.6% applied to pretax book income was higher than the statutory Federal tax rate of 21% primarily due to tax expense associated with unrecognized tax benefits and state and local income taxes, offset by the recognized benefit from general business credits.
The 2018 effective tax rate of 27.4% applied to pretax book income was higher than the statutory Federal tax rate of 21% primarily due to additional tax expense associated with unrecognized tax benefits related to an IRS audit and state and local income taxes, offset by applying a lower state tax rate applied to the deferred tax balances.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regards to future realization of deferred tax assets. As of December 31, 2020, management determined that it is more likely than not that the benefits from foreign tax credit carryforward and certain state deferred tax assets, including net operating loss carryforwards, from the Applebee’s company-operated restaurants will not be realized. In recognition of this risk, management recorded a valuation allowance of $3.0 million.
Liquidity and Capital Resources of the Company
COVID-19 Pandemic
As discussed in preceding sections of the MD&A, the measures put in place by various governmental entities to help contain the spread of the COVID-19 virus had a significant adverse impact on our restaurant and rental operations over the last ten months of 2020. In response to the numerous uncertainties related to the pandemic, we took several actions to mitigate the effects on our liquidity, as discussed below:
•We drew down a total of $220 million from our revolving credit facility. Including approximately $3 million in letters of credit, $223 million of the total $225 million available under our revolving facility has been utilized. We had no immediate need for additional liquidity, but drew on the revolving facility to maximize our financial flexibility. We plan to repay the $220 million drawn on the revolving credit facility in the month of March 2021.
•We have stopped repurchasing our common stock and our Board of Directors did not declare a dividend for the second, third and fourth quarters of 2020. Prior to taking these actions, we used cash totaling $53.8 million for dividends and stock repurchases in 2020, as compared to using cash of $156.6 million for dividends and stock
repurchases in 2019. We will reevaluate our capital allocation strategy as industry conditions improve and normal restaurant operations resume.
•We offered Applebee's franchisees the opportunity to defer payment of their royalty, advertising and other fees, and IHOP franchisees the opportunity to defer payment of their royalty, advertising, equipment rent and sublease rent payments, primarily for the months of March and April. Including a small amount of additional deferrals offered on a case-by-case basis, franchisees deferred a total of approximately $60 million of payments. In general, repayments will take place over nine months and began in the third quarter of 2020. At December 31, 2020, approximately $29 million of such deferred payments were outstanding.
•We voluntarily increased the interest reserve set aside for our securitized debt, from the required $16.4 million to $32.8 million. We also voluntarily accelerated the funding of interest on our securitized debt with the redirection of cash receipts within the securitization structure. As of the date of this report, the interest payments on long-term debt due March 5, 2021 and June 5, 2021 have been fully funded and are included in current restricted cash.
•We have reduced discretionary costs, limited new hiring and significantly reduced the use of independent contractors. At the outset of the pandemic, we temporarily furloughed certain team members across various functional groups in our restaurant support centers and company-operated restaurants and also curtailed the hours of substantially all of the hourly restaurant associates at our company-operated restaurants. Most of the hourly restaurant associates at our company-operated restaurants returned to work following the re-opening of those restaurants, and there were no team members from the restaurant support centers remaining on furlough as of December 31, 2020. Our G&A expenses for the ended December 31, 2020 were $18.0 million lower than the same period of the prior year.
Our total cash balances as of the past five fiscal quarter ends were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
March 31, 2020
|
|
June 30, 2020
|
|
September 30, 2020
|
|
December 31, 2020
|
|
(In millions)
|
Cash and cash equivalents
|
|
$
|
116.1
|
|
|
$
|
344.6
|
|
|
$
|
278.5
|
|
|
$
|
309.3
|
|
|
$
|
383.4
|
|
Restricted cash, current
|
|
40.7
|
|
|
34.2
|
|
|
31.2
|
|
|
47.5
|
|
|
39.9
|
|
Restricted cash, non-current
|
|
15.7
|
|
|
16.4
|
|
|
32.8
|
|
|
32.8
|
|
|
32.8
|
|
Total
|
|
$
|
172.5
|
|
|
$
|
395.2
|
|
|
$
|
342.5
|
|
|
$
|
389.6
|
|
|
$
|
456.1
|
|
The increase in total cash balances from December 31, 2019 to March 31, 2020 is primarily due to the draw-down of $220 million from our revolving credit facility in March 2020. The decrease in total cash balances from March 31, 2020 to June 30, 2020 is primarily due to the impact on our operations of the COVID-19 pandemic as well as to our offering franchisees the opportunity to defer payments due to us as noted above. The increase in total cash balances from June 30, 2020 to September 30, 2020 reflects the improvement in operations as restrictions on in-restaurant dining became more relaxed and the commencement of collections of amounts deferred by franchisees discussed above. The increase in total cash balances from September 30, 2020 to December 31, 2020 reflects higher sales in the fourth quarter of 2020 compared to the third quarter (including a 14th week in the fourth quarter), a $12.3 million tax refund received and collections of amounts deferred by franchisees discussed above.
We believe that our cash on hand, cash flow from operations, and the actions taken to mitigate the effects of the COVID-19 pandemic discussed above will provide us with adequate liquidity for at least the next twelve months.
Long-Term Debt
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 (“Class A-2-I Notes”) in an initial aggregate principal amount of $700 million and the Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II (“Class A-2-II Notes”) in an initial aggregate principal amount of $600 million (the “Class A-2-II Notes” and, together with the 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.
The Co-Issuers also replaced their existing revolving financing facility, the 2018-1 Variable Funding Senior Notes, Class A-1 (“2018 Class A-1 Notes”), with a new revolving financing facility, the 2019-1 Variable Funding Senior Notes, Class A-1 (the “2019 Class A-1 Notes”), on substantially the same terms as the 2018 Class A-1 Notes in order to conform the term of the 2019 Class A-1 Notes to the anticipated repayment dates for the 2019 Class A-2 Notes. The 2019 Class A-1 Notes and the 2019 Class A-2 Notes are referred to collectively herein as the “New Notes.”
The New Notes were issued in a securitization transaction pursuant to which substantially all the domestic revenue-generating assets and domestic intellectual property, as further described below, 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 New Notes.
2019 Class A-2 Notes
The New Notes were issued under a Base Indenture, dated as of September 30, 2014, and amended and restated as of June 5, 2019 (the “Base Indenture”), and 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 Base Indenture and the Series 2019-1 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.
While the 2019 Class A-2 Notes are outstanding, payment of principal and interest is required to be made on the Class A-2 Notes on a quarterly basis. The payment of principal on the 2019 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. Exceeding the leverage ratio of 5.25x does not violate any covenant related to the New Notes.
Our leverage ratio exceeded 5.25x as of June 30, 2020 and has remained greater than 5.25x since then. As of December 31, 2020, the Company's leverage ratio was 7.20x. Accordingly, we made a principal payment in the fourth quarter of 2020 and will continue to make principal payments until the leverage ratio is less than 5.25x.
We may voluntarily repay the New Notes at any time; however, if we repay the New Notes prior to certain dates we would be required to pay make-whole premiums. As of December 31, 2020, the make-whole premium associated with voluntary prepayment of the Class A-2-I Notes was approximately $35 million; this amount declines each quarter to zero in June 2022. As of December 31, 2020, the make-whole premium associated with voluntary prepayment of the Class A-2-II Notes was approximately $74 million; this amount declines each quarter to zero in June 2024. We would also 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 New Notes that must be bifurcated for separate valuation. We estimated the fair value of these derivatives to be immaterial as of December 31, 2020, based on the probability-weighted discounted cash flows associated with either event.
The legal final maturity of the 2019 Class A-2 Notes is in June 2049, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in June 2024 (the “Class A-2-I Anticipated Repayment Date”) and the Class A-2-II Notes will be repaid in June 2026 (the “Class A-2-II Anticipated Repayment Date”). If the Co-Issuers have not repaid or refinanced the Class A-2-I Notes by the Class A-2-I Anticipated Repayment Date or the Class A-2-II Notes by the Class A-2-II Anticipated Repayment Date, then additional interest will accrue on the Class A-2-I Notes and the 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 Class A-2 Note interest rate: (x) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on the applicable anticipated repayment date of the United States Treasury Security having a term closest to 10 years plus (y) 5.0%, plus (z) 2.15% for the Class A-2-I Notes and 2.64% for the Class A-2-II Notes.
In March 2020, in light of the COVID-19 pandemic, Standard & Poor's (“S&P”) placed the Company on “credit watch-negative” with respect to our 2019 Class A-2 Notes. In September 2020, S&P removed the Company from the credit watch and reaffirmed the “BBB” rating of the 2019 Class A-2 Notes.
2019 Class A-1 Notes
The Co-Issuers also entered into a revolving financing facility, the 2019 Class A-1 Notes, that allows for drawings up to $225 million of variable funding notes and the issuance of letters of credit. The 2019 Class A-1 Notes were issued under the Indenture. Drawings and certain additional terms related to the 2019 Class A-1 Notes are governed by the 2019 Class A-1 Note Purchase Agreement, dated June 5, 2019, among the Co-Issuers, certain special-purpose, wholly-owned indirect subsidiaries of the Company, each as a Guarantor, the Company, as manager, certain conduit investors, financial institutions and funding agents, and Barclays Bank PLC, as provider of letters of credit, swingline lender and administrative agent (the “Purchase Agreement”).
The 2019 Class A-1 Notes will be governed, in part, by the Purchase Agreement and by certain generally applicable terms contained in the Indenture. The applicable interest rate under the 2019 Class A-1 Notes 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 Eurodollar Funding Rate, in either case, plus 2.15%. 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) 1.15% plus (b) 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) the one-month Eurodollar Funding Rate plus 1.00%. There is no upfront fee for the 2019 Class A-1 Notes. There is a fee of 50 basis points on any unused portion of the 2019 Class A-1 Notes facility. Undrawn face amounts of
outstanding letters of credit that are not cash collateralized accrue a fee of 2.15% per annum. It is anticipated that the principal and interest on the 2019 Class A-1 Notes will be repaid in full on or prior to the quarterly payment date in June 2024 (the “2019 Class A-1 Anticipated Repayment Date”), subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions.
Management Agreement
Under the terms of the Management Agreement, dated September 30, 2014, as amended and restated as of September 5, 2018, as further amended and restated as of June 5, 2019 and as amended by that certain Amendment No. 1 to Management Agreement dated November 21, 2019, among the Company, the Securitization Entities, Applebee’s Services, Inc., International House of Pancakes, LLC and the Trustee, the Company will act as the manager with respect to the Securitized Assets. The primary responsibilities of the manager will be to perform certain franchising, distribution, intellectual property and operational functions on behalf of the Securitization Entities with respect to the Securitized Assets pursuant to the Management Agreement. The manager will be entitled to the payment of the weekly management fee, as set forth in the Management Agreement and will be subject to the liabilities set forth in the Management Agreement. The Company, as Manager, voluntarily began waiving its receipt of the weekly management fee in April, 2020 and this waiver remains in place as of December 31, 2020.
Covenants and Restrictions
The New 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 New 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 New Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The New Notes are subject to customary rapid amortization events provided for in the Indenture, including events tied to failure of the Securitization Entities 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 New 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 New 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 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
Our DSCR for the reporting period ended December 31, 2020 was approximately 3.3x.
During the second quarter of 2020, we voluntarily increased the interest reserve required to be set aside for our securitized debt from $16.4 million to $32.8 million, which now represents an estimated six months of interest and fees related to the 2019 Class A-2 Notes and the Revolver. During the second quarter of 2020, we voluntarily began accelerating the funding of interest on the 2019 Class A-2 Notes and the Revolver with the redirection of cash receipts within the securitization structure. As of the date of this report, the interest payments on the 2019 Class A-2 Notes and the Revolver due March 5, 2021 and June 7, 2021 have been fully funded within the securitization structure, in addition to the $32.8 million of interest reserve noted above.
Use of Credit Facilities
In March 2020, the Co-Issuers drew down a total of $220.0 million of the amount then available under the Revolver. Although the Company had no immediate need for additional liquidity, the Co-Issuers drew on the Revolver to increase the Company’s financial flexibility in light of then-current market conditions and uncertainty due to the COVID-19 pandemic. We plan to repay the $220 million drawn on the Revolver in the month of March 2021. It is anticipated that the principal and interest on any Revolver borrowings will be repaid in full on or prior to the quarterly payment date in June 2024, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions. The current interest rate for borrowings under the Revolver is 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. The interest rate on Revolver borrowings at December 31, 2020 was 2.42%. The weighted average interest rate on Revolver borrowings for the period outstanding during the year ended December 31, 2020 was 2.72%, for the year ended December 31, 2020.
The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR, initially by the end of 2021. On November 30, 2020, the Federal Reserve announced that LIBOR will be phased out and eventually replaced by June 2023. In the same announcement, U. S. banks were instructed to stop writing contracts using LIBOR by the end of 2021 and all contracts using LIBOR should be amended or terminated by June 30, 2023. We do not believe that the discontinuation of LIBOR as a reference rate for our 2019 Class A-1 Notes will have a material adverse effect on our financial position or materially affect our interest expense, however, it is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates.
At December 31, 2020, $2.8 million was pledged against the Revolver for outstanding letters of credit, leaving $2.2 million of the Revolver available for borrowing. The letters of credit are used primarily to satisfy insurance-related collateral requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions)
|
Net cash provided by operating activities
|
|
$
|
96.5
|
|
|
$
|
(58.7)
|
|
|
$
|
155.2
|
|
|
$
|
14.9
|
|
|
$
|
140.3
|
|
Net cash provided by (used in) investing activities
|
|
18.7
|
|
|
18.9
|
|
|
(0.2)
|
|
|
14.6
|
|
|
(14.8)
|
|
Net cash provided by (used) in financing activities
|
|
168.4
|
|
|
351.3
|
|
|
(182.9)
|
|
|
(94.6)
|
|
|
(88.3)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
$
|
283.6
|
|
|
$
|
311.5
|
|
|
$
|
(27.9)
|
|
|
$
|
(65.1)
|
|
|
$
|
37.2
|
|
Operating Activities
Cash provided by operating activities is primarily driven by revenues earned and collected from our franchisees, and profit from our company-owned restaurant, rental operations and financing operations.
Cash provided by operating activities decreased $58.7 million in 2020 compared to 2019. The components of that change are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(In millions)
|
Net (loss) income
|
|
$
|
(104.0)
|
|
|
$
|
(208.3)
|
|
|
$
|
104.3
|
|
Non-cash reconciling items
|
|
162.9
|
|
|
115.3
|
|
|
47.6
|
|
Changes in working capital
|
|
37.6
|
|
|
34.3
|
|
|
3.3
|
|
Cash provided by operating activities
|
|
$
|
96.5
|
|
|
$
|
(58.7)
|
|
|
$
|
155.2
|
|
The change in net income primarily was due to impairments of goodwill, intangible assets and long-lived tangible assets and decreased gross profit, partially offset by lower G&A expenses, each of which was discussed in preceding sections of this MD&A.
Non-cash reconciling items (primarily impairment and closure charges, depreciation and amortization, deferred income taxes, stock-based compensation and loss on extinguishment of debt) increased $115.3 million from 2019.The increase primarily was due to impairments of goodwill, intangible assets and long-lived tangible assets totaling $129.6 million discussed in preceding sections of this MD&A.
Net changes in working capital provided cash of $37.6 million during 2020 compared to providing cash of $3.3 million during 2019. This favorable change of $34.3 million between years primarily resulted from collection of a tax refund of $12.3 million related to Internal Revenue Service audits of our tax returns for years 2014 to 2016 and an increase of $14.1 million in accrued advertising due to the timing of payments of marketing accruals.
Investing Activities
Investing activities provided net cash of $18.7 million for the year ended December 31, 2020, as compared to using net cash of $0.2 million in 2019. The components of the increase of $18.9 million are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(In millions)
|
Principal receipts from notes, equipment contracts and other long-term receivables
|
|
$
|
31.1
|
|
|
$
|
7.0
|
|
|
$
|
24.1
|
|
Additions to property and equipment
|
|
(10.9)
|
|
|
8.5
|
|
|
(19.4)
|
|
|
|
|
|
|
|
|
Additions to long-term receivables
|
|
(1.5)
|
|
|
5.5
|
|
|
(7.0)
|
|
Other
|
|
—
|
|
|
(2.2)
|
|
|
2.2
|
|
Cash provided by (used in) investing activities
|
|
$
|
18.7
|
|
|
$
|
18.9
|
|
|
$
|
(0.2)
|
|
Principal receipts from notes, equipment contracts and other long-term receivables increased $7.0 million compared to 2019 due to the early payoff of several notes. Investing cash outflows in 2020 for additions to property and equipment and loans to franchisees were lower than 2019 by $8.5 million and $5.5 million, respectively. The decrease in additions to property and equipment was primarily due to a more focused capital expenditure program as well as some impact of COVID-19.
The Company has long-term receivables for equipment and direct financing receivables as well as other notes receivable from franchisees totaling $84.6 million at December 31, 2020. The following table represents the timing of principal receipts from these receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Receipts Due By Period
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Total
|
|
(In millions)
|
Equipment leases(1)
|
$
|
7.9
|
|
|
$
|
7.7
|
|
|
$
|
7.3
|
|
|
$
|
6.7
|
|
|
$
|
5.5
|
|
|
$
|
8.8
|
|
|
$
|
43.9
|
|
Direct financing leases(2)
|
8.4
|
|
|
6.6
|
|
|
3.2
|
|
|
1.2
|
|
|
0.5
|
|
|
2.8
|
|
|
22.7
|
|
Other notes(3)
|
5.8
|
|
|
3.2
|
|
|
2.7
|
|
|
2.1
|
|
|
1.2
|
|
|
3.0
|
|
|
18.0
|
|
Total
|
$
|
22.1
|
|
|
$
|
17.5
|
|
|
$
|
13.2
|
|
|
$
|
10.0
|
|
|
$
|
7.2
|
|
|
$
|
14.6
|
|
|
$
|
84.6
|
|
________________________________________________
(1)Equipment lease receivables extend through the year 2029.
(2)Direct financing lease receivables extend through the year 2040.
(3)Other notes receivable extend through the year 2024.
Financing Activities
Financing activities provided cash of $168.3 million for the year ended December 31, 2020, as compared to using cash of $182.9 million in 2019. The components of the increase of $351.3 million are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in cash used
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(In millions)
|
Repurchase of common stock
|
|
$
|
(29.9)
|
|
|
$
|
79.8
|
|
|
$
|
(109.7)
|
|
Dividends paid
|
|
(23.9)
|
|
|
23.0
|
|
|
(46.9)
|
|
Net (repayment) issuance of long-term debt, including issuance costs
|
|
(3.3)
|
|
|
(6.4)
|
|
|
3.1
|
|
Net borrowing (repayment) of revolving credit
|
|
220.0
|
|
|
245.0
|
|
|
(25.0)
|
|
All other
|
|
5.4
|
|
|
9.8
|
|
|
(4.4)
|
|
Cash provided by (used in) financing activities
|
|
$
|
168.3
|
|
|
$
|
351.2
|
|
|
$
|
(182.9)
|
|
The actions noted above taken in response to the COVID-19 pandemic were the primary factors underlying the change. We drew $220 million on our Revolver in 2020 as opposed to repaying the $25 million outstanding balance of the Revolver in 2019, a net change of $245 million. Additionally, we stopped repurchasing our common stock and paying dividends on common stock after the declaration of the pandemic. Prior to taking these actions, we used cash totaling $53.8 million for dividends and stock repurchases in 2020 as compared to using cash of $156.6 million for dividends and stock repurchases in 2019, conserving cash of approximately $103 million as compared to the prior year.
Adjusted Free Cash Flow
We define “adjusted free cash flow” for a given period as cash provided by operating activities, plus receipts from notes and equipment contract receivables, less additions to property and equipment. Management uses this liquidity measure in its periodic assessments of, among other things, the amount of cash dividends per share of common stock and repurchases of common stock and we believe it is important for investors to have the same measure used by management for that purpose. Adjusted free cash flow does not represent residual cash flow available for discretionary purposes.
Adjusted free cash flow is a non-U.S. GAAP measure. This non-U.S. GAAP measure is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute for, the U.S. GAAP information contained within our financial statements. Reconciliation of the cash provided by operating activities to adjusted free cash flow is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
Favorable
(Unfavorable) Variance
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(In millions)
|
Cash flows provided by operating activities
|
$
|
96.5
|
|
|
$
|
(58.7)
|
|
|
$
|
155.2
|
|
|
$
|
14.9
|
|
|
$
|
140.3
|
|
Net receipts from notes and equipment receivables
|
21.0
|
|
|
8.0
|
|
|
13.0
|
|
|
(1.9)
|
|
|
14.9
|
|
Additions to property and equipment
|
(10.9)
|
|
|
8.5
|
|
|
(19.4)
|
|
|
(5.1)
|
|
|
(14.3)
|
|
Adjusted free cash flow
|
$
|
106.6
|
|
|
$
|
(42.2)
|
|
|
$
|
148.8
|
|
|
$
|
7.9
|
|
|
$
|
140.9
|
|
The decrease in adjusted free cash flow in 2020 compared to 2019 was primarily due to the decrease in cash provided by operating activities, partially offset by a decrease in capital expenditures, each of which was discussed in preceding sections of this MD&A.
At December 31, 2020, our cash and cash equivalents totaled $383.4 million, including $71.6 million of cash held for gift card programs and IHOP advertising funds.
Capital Allocation
Dividends
During the year ended December 31, 2020, we paid dividends on common stock of $23.9 million, representing a cash dividend of $0.69 per share declared in the fourth quarter of 2019, paid in January 2020, and a cash dividend of $0.76 per share declared in the first quarter of 2020, paid in April 2020. In light of the COVID-19 pandemic, our Board of Directors did not declare a dividend for the second, third and fourth quarters of 2020. See Note 12 - Stockholders' Deficit, of the Notes to the Consolidated Financial Statements included in this report for dividends paid and declared in fiscal 2020, 2019 and 2018.
Share Repurchases
In February 2019, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $200 million of our common stock (the “2019 Repurchase Program”) on an opportunistic basis from time to time in the open market or in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The 2019 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. In light of the COVID-19 pandemic, we suspended repurchases of our common stock in March, 2020. See Note 12 - Stockholders' Deficit, of the Notes to the Consolidated Financial Statements included in this report for dividends paid and declared in fiscal 2020, 2019 and 2018.
A summary of shares repurchased under the 2019 Repurchase Program, during the year ended December 31, 2020 and cumulatively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Cost of shares
|
|
|
|
(In millions)
|
2019 Repurchase Program:
|
|
|
|
|
|
|
|
Repurchased during the year ended December 31, 2020
|
459,899
|
|
|
$
|
26.5
|
|
Cumulative (life-of-program) repurchases
|
1,697,597
|
|
|
$
|
129.8
|
|
Remaining dollar value of shares that may be repurchased
|
n/a
|
|
$
|
70.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate dividend payments on common stock and repurchases of common stock within the context of our overall capital allocation strategy with our Board of Directors on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements and other factors. We will continue to evaluate our capital allocation strategy as industry and overall economic conditions impacted by the COVID-19 pandemic evolve and normal restaurant operations resume.
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 5 for detail on all share repurchase activity during the fourth quarter of 2020.
Off-Balance Sheet Arrangements
We have obligations for guarantees on certain franchisee lease agreements, as disclosed below in “Contractual Obligations and Commitments” and Note 11 - Commitments and Contingencies, of the Notes to Consolidated Financial Statements. Other than such guarantees, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of SEC Regulation S-K as of December 31, 2020.
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales, costs or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
The following are our significant contractual obligations and commitments as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
Contractual Obligations
|
1 Year
|
|
2 - 3 Years
|
|
4 - 5 Years
|
|
More than
5 Years
|
|
Total
|
|
(In millions)
|
Debt(1)
|
$
|
70.3
|
|
|
$
|
114.0
|
|
|
$
|
981.7
|
|
|
$
|
606.5
|
|
|
$
|
1,772.5
|
|
Operating leases(2)
|
91.1
|
|
|
154.5
|
|
|
119.5
|
|
|
144.9
|
|
|
510.1
|
|
Finance leases(1)
|
15.9
|
|
|
26.2
|
|
|
18.3
|
|
|
50.9
|
|
|
111.3
|
|
Financing obligations(1)
|
4.5
|
|
|
8.9
|
|
|
10.0
|
|
|
34.8
|
|
|
58.2
|
|
Purchase commitments
|
83.6
|
|
|
4.4
|
|
|
2.0
|
|
|
—
|
|
|
90.0
|
|
Unrecognized income tax benefits(3)
|
0.8
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
2.2
|
|
Total minimum payments
|
266.2
|
|
|
308.0
|
|
|
1,131.5
|
|
|
838.5
|
|
|
2,544.3
|
|
Less interest
|
(88.0)
|
|
|
(159.3)
|
|
|
(102.7)
|
|
|
(57.4)
|
|
|
(407.4)
|
|
Total
|
$
|
178.2
|
|
|
$
|
148.7
|
|
|
$
|
1,028.8
|
|
|
$
|
781.1
|
|
|
$
|
2,136.9
|
|
(1) Includes interest calculated on balances as of December 31, 2020 using interest rates in effect as of December 31, 2020.
(2) Includes interest calculated on balances as of December 31, 2020 using interest rates used to calculate operating lease liability.
(3) While up to $0.8 million is expected to be paid within one year, there is no contractual obligation to do so. For the remaining liability, due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate when a cash settlement with a taxing authority will occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration By Period
|
Commitments
|
1 Year
|
|
2 - 3 Years
|
|
4 - 5 Years
|
|
More than
5 Years
|
|
Total
|
|
(In millions)
|
Lease guarantees(4)
|
$
|
16.4
|
|
|
$
|
29.0
|
|
|
$
|
27.4
|
|
|
$
|
172.8
|
|
|
$
|
245.6
|
|
Letters of credit(5)
|
2.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
Food purchases(6)
|
11.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11.2
|
|
Total
|
$
|
30.4
|
|
|
$
|
29.0
|
|
|
$
|
27.4
|
|
|
$
|
172.8
|
|
|
$
|
259.6
|
|
(4) This amount represents the maximum potential liability for future payment guarantees under leases that have been assigned to third-party buyers of Applebee's company-operated restaurants and expire at the end of the respective lease terms, which range from 2021 through 2048. See Note 11 - Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information.
(5) Primarily used to satisfy insurance-related collateral requirements. These letters of credit expire annually, but typically are renewed in the same amount each year unless collateral requirements change.
(6) In some instances, IHOP and Applebee's may be required to guarantee their purchase of any remaining inventory of certain food and other items purchased by CSCS.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. Our significant accounting policies are comprehensively described in Note 2 - Basis of Presentation and Significant Accounting Policies, of the Notes to the Consolidated Financial Statements. We believe the accounting policies discussed below are particularly important to the understanding of our consolidated financial statements and require higher degree of judgment and/or complexity in the preparation of those consolidated financial statements. In exercising those judgments, we make estimates and assumptions that affect the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting periods covered by the financial statements. On an ongoing basis, we evaluate our estimates based on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates. Changes in estimates and judgments could significantly affect our results of operations, financial condition and cash flow in the future.
Revenue Recognition
We recognize revenue from our franchise and company-operated restaurants in accordance with Accounting Standards Codification 606 - Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration we expect to receive for those services or goods. Our rental and financing revenues are recognized in accordance with other U.S. GAAP accounting standards and are not subject to ASC 606.
In determining the amount and timing of revenue from contracts with customers, we make judgments as to whether uncertainty as to collectibility of the consideration that we are owed precludes recognition of the revenue on an accrual basis. These judgments are based on the facts specific to each circumstance. Primary factors considered include past payment history and our subjective assessment of the likelihood of receiving payment in the future. The timing of recognition does not require significant judgment as it is based on either the term of the franchise agreement, the month of reported sales by the franchisee or the date of product shipment, none of which require estimation.
Significant judgments with respect to rental revenues are discussed below under Leases. We do not have to make significant judgments with respect to revenues from our company-operated restaurants or our financing operations.
Goodwill and Intangible Assets
Goodwill and intangible assets considered to have an indefinite life (primarily the Applebee's tradename) are evaluated throughout the year to determine if indicators of impairment exist. Such indicators include, but are not limited to, events or circumstances such as a significant adverse change in our business, in the business overall climate, unanticipated competition, a loss of key personnel, adverse legal or regulatory developments or a significant decline in the market price of our common stock.
If no indicators of impairment have been noted during these preliminary assessments, we perform an assessment of goodwill and intangible assets annually in the fourth fiscal quarter. We first assess qualitatively whether it is more-likely-than-not that an impairment does not exist. Significant factors considered in this assessment include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, share price fluctuations, overall financial performance and results of past impairment tests. If we do not qualitatively determine that it is more-likely-than-not that an impairment does not exist, we perform a quantitative impairment test.
In performing a quantitative test for impairment of goodwill, we primarily use the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of goodwill 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, changes in working capital and an estimated income tax rate, along with an appropriate discount rate based on our estimated cost of equity capital and after-tax cost of debt. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.
In the process of a quantitative test, if necessary, of the Applebee's tradename intangible asset, we primarily use 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, an estimated income tax rate and a discount rate to be applied to the forecast revenue stream.
There is an inherent degree of uncertainty in preparing any forecast of future results. Future trends in 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 demographics of the guests that frequently patronize Applebee's restaurants. Accordingly, there are a number of potential events that could reasonably be expected to negatively affect the forecast of system-wide sales, including a decrease in customers' disposable income available for discretionary spending (because of circumstances such as job losses, credit constraints, higher housing costs, increased tax rates, energy costs, interest rates or other costs) or a decrease in 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). Significant increases in either the estimated income tax rate or the discount rate could adversely impact estimated fair values used in quantitative tests for impairment.
Long-Lived Assets
On a regular basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets (primarily assets related to properties and equipment leased or subleased to franchisees) may not be recoverable. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. Significant factors considered include, but are not limited to, current and forecast sales, current and forecast cash flows, the number of years the franchisee's restaurant has been in operation, its remaining lease life, and other factors which apply on a case-by-case basis. The analysis is performed at the individual restaurant level for indicators of permanent impairment. Recoverability of the Company's assets is measured by comparing the assets' carrying value to the undiscounted cash flows expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.
On a regular basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of intangible assets with finite lives, primarily assets related to Applebee's franchise rights. Recoverability of the asset is measured by comparing the assets' carrying value to the discounted future cash flows expected to be generated over the asset's remaining useful life. Significant factors considered include, but are not limited to, current and forecast sales, current and forecast cash flows and a discount rate to be applied to the forecast revenue stream.
Allowance for Credit Losses
The allowance for credit losses is our best estimate of the amount of probable credit losses in our existing receivables; however, changes in circumstances relating to receivables may result in additional allowances in the future. We determine the allowance based on historical experience, current payment patterns, future obligations and our assessment of the ability to pay outstanding balances. The primary indicator of credit quality is delinquency, which is considered to be a receivable balance greater than 90 days past due. We continually review our allowance for credit losses. Past due balances and future obligations are reviewed individually for collectability. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Leases
Our restaurants are located on (i) sites owned by us, (ii) sites leased by us from third parties and (iii) sites owned or leased by franchisees. For sites owned by or leased by us from third parties, we, in turn, sublease to our franchisees. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or finance lease in accordance with the provisions of U.S. GAAP governing the accounting for leases.
The Company's lease agreements generally do not provide information to determine the implicit interest rate in the agreements. This requires the Company to make significant judgments in determining the incremental borrowing rate to be used in calculating operating lease liabilities as of the adoption date. The Company estimates the incremental borrowing rate primarily by reference to (i) yield rates on debt issuances by companies of a similar credit rating as the Company; (ii) U.S. Treasury rates as of the adoption or commencement date; and (iii) adjustments for differences between these rates and the lease term.
Management also makes judgments regarding the term for each restaurant property lease, which can impact the classification and accounting for a lease as finance or operating, the rent holiday and/or escalations in payment that are taken into consideration when calculating straight-line rent and the term over which the right-of-use asset (for operating leases) or equipment under finance lease is amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
Income Taxes
We provide for income taxes based on our estimate of federal and state income tax liabilities. We make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. Tax laws are complex and subject to different interpretations by the taxpayers and respective governmental authorities. We review our tax positions quarterly and adjust the balances as new information becomes available.
We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between the financial reporting basis and the tax basis of recorded assets and liabilities. Deferred tax accounting requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portions or all the net deferred tax assets will not be realized. This test requires projection of our taxable income into future years to determine if there will be taxable income sufficient to realize the tax assets. The preparation of the projections requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense will increase or decrease, respectively, in the period such determination is made.
FASB ASC Topic 740-10 requires that a position taken or expected to be taken in a tax return be recognized in the financial statement when it is more likely than not (i.e. a likelihood of more than 50 percent) that the position would be sustained upon examination by taxing authorities including all appeals or litigation processes, based on its technical merits. A recognized tax position is then measured on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. For each reporting period, management applies a consistent methodology to measure and adjust all uncertain tax positions based on the available information.
Legal Contingencies
We are 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 outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.
Stock-Based Compensation
We account for stock-based compensation in accordance with U.S. GAAP governing share-based payments. Accordingly, we measure stock-based compensation expense at the grant date, based on the fair value of the award, and recognize the expense over the employee's requisite service period using the straight-line method. The fair value of each employee stock option and restricted stock award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our stock-based compensation. The Black-Scholes model meets the requirements of U.S. GAAP. The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and forfeiture rate. These inputs are subjective and are determined using management's judgment. If differences arise between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining future stock-based compensation expense. Any such changes could impact our operations in the period in which the changes are made and in subsequent periods.
Accounting Standards Adopted in the Current Fiscal Year
See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in this report for a description of accounting standards we adopted in fiscal 2020.
New Accounting Pronouncements
See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in this report, for a description of newly issued accounting standards that may impact us in the future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to financial market risk, including interest rates and commodity prices. We address these risks through controlled risk management that may include the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into financial instruments for trading or speculative purposes.
Interest Rate Risk
The significant majority of our long-term debt outstanding at December 31, 2020 was issued at fixed interest rates (see Note 8 - Long-Term Debt, of the Notes to Consolidated Financial Statements).We are only exposed to interest rate risk on borrowings we make under our 2019 Class A-1 Notes, a revolving credit facility (the “Revolver”), borrowings from which are subject to variable interest rates. In March 2020, we drew down $220.0 million from the Revolver, all of which was outstanding at December 31, 2020. A 1% increase or decrease in interest rates would increase or decrease our annual interest expense by approximately $2.2 million.
We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. We had no material amounts of derivative instruments at December 31, 2020 and did not hold any material amount of derivative instruments during the year ended December 31, 2020.
Investments in instruments earning a fixed rate of interest carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. We currently do not hold any fixed rate investments.
Based on our interest-earning cash, cash equivalents and restricted cash balances as of December 31, 2020, a 1% increase in interest rates would increase our annual interest income by approximately $4.1 million. A 1% decline in interest rates would decrease our annual interest income by less than this amount as the majority of our cash, cash equivalents and restricted cash are currently yielding less than 1%.
Many of the food products purchased by our franchisees and area licensees are affected by commodity pricing and are therefore subject to unpredictable price volatility. Extreme increases in commodity prices and/or long-term changes could affect our franchisees, area licensees and company-operated restaurants adversely. We expect that, in most cases, the IHOP and Applebee's systems would be able to pass increased commodity prices through to their customers via increases in menu prices. From time to time, competitive circumstances could limit short-term menu price flexibility, and in those cases, franchisees' margins would be negatively impacted by increased commodity prices. Since the significant majority of our restaurants are franchised, we believe that any changes in commodity pricing that cannot be adjusted for by changes in menu pricing or other strategies would not be material to our financial condition, results of operations or cash flows.
The Company and owners of Applebee's and IHOP franchise restaurants are members of CSCS, a Co-op that manages procurement activities for the Applebee's and IHOP restaurants that belong to the Co-op. We believe the larger scale created by combining the supply chain requirements of both brands under one organization can provide cost savings and efficiency in the purchasing function. As of December 31, 2020, 100% of Applebee's domestic franchise restaurants and 97% IHOP domestic franchise restaurants are members of CSCS. In some instances, IHOP and Applebee's may be required to guarantee their purchase of any remaining inventory of certain food and other items purchased by CSCS for the purpose of supplying limited time promotions on behalf of the Applebee's and IHOP systems as a whole. None of these food product guarantees is a derivative instrument. At December 31, 2020, our outstanding guarantees for food product purchases were $11.2 million.
International Currency Exchange Rate Risk
We have minimal exposure to international currency exchange rate fluctuations. Revenue derived from all international country operations comprised less than 2% of total consolidated revenue for the year ended December 31, 2020, such that a hypothetical concurrent 10% adverse change in the currency of every international country in which our franchisees operate restaurants would have a negative impact of less than 0.2% of our consolidated revenue. We do not hold a material amount of cash and cash equivalents in currencies other than the U.S. Dollar.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Dine Brands Global, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Dine Brands Global, Inc. and Subsidiaries (the Company) as of January 3, 2021 and December 29, 2019, the related consolidated statements of comprehensive (loss) income, stockholders’ deficit and cash flows for each of the three years in the period ended January 3, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 3, 2021 and December 29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 3, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Impairment of Goodwill and Indefinite Lived Intangible Assets
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Description of the Matter
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At January 3, 2021, the Company’s goodwill and indefinite lived tradename intangible asset (tradename) were $251.6 million and $468.0 million, respectively. The majority of the goodwill and the entirety of the tradename relates to the Applebee's franchised restaurants reporting unit (Applebee’s franchise unit). As discussed in Notes 2, 6 and 7 to the consolidated financial statements, goodwill and tradename are tested for impairment at least annually, and more frequently if the Company believes indicators of impairment exist. During the second quarter of fiscal 2020, due primarily to the impact of the COVID-19 pandemic on the Company’s operations and stock price, management determined that impairment indicators existed and performed quantitative impairment tests. As a result of the impairment tests, the Company recognized a $92.2 million impairment related to goodwill and an $11.0 million impairment related to tradename, which represented the amounts by which the carrying values exceeded the estimated fair values of the reporting unit and tradename assets, respectively.
Auditing management’s goodwill and tradename impairment tests was especially challenging and complex due to the significant estimation underlying the determination of fair values. In particular, the fair value estimates were sensitive to changes in the significant assumptions used under the income and market approaches utilized to determine the fair value of goodwill and the relief of royalty method utilized to determine the fair value of tradename. Significant assumptions made by management in estimating fair value under the income and market approaches included future trends in sales and the appropriate discount rate, as well as the selection of guideline companies and the valuation multiples applied. Significant assumptions used to determine fair value under the relief of royalty method included future trends in sales, royalty rate and discount rate.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill and tradename impairment tests, including controls over the review of the indicators of potential impairment, assumptions used, financial forecasts and the accuracy of the underlying data.
Our testing of the Company’s impairment measurements included, among other procedures, evaluating the significant assumptions and data used in estimating fair values. For example, we compared the forecasted future sales growth rates to historical results, analyst projections and industry trends. We also performed sensitivity analyses on the significant assumptions used, agreed historical balances to accounting records, and recalculated management's estimates. Additionally, we involved our valuation specialists to assist with our evaluation of the methodology used and to assess whether assumptions such as discount rates were comparable to observable market data.
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We have served as the Company’s auditor since 2004.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 2, 2021
Dine Brands Global, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
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December 31,
|
Assets
|
2020
|
|
2019
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
383,369
|
|
|
$
|
116,043
|
|
Receivables, net of allowance of $15,057 (2020) and $3,138 (2019)
|
121,897
|
|
|
136,869
|
|
Restricted cash
|
39,884
|
|
|
40,732
|
|
Prepaid gift card costs
|
29,080
|
|
|
36,077
|
|
|
|
|
|
Prepaid income taxes
|
6,178
|
|
|
13,290
|
|
|
|
|
|
Other current assets
|
6,098
|
|
|
3,906
|
|
Total current assets
|
586,506
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|
|
346,917
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|
Other intangible assets, net
|
549,671
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|
|
575,103
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|
Operating lease right-of-use assets
|
346,086
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|
|
366,931
|
|
Goodwill
|
251,628
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|
|
343,862
|
|
Property and equipment, net
|
187,977
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|
|
216,420
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Long-term receivables, net of allowance of $7,999 (2020) and $8,155 (2019)
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54,512
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|
|
85,999
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Deferred rent receivable
|
56,449
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|
|
70,308
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Non-current restricted cash
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32,800
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|
|
15,700
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|
Other non-current assets, net
|
9,316
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|
|
28,271
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|
Total assets
|
$
|
2,074,945
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|
|
$
|
2,049,511
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Liabilities and Stockholders' Deficit
|
|
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Current liabilities:
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|
|
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Current maturities of long-term debt
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$
|
13,000
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|
|
$
|
—
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Accounts payable
|
37,424
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|
|
40,925
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Gift card liability
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144,159
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|
|
159,019
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Current maturities of operating lease obligations
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69,672
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|
|
72,815
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Current maturities of finance lease and financing obligations
|
11,293
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|
|
13,669
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|
Accrued employee compensation and benefits
|
21,237
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|
|
23,904
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|
Accrued advertising expenses
|
21,641
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|
|
8,760
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|
|
|
|
|
Deferred franchise revenue, short-term
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7,682
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|
|
10,086
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|
Dividends payable
|
—
|
|
|
11,702
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|
Other accrued expenses
|
22,460
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|
|
17,032
|
|
Total current liabilities
|
348,568
|
|
|
357,912
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Long-term debt, net, less current maturities
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1,491,996
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|
1,288,248
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Operating lease obligations, less current maturities
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345,163
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|
|
359,025
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Finance lease obligations, less current maturities
|
69,012
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|
|
77,393
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Financing obligations, less current maturities
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32,797
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|
|
37,682
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Deferred income taxes, net
|
78,293
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|
|
98,499
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Deferred franchise revenue, long-term
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52,237
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|
|
56,944
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|
|
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Other non-current liabilities
|
11,530
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|
|
15,582
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|
Total liabilities
|
2,429,596
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|
|
2,291,285
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|
Commitments and contingencies
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
Preferred stock, $1 par value, 10,000,000 shares authorized, no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; shares: 40,000,000 authorized; 2020 -24,882,122 issued, 16,452,174 outstanding; 2019 - 24,925,447 issued, 16,521,921 outstanding
|
249
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|
|
249
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|
Additional paid-in-capital
|
257,625
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|
|
246,192
|
|
(Accumulated deficit) retained earnings
|
(55,553)
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|
|
61,653
|
|
Accumulated other comprehensive loss
|
(55)
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|
|
(58)
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Treasury stock, at cost; shares: 2020 - 8,429,948; 2019 - 8,403,526
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(556,917)
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|
|
(549,810)
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Total stockholders' deficit
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(354,651)
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|
|
(241,774)
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Total liabilities and stockholders' deficit
|
$
|
2,074,945
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|
|
$
|
2,049,511
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See the accompanying notes to the consolidated financial statements.
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(In thousands, except per share amounts)
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Year Ended December 31,
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2020
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2019
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2018
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Revenues:
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Franchise revenues:
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|
|
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Royalties, franchise fees and other
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$
|
267,959
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|
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$
|
368,171
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|
|
$
|
375,640
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Advertising revenues
|
201,494
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|
|
283,015
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|
|
268,294
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Total franchise revenues
|
469,453
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|
|
651,186
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|
|
643,934
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|
Company restaurant sales
|
108,054
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|
|
131,214
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|
|
7,084
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|
Rental revenues
|
105,939
|
|
|
120,666
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|
|
121,934
|
|
Financing revenues
|
5,822
|
|
|
7,112
|
|
|
7,979
|
|
Total revenues
|
689,268
|
|
|
910,178
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|
|
780,931
|
|
Cost of revenues:
|
|
|
|
|
|
Franchise expenses:
|
|
|
|
|
|
Advertising expenses
|
202,012
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|
|
281,781
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|
|
269,590
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|
Bad debt expense (credit)
|
12,756
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|
|
(365)
|
|
|
452
|
|
Other franchise expenses
|
24,204
|
|
|
31,338
|
|
|
60,577
|
|
Total franchise expenses
|
238,972
|
|
|
312,754
|
|
|
330,619
|
|
Company restaurant expenses
|
111,550
|
|
|
123,272
|
|
|
5,872
|
|
Rental expenses:
|
|
|
|
|
|
Interest expense from finance leases
|
4,563
|
|
|
5,602
|
|
|
6,894
|
|
Other rental expenses
|
84,939
|
|
|
85,157
|
|
|
83,862
|
|
Total rental expenses
|
89,502
|
|
|
90,759
|
|
|
90,756
|
|
Financing expenses
|
528
|
|
|
579
|
|
|
597
|
|
Total cost of revenues
|
440,552
|
|
|
527,364
|
|
|
427,844
|
|
Gross profit
|
248,716
|
|
|
382,814
|
|
|
353,087
|
|
General and administrative expenses
|
144,791
|
|
|
162,815
|
|
|
166,683
|
|
Impairment and closure charges
|
132,620
|
|
|
1,487
|
|
|
2,107
|
|
Interest expense, net
|
66,895
|
|
|
60,393
|
|
|
61,686
|
|
Amortization of intangible assets
|
10,903
|
|
|
11,702
|
|
|
10,105
|
|
Loss on extinguishment of debt
|
—
|
|
|
8,276
|
|
|
—
|
|
Debt refinancing costs
|
—
|
|
|
—
|
|
|
2,523
|
|
Loss (gain) on disposition of assets
|
2,069
|
|
|
(332)
|
|
|
(625)
|
|
(Loss) income before income tax benefit (provision)
|
(108,562)
|
|
|
138,473
|
|
|
110,608
|
|
Income tax benefit (provision)
|
4,568
|
|
|
(34,127)
|
|
|
(30,254)
|
|
Net (loss) income
|
(103,994)
|
|
|
104,346
|
|
|
80,354
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
Adjustment to unrealized loss on available-for-sale investments
|
—
|
|
|
—
|
|
|
50
|
|
Foreign currency translation adjustment
|
3
|
|
|
2
|
|
|
(5)
|
|
Total comprehensive (loss) income
|
$
|
(103,991)
|
|
|
$
|
104,348
|
|
|
$
|
80,399
|
|
Net (loss) income available to common stockholders:
|
|
|
|
|
|
Net (loss) income
|
$
|
(103,994)
|
|
|
$
|
104,346
|
|
|
$
|
80,354
|
|
Less: Net income allocated to unvested participating restricted stock
|
(420)
|
|
|
(3,532)
|
|
|
(2,711)
|
|
Net (loss) income available to common stockholders
|
$
|
(104,414)
|
|
|
$
|
100,814
|
|
|
$
|
77,643
|
|
Net (loss) income available to common stockholders per share:
|
|
|
|
|
|
Basic
|
$
|
(6.43)
|
|
|
$
|
5.95
|
|
|
$
|
4.43
|
|
Diluted
|
$
|
(6.43)
|
|
|
$
|
5.85
|
|
|
$
|
4.37
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
16,230
|
|
|
16,934
|
|
|
17,533
|
|
Diluted
|
16,230
|
|
|
17,245
|
|
|
17,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial statements.
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Treasury Stock
|
|
|
|
|
Shares
Outstanding
|
Amount
|
|
Additional
Paid-in
Capital
|
|
(Accumulated Deficit) Retained Earnings
|
|
Shares
|
Cost
|
|
Total
|
Balance at December 31, 2017
|
|
17,993
|
|
$
|
250
|
|
|
$
|
276,408
|
|
|
$
|
(69,940)
|
|
|
$
|
(105)
|
|
|
7,029
|
|
$
|
(422,153)
|
|
|
$
|
(215,540)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
|
—
|
|
|
80,354
|
|
|
—
|
|
|
—
|
|
—
|
|
|
80,354
|
|
Other comprehensive gain
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
—
|
|
—
|
|
|
45
|
|
Purchase of common stock
|
|
(479)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
479
|
|
(34,929)
|
|
|
(34,929)
|
|
Reissuance of treasury stock
|
|
167
|
|
—
|
|
|
(2,551)
|
|
|
—
|
|
|
—
|
|
|
(167)
|
|
6,479
|
|
|
3,928
|
|
Net use of shares for stock plans
|
|
(11)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Repurchase of restricted shares for taxes
|
|
(27)
|
|
—
|
|
|
(1,972)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(1,972)
|
|
Stock-based compensation
|
|
—
|
|
—
|
|
|
10,546
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
10,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common stock in excess of retained earnings
|
|
—
|
|
—
|
|
|
(44,705)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(44,705)
|
|
Balance at December 31, 2018
|
|
17,644
|
|
250
|
|
|
237,726
|
|
|
10,414
|
|
|
(60)
|
|
|
7,341
|
|
(450,603)
|
|
|
(202,273)
|
|
Adoption of lease accounting guidance
|
|
—
|
|
—
|
|
|
—
|
|
|
(5,030)
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(5,030)
|
|
Net income
|
|
—
|
|
—
|
|
|
—
|
|
|
104,346
|
|
|
—
|
|
|
—
|
|
—
|
|
|
104,346
|
|
Other comprehensive gain
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
—
|
|
|
2
|
|
Purchase of common stock
|
|
(1,348)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,348
|
|
(111,697)
|
|
|
(111,697)
|
|
Reissuance of treasury stock
|
|
285
|
|
(1)
|
|
|
(520)
|
|
|
—
|
|
|
—
|
|
|
(285)
|
|
12,490
|
|
|
11,969
|
|
Net use of shares for stock plans
|
|
(30)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Repurchase of restricted shares for taxes
|
|
(30)
|
|
—
|
|
|
(2,728)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(2,728)
|
|
Stock-based compensation
|
|
—
|
|
—
|
|
|
10,808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
10,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common stock
|
|
—
|
|
—
|
|
|
982
|
|
|
(48,077)
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(47,095)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax withheld related to settlement of restricted stock units
|
|
—
|
|
—
|
|
|
(76)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(76)
|
|
Balance at December 31, 2019
|
|
16,522
|
|
249
|
|
|
246,192
|
|
|
61,653
|
|
|
(58)
|
|
|
8,404
|
|
(549,810)
|
|
|
(241,774)
|
|
Adoption of credit loss accounting guidance (Note 2)
|
|
—
|
|
—
|
|
|
—
|
|
|
(497)
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(497)
|
|
Net loss
|
|
—
|
|
—
|
|
|
—
|
|
|
(103,994)
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(103,994)
|
|
Other comprehensive gain
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
—
|
|
|
3
|
|
Purchase of common stock
|
|
(460)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
460
|
|
(26,527)
|
|
|
(26,527)
|
|
Reissuance of treasury stock
|
|
433
|
|
—
|
|
|
1,102
|
|
|
—
|
|
|
—
|
|
|
(433)
|
|
19,420
|
|
|
20,522
|
|
Net use of shares for stock plans
|
|
(8)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Repurchase of restricted shares for taxes
|
|
(36)
|
|
—
|
|
|
(2,479)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(2,479)
|
|
Stock-based compensation
|
|
—
|
|
—
|
|
|
12,508
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
12,508
|
|
Dividends on common stock
|
|
—
|
|
—
|
|
|
507
|
|
|
(12,715)
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(12,208)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax withheld related to settlement of restricted stock units
|
|
—
|
|
—
|
|
|
(205)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(205)
|
|
Balance at December 31, 2020
|
|
16,452
|
|
$
|
249
|
|
|
$
|
257,625
|
|
|
$
|
(55,553)
|
|
|
$
|
(55)
|
|
|
8,430
|
|
$
|
(556,917)
|
|
|
$
|
(354,651)
|
|
See the accompanying notes to the consolidated financial statements.
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities
|
|
|
|
|
|
Net (loss) income
|
$
|
(103,994)
|
|
|
$
|
104,346
|
|
|
$
|
80,354
|
|
Adjustments to reconcile net (loss) income to cash flows provided by operating activities:
|
|
|
|
|
|
Impairment and closure charges
|
132,501
|
|
|
1,485
|
|
|
2,038
|
|
Depreciation and amortization
|
42,829
|
|
|
42,493
|
|
|
32,175
|
|
Non-cash stock-based compensation expense
|
12,508
|
|
|
10,808
|
|
|
10,546
|
|
Non-cash interest expense
|
2,698
|
|
|
3,369
|
|
|
3,792
|
|
Deferred income taxes
|
(20,049)
|
|
|
(5,494)
|
|
|
(11,847)
|
|
Deferred revenue
|
(7,111)
|
|
|
(7,695)
|
|
|
(5,577)
|
|
Loss on extinguishment of debt
|
—
|
|
|
8,276
|
|
|
—
|
|
Loss (gain) on disposition of assets
|
2,069
|
|
|
(332)
|
|
|
(623)
|
|
Other
|
(2,566)
|
|
|
(5,374)
|
|
|
(949)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
(9,750)
|
|
|
(396)
|
|
|
3,149
|
|
Current income tax receivables and payables
|
16,143
|
|
|
8,677
|
|
|
8,119
|
|
Gift card receivables and payables
|
12,231
|
|
|
(1,037)
|
|
|
(1,488)
|
|
Other current assets
|
(2,191)
|
|
|
(498)
|
|
|
10,425
|
|
Accounts payable
|
6,455
|
|
|
583
|
|
|
(9,940)
|
|
Accrued employee compensation and benefits
|
(1,909)
|
|
|
(3,575)
|
|
|
13,183
|
|
Accrued advertising expenses
|
12,881
|
|
|
(1,166)
|
|
|
—
|
|
Other current liabilities
|
3,758
|
|
|
710
|
|
|
6,989
|
|
Cash flows provided by operating activities
|
96,503
|
|
|
155,180
|
|
|
140,346
|
|
Cash flows from investing activities
|
|
|
|
|
|
Principal receipts from notes, equipment contracts and other long-term receivables
|
31,155
|
|
|
24,075
|
|
|
25,771
|
|
Net additions to property and equipment
|
(10,927)
|
|
|
(19,424)
|
|
|
(14,279)
|
|
Proceeds from sale of property and equipment
|
537
|
|
|
2,540
|
|
|
655
|
|
Additions to long-term receivables
|
(1,475)
|
|
|
(6,955)
|
|
|
(6,500)
|
|
Acquisition of business
|
—
|
|
|
—
|
|
|
(20,155)
|
|
Other
|
(565)
|
|
|
(389)
|
|
|
(293)
|
|
Cash flows provided by (used in) investing activities
|
18,725
|
|
|
(153)
|
|
|
(14,801)
|
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
—
|
|
|
1,300,000
|
|
|
—
|
|
Repayment of long-term debt
|
(3,250)
|
|
|
(1,283,750)
|
|
|
(13,000)
|
|
Borrowings from revolving credit facility
|
220,000
|
|
|
—
|
|
|
75,000
|
|
Repayments of revolving credit facility
|
—
|
|
|
(25,000)
|
|
|
(50,000)
|
|
Payment of debt issuance costs
|
—
|
|
|
(13,150)
|
|
|
(3,633)
|
|
Dividends paid on common stock
|
(23,934)
|
|
|
(46,859)
|
|
|
(51,125)
|
|
Repurchase of common stock
|
(29,853)
|
|
|
(109,698)
|
|
|
(33,603)
|
|
Principal payments of finance lease obligations
|
(12,451)
|
|
|
(13,639)
|
|
|
(13,907)
|
|
Proceeds from stock options exercised
|
20,523
|
|
|
11,969
|
|
|
3,928
|
|
Tax payments for restricted stock upon vesting
|
(2,480)
|
|
|
(2,728)
|
|
|
(1,972)
|
|
Tax payments for share settlement of restricted stock units
|
(205)
|
|
|
(76)
|
|
|
—
|
|
Cash flows provided by (used in) financing activities
|
168,350
|
|
|
(182,931)
|
|
|
(88,312)
|
|
Net change in cash, cash equivalents and restricted cash
|
283,578
|
|
|
(27,904)
|
|
|
37,233
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
172,475
|
|
|
200,379
|
|
|
163,146
|
|
Cash, cash equivalents and restricted cash at end of year
|
$
|
456,053
|
|
|
$
|
172,475
|
|
|
$
|
200,379
|
|
Supplemental disclosures
|
|
|
|
|
|
Interest paid
|
$
|
69,208
|
|
|
$
|
66,104
|
|
|
$
|
66,059
|
|
Income taxes paid
|
$
|
11,873
|
|
|
$
|
44,748
|
|
|
$
|
34,246
|
|
Non-cash conversion of accounts receivable to notes receivable
|
$
|
1,307
|
|
|
$
|
185
|
|
|
$
|
11,959
|
|
See the accompanying notes to the consolidated financial statements.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
1. The Company
The first International House of Pancakes® (“IHOP”) restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter, the Company began developing and franchising additional restaurants. The Company was incorporated as IHOP Corp. under the laws of the State of Delaware in 1976. In November 2007, the Company acquired Applebee's International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the Company was changed to DineEquity, Inc. and on February 20, 2018, the name of the Company was changed to Dine Brands Global, Inc.SM (“Dine Brands Global”). The Company owns, franchises and operates two restaurant concepts: Applebee's Neighborhood Grill + Bar® (“Applebee's”), in the bar and grill segment within the casual dining category of the restaurant industry, and IHOP® in the family dining category of the restaurant industry.
As of December 31, 2020, there were 1,772 IHOP restaurants, of which 1,611 were subject to franchise agreements and 158 were subject to area license agreements. These IHOP restaurants were located in all 50 states of the United States, the District of Columbia, two United States territories and nine countries outside the United States. As of December 31, 2020, there were 1,711 Applebee's® restaurants, of which 1,642 were subject to franchise agreements and 69 were company-operated restaurants. These Applebee's restaurants were located in 49 states of the United States, two United States territories and 11 countries outside the United States.
References herein to Applebee's and IHOP restaurants are to these restaurant concepts, whether operated by franchisees, area licensees or the Company. Retail sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company.
2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Dine Brands Global, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Periods
The Company has a 52/53 week fiscal year that ends on the Sunday nearest to December 31 of each year. In a 52-week fiscal year, each fiscal quarter contains 13 weeks, comprised of two, four-week fiscal months followed by a five-week fiscal month. In a 53-week fiscal year, the last month of the fourth fiscal quarter contains six weeks. For convenience, the Company refers to its fiscal years as ending on December 31 and its fiscal quarters as ending on March 31, June 30 and September 30. The December 31, 2020 fiscal year ended January 3, 2021 and contained 53 weeks. The 2019 and 2018 fiscal years ended December 29, 2019 and December 30, 2018, respectively, and each contained 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires the Company's management to make estimates and assumptions 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 in the calculation and assessment of the following: impairment of tangible and intangible assets and goodwill; income taxes; allowance for doubtful 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.
Risks and Uncertainties
The Company was subject to risks and uncertainties as a result of the outbreak of a novel strain of coronavirus, designated “COVID-19” and declared to be a pandemic in March 2020. The Company first began to experience impacts from COVID-19 in March 2020, as federal, state and local governments reacted to the COVID-19 pandemic by encouraging or requiring social distancing, instituting shelter-in-place orders, and requiring, in varying degrees, reduced operating hours, restaurant dine-in and/or indoor dining limitations, capacity limitations or other restrictions that largely limited restaurants to off-premise sales (take-out and delivery) in the early stages of the pandemic. Most of the Company's international restaurants were impacted as well as
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
a result of restrictions put in place in various countries similar to those in the United States. Over the course of 2020, certain of these restrictions were relaxed as incidents of infection from the initial outbreak declined, but many of the restrictions were reinstituted as incidents of infection surged. The degree and duration of restriction varied by individual geographic area. The extent of the continuing impact of the COVID-19 pandemic on the Company's business remains highly uncertain and difficult to predict, as the operating status of our restaurants remains fluid and subject to change as government authorities modify existing restrictions or implement new restrictions on restaurant operations in response to changes in the number of COVID-19 infections and the availability and acceptance of vaccines in their respective jurisdictions. Additionally, economies worldwide have been negatively impacted by the COVID-19 pandemic, which possibly could cause a domestic and/or global economic recession.
The Company has taken several actions to mitigate the effects of the COVID-19 pandemic on its operations and its franchisees, as follows: (i) drew down $220 million from its revolving credit facility, leaving available remaining borrowing under the facility of approximately $2 million; (ii) terminated repurchases of common stock for the foreseeable future; (iii) the Company's Board of Directors decided not to declare a dividend for the second, third and fourth quarters of 2020; (iv) voluntarily increased the interest reserve for securitized debt from the required $16.4 million (one quarter of estimated interest) to $32.8 million; (v) reduced discretionary costs, limited new hiring and reduced the use of independent contractors; (vi) temporarily furloughed certain team members across various functional groups at its restaurant support centers during 2020; (vii) deferred franchisee payment of royalty, advertising and other fees, and lease obligations for up to two months on a case-by-case basis; (viii) deferred franchisee development obligations for up to 15 months and franchisee remodel obligation until the end of 2022; (ix) engaged a national real estate firm to assist franchisees with landlord discussions regarding rent deferrals, abatements and other modifications to lease agreements; (x) negotiated deferrals and abatements for properties on which the Company was lessee and (xi) hired external consultants to work with franchisees in assessing their financial health and to better understand performance variability.
The severity of the continued impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, how long the pandemic will last, whether/when recurrences of the virus may arise, what restrictions on in-restaurant dining may be enacted or re-enacted, the availability and acceptance of vaccines, the timing and extent of customer re-engagement with the Company's brands and, in general, what the short- and long-term impact on consumer discretionary spending the COVID-19 pandemic might have on the Company and the restaurant industry as a whole, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be impacted adversely by the length of time dine-in restrictions are in place and the success of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by itself and its franchisees. As such, the extent to which the COVID-19 pandemic may continue to materially impact the Company's financial condition, liquidity, or results of operations remains highly uncertain.
Concentration of Credit Risk
The Company's cash, cash equivalents, restricted cash and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with financial institutions that management believes are creditworthy. The Company does not believe that it is exposed to any significant credit risk on cash, cash equivalents and restricted cash. At times, cash, cash equivalents and restricted cash balances may be in excess of FDIC insurance limits.
Accounts receivable are derived from revenues earned from franchisees and area licensees located primarily in the United States. Financing receivables arise from the financing of restaurant equipment, leases or franchise fees with the Company by IHOP franchisees. The Company is subject to a concentration of credit risk with respect to receivables from franchisees that own a large number of Applebee's or IHOP restaurants. As of December 31, 2020, two franchisees (one Applebee's franchisee and one franchisee with cross-brand ownership) operated a combined total of 830 Applebee's and IHOP restaurants in the United States, which comprised 26.0% of the total Applebee's and IHOP franchise and area license restaurants in the United States. Revenues from these two franchisees represented 17.1%, 17.4%, and 19.8% of total consolidated revenue for the years ended December 31, 2020, 2019 and 2018, respectively. One franchisee represented 11.0%, 10.6% and 11.9% of total consolidated revenue for the years ended December 31, 2020, 2019 and 2018, respectively. Receivables from these franchisees totaled $20.4 million and $14.4 million at December 31, 2020 and 2019, respectively.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. These cash equivalents are stated at cost which approximates market value. Cash held related to IHOP advertising funds and the Company's gift card programs is not considered to be restricted cash as there are no restrictions on the use of these funds. The components of cash and cash equivalents were as follows:
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December 31,
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2020
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2019
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(In millions)
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Money market funds
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$
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175.0
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$
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—
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IHOP advertising funds and gift card programs
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71.6
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56.6
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Other depository accounts
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136.8
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59.4
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Total cash and cash equivalents
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$
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383.4
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$
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116.0
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Restricted Cash
Current
Current restricted cash primarily consisted of funds required to be held in trust in connection with the Company's securitized debt and funds from Applebee's franchisees pursuant to franchise agreements, usage of which was restricted to advertising activities. The components of current restricted cash were as follows:
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December 31,
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2020
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2019
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(In millions)
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Securitized debt reserves
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$
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27.0
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$
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38.3
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Applebee's advertising funds
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12.8
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2.3
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Other
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0.1
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0.1
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Total current restricted cash
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$
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39.9
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$
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40.7
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Non-current
Non-current restricted cash of $32.8 million and $15.7 million at December 31, 2020 and 2019, respectively, represents interest reserves set aside for the duration of the securitized debt. The required reserve is approximately one quarter's interest payment on the Company's securitized. The Company voluntarily increased the amount held in non-current cash to twice the required amount during the year ended December 31, 2020.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Properties under finance leases are stated at the present value of the minimum lease payments. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or remaining useful lives. Leasehold improvements and properties under finance leases are amortized on a straight-line basis over their estimated useful lives or the lease term, if less. The general ranges of depreciable and amortizable lives are as follows:
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Category
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Depreciable Life
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Buildings and improvements
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25 to 40 years
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Leaseholds and improvements
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Shorter of primary lease term or between three to 40 years
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Equipment and fixtures
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Three to five years
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Internal-use software
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Three to 10 years
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Properties under finance leases
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Primary lease term or remaining primary lease term
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Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Long-Lived Assets
On a regular basis, the Company assesses whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets (primarily assets related to property and equipment leased or subleased to franchisees) may not be recoverable. The Company tests impairment using historical cash flows and other relevant facts and circumstances as the primary basis for estimates of future cash flows. The Company considers factors such as the number of years the franchisee's restaurant has been in operation, sales trends, cash flow trends, remaining lease life and other factors which apply on a case-by-case basis. The analysis is performed at the restaurant level for indicators of permanent impairment.
Recoverability of the Company's assets is measured by comparing the assets' carrying value to the undiscounted future cash flows expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. Total expected undiscounted future cash flows that are less than the carrying amount of the assets is an indicator of impairment. If it is decided that there has been an impairment, the carrying amount of the asset is written down to the estimated fair value as determined in accordance with U.S. GAAP governing fair value measurements. The primary method of estimating fair value is based on a discounted cash flow analysis. Any loss resulting from impairment is recognized as a charge against operations.
See Note 13 - Long-lived Tangible Asset Impairment and Closure Charges, of the Notes to the Consolidated Financial Statements for additional information.
Goodwill and Intangible Assets
Goodwill is recorded when the aggregate purchase price of an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Intangible assets resulting from an acquisition are accounted for using the purchase method of accounting and are estimated by management based on the fair value of the assets received. The Company's identifiable intangible assets are comprised primarily of the Applebee's tradename and Applebee's franchise agreements. Identifiable intangible assets with finite lives (franchise agreements) are amortized over the period of estimated benefit using the straight-line method and estimated useful lives. Goodwill and intangible assets considered to have an indefinite life (primarily the Applebee's tradename) are not subject to amortization. The determination of indefinite life is subject to reassessment if changes in facts and circumstances indicate the period of benefit has become finite.
Goodwill has been allocated to three reporting units. The significant majority of the Company's goodwill resulted from the November 29, 2007 acquisition of Applebee's and was allocated to the Applebee's franchised restaurants unit (“Applebee's franchise unit”). Smaller amounts of goodwill arising from other business combinations have been allocated to the IHOP franchised restaurants unit (“IHOP franchise unit”) and the Applebee's company restaurants unit (“Applebee's company unit”). See Note 6 - Goodwill, of the Notes to the Consolidated Financial Statements for additional information.
The Company evaluates the goodwill of the Applebee's franchise and company units and the indefinite-lived Applebee's tradename for impairment as of October 31 of each year. The Company evaluates the goodwill of the IHOP franchise unit for impairment as of December 31 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.
When evaluating goodwill and indefinite-lived intangible assets for impairment, under U.S. GAAP, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit or the intangible asset is more-likely-than-not greater than the carrying amount. Such qualitative factors include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, share price fluctuations, overall financial performance and results of past impairment tests. If, based on a review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value is greater than the carrying value, the Company may bypass a quantitative test for impairment.
In performing the quantitative test for impairment of goodwill, the Company primarily uses the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method. Significant assumptions used to determine fair value under the discounted cash flow method include expected future trends in sales, operating expenses, overhead expenses, capital expenditures and changes in working capital, along with an appropriate discount rate based on the Company's estimated cost of equity capital and after-tax cost of debt. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied. The Company measures impairment as the excess of a reporting unit's carrying amount over its fair value as determined by the quantitative test described above.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
In the process of performing its quantitative impairment review of intangible assets considered to have an indefinite life, the Company primarily uses 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 an appropriate discount rate based on the Company's estimated cost of equity capital and after-tax cost of debt to be applied to the forecast revenue stream.
Revenue Recognition
The Company's revenues are recorded in four categories: franchise operations, company restaurant operations, rental operations and financing operations. Franchise revenue (which comprises most of the Company's revenues) and revenue from company-operated restaurants are recognized in accordance with Accounting Standards Codification 606 - Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration the Company expects to receive for those services or goods. The Company's rental and financing revenues are recognized in accordance with other U.S. GAAP accounting standards and are not subject to ASC 606.
Franchise Revenues
The Company owns and franchises the Applebee’s and IHOP restaurant concepts. The franchise arrangement for both brands is documented in the form of a franchise agreement and, in most cases, a development agreement. The franchise arrangement between the Company as the franchisor and the franchisee as the customer requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the 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 brand’s symbolic intellectual property over the term of the license. The services provided by the Company are 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 both brands primarily consists of (a) initial franchise/development fees; (b) continuing franchise fees (royalties); and (c) advertising fees. Since the Company considers the licensing of the 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 waffle dry mix from the Company.
The Company recognizes the primary components of the transaction price as follows:
•Franchise and development fees are recognized as revenues ratably on a straight-line basis over the term of the 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 advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenues are recognized when the franchisee's reported sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either a contract asset (unbilled receivable) or, once billed, accounts receivable, on the balance sheet;
•Revenue from the sales of proprietary pancake and waffle dry mix is recognized in the period in which distributors ship the franchisee's order; recognition of revenue results in accounts receivable on the balance sheet.
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectibility of the amount; however, the timing of recognition does not require significant judgment as it is based on either the franchise term, the month of sale as reported by the franchisee or the date of product shipment, none of which require estimation.
The Company does not incur a significant amount of contract acquisition costs in conducting its franchising activities. The Company believes its franchising arrangements do not contain a significant financing component.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Any excess or deficiency of advertising fee revenue compared to advertising expenditures, is recognized in the fourth quarter of the Company's fiscal year. Any excess of revenue over expenditures is recognized only to the extent of previously recognized deficits. When advertising revenues exceed the related advertising expenses and there is no recovery of a previously recognized deficit of advertising revenues, advertising costs are accrued up to the amount of revenues.
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 sales taxes collected from guests that are remitted to the appropriate taxing authorities, with no significant judgments required.
Rental Revenues
Rental operations revenues include revenues from operating leases and interest income from direct financing leases. See Basis of Presentation and Summary of Significant Accounting Policies - Leases.
Financing Revenues
Financing operations revenues consist primarily of interest income from the financing of franchise fees and equipment leases, other notes receivable from franchisees and sales of equipment associated with refranchised IHOP restaurants. Interest income is recorded as earned.
Gift Card
The Company administers gift card programs for Applebee's and IHOP. The Company records a liability in the period in which a gift card is sold and recognizes costs associated with its administration of the gift card programs as prepaid assets when the costs are incurred. The liability and prepaid asset recorded on the Company's books are relieved when gift cards are redeemed. If redemption occurs at a franchisee-operated restaurant, the gift card revenue, net of costs, is remitted to the franchisee. The Company receives gift card breakage revenue only from gift cards redeemed at company-operated restaurants. Breakage revenue for gift cards redeemed at company-operated restaurants for the year ended December 31, 2020 was not material. Breakage revenue was not recorded for the years ended 2019 and 2018 as the Company did not have sufficient history from operating the restaurants on which to base an estimate for breakage.
Allowance for Credit Losses
The allowance for credit losses is the Company's best estimate of the amount of probable credit losses incurred on existing receivables; however, changes in circumstances relating to receivables may result in changes to the allowance in the future. The Company determines the allowance based on historical losses, current conditions, and reasonable and supportable forecasts used in assessing the franchisee's or area licensee's ability to pay outstanding balances. The primary indicator of credit quality is delinquency, which is considered to be a receivable balance greater than 90 days past due. The Company continually reviews the allowance for credit losses. Past due balances and future obligations are reviewed individually for collectability. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. Credit losses historically have been within management's estimates.
Leases
The Company accounts for its leasing activities in accordance with accounting guidance for leases, as codified in Accounting Standards Topic 842 (“ASC 842”), adopted as of the beginning of its 2019 fiscal year. In adopting ASC 842, the Company utilized expedients that allowed it to retain the classification, as either an operating lease or a finance lease, that was previously determined under prior accounting guidance for leases. The Company reassesses this classification upon renewal, extension or the modification of an existing lease agreement. The Company determines the appropriate classification upon entering into a new contract determined to contain a lease.
Operating lease assets and liabilities are recognized at the lease commencement date, or were recognized upon adoption of ASC 842. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company's right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
The Company's lease agreements generally do not provide information to determine the implicit interest rate in the agreements. This requires the Company to make significant judgments in determining the incremental borrowing rate to be used in calculating operating lease liabilities as of the adoption or commencement date. The Company estimates the incremental borrowing rate primarily by reference to (i) yield rates on debt issuances by companies of a similar credit rating as the Company; (ii) U.S. Treasury rates as of the adoption or commencement date; and (iii) adjustments for differences between these rates and the lease term.
The cost of an operating lease is recognized over the lease term on a straight-line basis. The lease term commences on the date the Company has the right to control the use of the leased property. Certain leases may contain provisions for rent holidays and fixed-step escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and fixed-step escalations are reflected in rent expense on a straight-line basis over the expected lease term. Differences between amounts paid and amounts expensed are recorded as deferred rent. Certain leases may include rent escalations based on inflation indexes and fair market value adjustments. Certain leases may contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales. Subsequent escalations subject to such an index and contingent rental payments are recognized as variable lease expense.
The rental payments or receipts on those property leases that meet the finance lease criteria result in the recognition of interest expense or interest income and a reduction of finance lease obligation or financing lease receivable, respectively. Finance lease obligations are amortized based on the Company's incremental borrowing rate and direct financing lease receivables are amortized using the implicit interest rate.
Pre-opening Expenses
Expenditures related to the opening of new or relocated restaurants are charged to expense when incurred.
Advertising
Advertising fees included as franchise revenue for the years ended December 31, 2020, 2019 and 2018 were $201.5 million, $283.0 million and $268.3 million, respectively.
Advertising expense reflected in the Consolidated Statements of Comprehensive (Loss) Income includes contributions to the national advertising fund made by Applebee's and IHOP, local marketing advertising costs incurred by company-operated restaurants, and certain advertising costs incurred by the Company to benefit future franchise operations. Costs of advertising typically are expensed either as incurred or the first time the advertising takes place. Advertising expense included in company restaurant operations for the years ended December 31, 2020, 2019 and 2018 was $5.2 million, $6.1 million, and $0.3 million, respectively.
Fair Value Measurements
The Company determines the fair market values of its financial assets and liabilities, as well as non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy established in U.S. GAAP. As necessary, the Company measures its financial assets and liabilities using inputs from the following three levels of the fair value hierarchy:
•Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
•Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
•Level 3 inputs are unobservable and reflect the Company's own assumptions.
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. None of the Company's non-financial assets or non-financial liabilities is required to be measured at fair value on a recurring basis. Assets recognized or disclosed at fair value in the consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill and other intangible assets, which are measured at fair value if determined to be impaired. The Company has not elected to use fair value measurement for any assets or liabilities for which fair value measurement is not presently required.
The Company believes the fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying amounts due to their short duration.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
The fair values of non-current financial instruments, determined based on Level 2 inputs, are shown in the following table:
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December 31,
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2020
|
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2019
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(In millions)
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Face value of Series 2019-1 Fixed Rate Senior Secured Notes
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|
$
|
1,296.8
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|
|
$
|
1,300.0
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Fair value of Series 2019-1 Fixed Rate Senior Secured Notes
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|
$
|
1,259.5
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|
|
$
|
1,326.3
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Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records estimated tax liabilities to the extent the contingencies are probable and can be reasonably estimated. The Company recognizes interest accrued related to unrecognizable tax benefits and penalties as a component of the income tax provision recognized in the Consolidated Statements of Comprehensive (Loss) Income.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities based on its technical merits, including all appeals or litigation processes. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. For each reporting period, management applies a consistent methodology to measure and adjust all uncertain tax positions based on the available information.
Stock-Based Compensation
Members of the Board of Directors and certain employees are eligible to receive stock options, restricted stock, restricted stock units and performance units pursuant to the Dine Brands Global, Inc. 2019 Stock Incentive Plan. Shares of unvested restricted stock are subject to restrictions on transfer and forfeiture under certain circumstances. The holder of unvested restricted stock has the right to vote and receive regular cash dividends with respect to the shares of unvested restricted stock.
The Company accounts for all stock-based payments to employees and non-employee directors, including grants of stock options, restricted stock, restricted stock units and performance units to be recognized in the financial statements, based on their respective grant date fair values. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods.
The grant date fair value of restricted stock and stock-settled restricted stock units is determined based on the Company's stock price on the grant date. The Company estimates the grant date fair value of stock option awards using the Black-Scholes option pricing model, which considers, among other factors, a risk-free interest rate, the expected life of the award and the historical volatility of the Company's stock price. The Company estimates the grant date fair value of awards with performance-based market conditions using a Monte Carlo simulation method which considers, among other factors, the performance-based market condition, a risk-free interest rate, the expected life of the award and the historical volatility of the Company's stock price. Awards of cash-settled restricted stock units are classified as liabilities with the liability and compensation expense related to cash-settled awards adjusted to fair value at each balance sheet date.
Net (Loss) Income Per Share
Net (loss) income per share is calculated using the two-class method prescribed in U.S. GAAP. Basic net (loss) income per share is computed by dividing the net (loss) income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing the net (loss) income available to common stockholders for the period by the weighted average number of common shares and potential shares of common stock outstanding during the period if their effect is dilutive. The Company uses the treasury stock method to calculate the weighted average shares used in the diluted earnings per share calculation. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of restricted stock.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Other Comprehensive (Loss) Income
For the years ended December 31, 2020, 2019 and 2018, the income tax benefit or provision allocated to items of other comprehensive (loss) income was not significant.
Treasury Stock
The Company may from time to time utilize treasury stock when vested 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 method.
Dividends
Dividends declared on common stock are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends declared in excess of retained earnings are recorded as a reduction of additional paid-in capital.
Reporting Segments
The Company identifies its reporting segments based on the organizational units used by management to monitor performance and make operating decisions. The Company has five operating segments: Applebee's franchise operations, IHOP 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 IHOP franchise operations), rental operations, financing operations and company-operated restaurant operations. The Company considers these to be its reportable segments, regardless of whether any segment exceeds 10% of consolidated revenues, income before income tax provision or total assets.
Franchise Segment
As of December 31, 2020, the franchise operations reportable segment consisted of 1,642 restaurants operated by Applebee's franchisees in the United States, two United States territories and 11 countries outside the United States and 1,769 restaurants operated by IHOP franchisees and area licensees in the United States, two United States territories and 9 countries outside the United States. Franchise operations revenue consists primarily of royalties and advertising fees based on a percentage of the franchisee's gross sales, sales of proprietary products (primarily IHOP pancake and waffle dry mixes) and other franchise fees.
Franchise operations expenses include advertising expense, the cost of proprietary products, pre-opening training expenses and other franchise-related costs.
Rental Segment
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental operations expenses are costs of operating leases and interest expense of finance leases on franchisee-operated restaurants. The rental operations revenue and expenses are primarily generated by IHOP. Applebee's has an insignificant amount of rental activity.
Financing Segment
Financing operations revenue primarily consists of interest income from the financing of IHOP franchise fees and equipment leases, notes receivable from Applebee's franchisees and sales of equipment associated with refranchised IHOP restaurants. Financing expenses are the cost of restaurant equipment.
Company Segment
As of December 31, 2020, the Company operated 69 Applebee's restaurants that were acquired from a former franchisee in December 2018. The company segment presented in these financial statements consists of these 69 Applebee's restaurants in 2020 and 2019 and for three weeks in December of 2018. All company-operated restaurants were located in the United States. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, beverage, labor, benefits, utilities, rent and other operating costs.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Accounting Standards Adopted Effective January 1, 2020
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on the measurement of current expected credit losses (“CECL”) on financial instruments. The new guidance has replaced the incurred loss methodology of recognizing credit losses on financial instruments with a methodology that estimates the expected credit loss on financial instruments and reflects the net amount expected to be collected on the financial instrument. The Company adopted this change in accounting principle as of the first day of the first fiscal quarter of 2020 using the modified retrospective method. Accordingly, financial information for periods prior to the date of initial application has not been adjusted.
Upon adoption of the new CECL guidance, the Company recognized an increase to its allowance for credit losses of $0.7 million. The Company recognized an adjustment to retained earnings upon adoption of $0.5 million, net of tax of $0.2 million.
Additional new accounting guidance became effective for the Company as of the beginning of fiscal 2020 that the Company reviewed and concluded was either not applicable to its operations or had no material effect on its consolidated financial statements in the current or future fiscal years.
Newly Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued new guidance intended to simplify the accounting for income taxes, change the accounting for certain income tax transactions, and make other minor changes. The Company will be required to adopt the new guidance beginning with its first fiscal quarter of 2021; early adoption in any interim period after issuance of the new guidance is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements but does not expect this standard to have a material effect on its financial statements. The Company did not adopt the standard early.
In March 2020 with an update in January 2021, the FASB issued guidance which provides optional expedients and exceptions for applying current U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The guidance can be adopted immediately and is applicable to contracts entered into on or before December 31, 2022. The Company is currently evaluating our contracts that reference LIBOR and the potential effects of adopting this new guidance. The Company is currently assessing the impact this guidance will have on its consolidated financial statements but does not expect this standard to have a material effect on its financial statements. The Company does not intend to adopt the standard early.
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 when adoption is required in the future.
3. Revenue Disclosures
The following table disaggregates our franchise revenues by major type for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Franchise Revenues:
|
|
|
|
|
|
|
Royalties
|
|
$
|
215,214
|
|
|
$
|
302,169
|
|
|
$
|
311,568
|
|
Advertising fees
|
|
201,494
|
|
|
283,015
|
|
|
268,294
|
|
Pancake and waffle dry mix sales and other
|
|
38,936
|
|
|
53,973
|
|
|
52,108
|
|
Franchise and development fees
|
|
13,809
|
|
|
12,029
|
|
|
11,964
|
|
Total franchise revenues
|
|
$
|
469,453
|
|
|
$
|
651,186
|
|
|
$
|
643,934
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
3. Revenue Disclosures (Continued)
Accounts and other receivables related to franchise revenues as of December 31, 2020 and 2019 were $76.3 million (net of allowance of $11.4 million) and $63.5 million (net of allowance of $0.7 million), respectively, and were included in receivables, net in the Consolidated Balance Sheets.
Changes in the Company's contract liability for deferred franchise revenues during the year ended December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Deferred Franchise Revenue (short- and long-term)
|
|
|
(In thousands)
|
Balance at December 31, 2019
|
|
67,030
|
|
Recognized as revenues during the year ended December 31, 2020
|
|
(12,913)
|
|
Fees deferred during the year ended December 31, 2020
|
|
5,802
|
|
Balance at December 31, 2020
|
|
$
|
59,919
|
|
The balance of deferred franchise revenues as of December 31, 2020 is expected to be recognized as follows:
|
|
|
|
|
|
|
(In thousands)
|
2021
|
$
|
7,682
|
|
2022
|
7,273
|
|
2023
|
6,758
|
|
2024
|
6,158
|
|
2025
|
5,372
|
|
Thereafter
|
26,676
|
|
Total
|
$
|
59,919
|
|
4. Current Expected Credit Losses
Prior to the adoption of CECL, the Company recorded incurred loss reserves against receivable balances based on current and historical information, with delinquency status being the primary indicator of a deterioration in credit quality. The recently adopted 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.
Upon adoption of the CECL methodology, the Company developed its estimated loss reserves in the following manner. The Company continued to record 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 following CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.
Historical Losses
Historical loss rates over a five-year span were calculated for financial assets with common risk characteristics. The Company determined historical loss rate data for each franchise brand concept was more relevant than a single blended rate. Historical losses were determined based on the average charge-off method. Historical loss rates are further adjusted by factors related to current conditions and forecasts of future economic conditions.
Current Conditions
The Company identified three metrics that it believes provide the most relevant reflection of the current risks inherent in the Company’s franchisee-based restaurant business, as follows: (1) delinquency status, (2) system-wide same-restaurant sales, and (3) restaurant unit-level economics. The current conditions adjustment factor was increased to account for the impact of the COVID-19 pandemic.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
4. Current Expected Credit Losses (Continued)
Reasonable and Supportable Forecasts
The third component in the CECL methodology involves consideration of macroeconomic conditions that can impact the estimate of expected credit losses in the future. The Company has not developed an internal methodology in this regard; rather, the Company utilizes existing, publicly accessible sources of economic data, primarily forecasts of overall unemployment rate as well as consumer spending based on the personal consumption expenditure index.
Reversion to History
The Company has determined that reversion to history was not required since the remaining average lives of the Company’s financial assets are not exceedingly lengthy.
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.
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 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 in June 2017, and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. The notes have a term from two to ten years and bear interest averaging 4.7% and 5.1% per annum at December 31, 2020 and 2019, respectively. Due to the risk inherent in Applebee's notes that were converted from previously delinquent franchisee accounts receivable balances, a significant portion of these notes have specific reserves recorded against them totaling $8.9 million as of December 31, 2020.
Equipment Leases Receivable
Equipment leases receivable also relate to IHOP franchise development activity prior to 2003. IHOP provided the financing for the leasing of the equipment. Equipment lease contracts are collateralized by the equipment in the restaurant. Equipment lease contracts are due in equal weekly installments, primarily bear interest averaging 9.8% and 9.9% per annum at December 31, 2020 and 2019, respectively. The term of an equipment lease contract coincides with the term of the corresponding restaurant building lease. The weighted average remaining life of the Company’s equipment leases is 5.5 years as of December 31, 2020. 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.
Direct Financing Leases Receivable
Direct financing lease receivables 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. IHOP provided the financing for leasing or subleasing the site. Direct financing leases at December 31, 2020, comprised 90 leases with a weighted average remaining life of 4.1 years, and relate to locations that IHOP is leasing from third parties and subleasing to franchisees. Where applicable, building leases and equipment contracts contain cross-default provisions wherein a default under one constitutes a default under all.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
4. Current Expected Credit Losses (Continued)
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.
Total receivables balances at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
2020
|
|
2019
|
|
(In millions)
|
Accounts receivable
|
$
|
85.7
|
|
|
$
|
60.8
|
|
Gift card receivables
|
22.5
|
|
|
46.7
|
|
|
|
|
|
Notes receivable
|
18.6
|
|
|
28.9
|
|
Financing receivables:
|
|
|
|
Equipment leases receivable
|
43.9
|
|
|
56.3
|
|
Direct financing leases receivable
|
22.7
|
|
|
34.0
|
|
Franchise fee notes receivable
|
0.1
|
|
|
0.2
|
|
Other
|
6.0
|
|
|
7.3
|
|
|
199.5
|
|
|
234.2
|
|
Less: allowance for doubtful accounts and notes receivable
|
(23.1)
|
|
|
(11.3)
|
|
|
176.4
|
|
|
222.9
|
|
Less: current portion
|
(121.9)
|
|
|
(136.9)
|
|
Long-term receivables
|
$
|
54.5
|
|
|
$
|
86.0
|
|
|
|
|
|
Changes in the allowance for credit losses during the year ended December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Notes receivable, short-term
|
|
Notes receivable, long-term
|
|
Lease Receivables
|
|
Equipment Receivables
|
|
Other (1)
|
|
Total
|
|
(In millions)
|
Balance, December 31, 2019
|
$
|
0.7
|
|
|
$
|
2.4
|
|
|
$
|
8.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11.3
|
|
Increase due to CECL adoption
|
0.3
|
|
|
0.0
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.7
|
|
Bad debt expense for the year ended December 31, 2020
|
5.0
|
|
|
2.5
|
|
|
0.5
|
|
|
1.2
|
|
|
3.4
|
|
|
0.2
|
|
|
12.8
|
|
Advertising provision adjustment
|
5.4
|
|
|
(0.7)
|
|
|
(1.2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.5
|
|
Write-offs
|
(0.2)
|
|
|
(0.6)
|
|
|
(2.3)
|
|
|
(0.9)
|
|
|
(1.2)
|
|
|
—
|
|
|
(5.2)
|
|
Recoveries
|
0.0
|
|
|
—
|
|
|
—
|
|
|
0.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2020
|
$
|
11.2
|
|
|
$
|
3.6
|
|
|
$
|
5.3
|
|
|
$
|
0.4
|
|
|
$
|
2.3
|
|
|
$
|
0.3
|
|
|
$
|
23.1
|
|
(1) Primarily distributor receivables, gift card receivables and credit card receivables
The Company's primary credit quality indicator for all portfolio segments is delinquency. The delinquency status of receivables (other than accounts receivable, gift card receivables and distributor receivables) at December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, short-term
|
|
Notes receivable, long-term
|
|
Lease Receivables
|
|
Equipment Receivables
|
|
Other (1)
|
|
Total
|
|
(In millions)
|
Current
|
$
|
3.9
|
|
|
$
|
12.2
|
|
|
$
|
22.7
|
|
|
$
|
43.9
|
|
|
$
|
2.0
|
|
|
$
|
84.7
|
|
30-59 days
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
60-89 days
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
90-119 days
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
120+ days
|
2.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
Total
|
$
|
6.5
|
|
|
$
|
12.2
|
|
|
$
|
22.7
|
|
|
$
|
43.9
|
|
|
$
|
2.0
|
|
|
$
|
87.3
|
|
(1) Primarily credit card receivables
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
4. Current Expected Credit Losses (Continued)
The year of origination of the Company's financing receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, short and long-term
|
|
Lease Receivables
|
|
Equipment Receivables
|
|
Total
|
|
(In millions)
|
2020
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
2019
|
2.6
|
|
|
0.9
|
|
|
—
|
|
|
3.5
|
|
2018
|
8.1
|
|
|
—
|
|
|
—
|
|
|
8.1
|
|
2017
|
6.4
|
|
|
—
|
|
|
—
|
|
|
6.4
|
|
2016
|
—
|
|
|
1.3
|
|
|
—
|
|
|
1.3
|
|
Prior
|
0.1
|
|
|
19.0
|
|
|
43.9
|
|
|
63.0
|
|
Total
|
$
|
18.7
|
|
|
$
|
22.7
|
|
|
$
|
43.9
|
|
|
$
|
85.3
|
|
The Company does not place its financing receivables in non-accrual status.
The following table summarizes the activity in the allowance for doubtful accounts and notes receivable for the years ended December 31, 2019 and 2018, prior to the adoption of CECL:
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
(In millions)
|
Balance at December 31, 2017
|
$
|
22.2
|
|
Provision
|
10.3
|
|
Charge-offs
|
(15.3)
|
|
|
|
Balance at December 31, 2018
|
17.2
|
|
Provision
|
(0.4)
|
|
Charge-offs
|
(5.0)
|
|
Recoveries
|
(0.5)
|
|
Balance at December 31, 2019
|
$
|
11.3
|
|
5. Property and Equipment
Property and equipment by category at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
(In millions)
|
Leaseholds and improvements
|
$
|
221.7
|
|
|
$
|
235.4
|
|
Properties under finance leases
|
95.2
|
|
|
100.5
|
|
Equipment and fixtures
|
62.1
|
|
|
60.7
|
|
Buildings and improvements
|
55.4
|
|
|
56.6
|
|
Land
|
52.1
|
|
|
55.9
|
|
Internal-use software
|
37.0
|
|
|
34.7
|
|
Construction in progress
|
5.0
|
|
|
4.7
|
|
Property and equipment, gross
|
528.5
|
|
|
548.5
|
|
Less: accumulated depreciation and amortization
|
(340.5)
|
|
|
(332.1)
|
|
Property and equipment, net
|
$
|
188.0
|
|
|
$
|
216.4
|
|
The Company recorded depreciation expense on property and equipment of $31.9 million, $30.8 million and $22.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Accumulated depreciation and amortization includes accumulated amortization for properties under finance leases in the amount of $49.6 million and $51.1 million at December 31, 2020 and 2019, respectively.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
6. Goodwill
The significant majority of the Company's goodwill arose from the November 29, 2007 acquisition of Applebee's. Changes in the carrying amount of goodwill for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applebee's Franchise Unit
|
|
|
|
Applebee's Company Unit
|
|
IHOP Franchise Unit
|
|
|
|
Total
|
|
(In millions)
|
Balance at December 31, 2017
|
$
|
328.4
|
|
|
|
|
$
|
—
|
|
|
$
|
10.8
|
|
|
|
|
$
|
339.2
|
|
Business acquisition
|
—
|
|
|
|
|
6.1
|
|
|
—
|
|
|
|
|
6.1
|
|
Balance at December 31, 2018
|
328.4
|
|
|
|
|
6.1
|
|
|
10.8
|
|
|
|
|
345.3
|
|
Purchase price adjustment related to business acquisition
|
—
|
|
|
|
|
(1.5)
|
|
|
—
|
|
|
|
|
(1.5)
|
|
Balance at December 31, 2019
|
328.4
|
|
|
|
|
4.6
|
|
|
10.8
|
|
|
|
|
343.9
|
|
Impairment loss
|
(92.2)
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
(92.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
236.2
|
|
|
|
|
$
|
4.6
|
|
|
$
|
10.8
|
|
|
|
|
$
|
251.6
|
|
Gross and net carrying amounts of goodwill at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Gross
|
|
Accumulated
Impairment Loss
|
|
Net
|
|
Gross
|
|
Accumulated
Impairment Loss
|
|
Net
|
|
(In millions)
|
Applebee's Franchise Unit
|
$
|
686.7
|
|
|
$
|
(450.5)
|
|
|
$
|
236.2
|
|
|
$
|
686.6
|
|
|
$
|
(358.2)
|
|
|
$
|
328.4
|
|
Applebee's Company Unit
|
4.6
|
|
|
—
|
|
|
4.6
|
|
|
4.6
|
|
|
—
|
|
|
4.6
|
|
IHOP Franchise Unit
|
10.8
|
|
|
—
|
|
|
10.8
|
|
|
10.8
|
|
|
—
|
|
|
10.8
|
|
Total
|
$
|
702.1
|
|
|
$
|
(450.5)
|
|
|
$
|
251.6
|
|
|
$
|
702.1
|
|
|
$
|
(358.2)
|
|
|
$
|
343.9
|
|
The Company assesses goodwill for impairment in accordance with its policy described in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies.
Because of the risks and uncertainties associated with the COVID-19 pandemic, the Company performed an interim assessment to determine whether the impact of COVID-19 indicated a potential impairment to its goodwill and intangible assets. In the second quarter of 2020, the Company noted that its common stock had recovered less of its early March 2020 (pre-pandemic) market value than the overall U.S. stock market had recovered. The Company also was able to assess several months of data as to the impact of the COVID-19 pandemic on its operations and, in turn, assess the impact that might have on the risk premium incorporated into its discount rate. Based on these developments, the Company determined that an interim quantitative test for impairment of the goodwill of the Applebee's Franchise and Company units should be performed as of May 24, 2020. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The fair value technique used in this instance is classified as Level 3, where unobservable inputs are used when little or no market data is available.
As a result of performing the quantitative test of impairment, the Company recognized an impairment loss of $92.2 million to the goodwill of the Applebee's Franchise unit. The majority of the impairment was due to an increase in the assessed risk premium incorporated into the discount rate assumption. There was no impairment of the Applebee's Company unit.
In the fourth quarter of 2020, the Company performed qualitative assessments of the goodwill of the Applebee's Franchise unit, the Applebee's Company unit and the IHOP franchise unit. In performing that analysis the Company considered, among other things, the Company's operating performance subsequent to May 2020 and what, if any, impact that performance had on the long-term forecast of future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working capital that had been used in performing a quantitative impairment test as of May 2020. The Company also considered the market value of the Company's stock, absolute and relative to peers, the continuing favorable impact of the Tax Cuts and Jobs Act (the “Tax Act”) on future cash flows and general economic conditions and the impact these changes might have on an appropriate discount rate. As result of the qualitative test, the Company concluded it was more likely than not that the fair values of each unit exceeded the respective carrying amounts and therefore, a quantitative test of impairment was not necessary.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
6. Goodwill (Continued)
In the fourth quarter of 2019, the Company performed qualitative assessments of the goodwill of the Applebee's Franchise unit, the Applebee's Company unit and the IHOP franchise unit. In performing that analysis the Company considered, among other things, Applebee's key performance indicators during 2019 and what, if any, impact that performance had on the long-term forecast of future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working capital that had been used in performing a quantitative impairment test in the third quarter of 2017. The Company also considered the current market price of its common stock, the favorable impact of the Tax Act on future cash flows and the impact these changes would have on an appropriate discount rate. As result of the qualitative test, the Company concluded it was more likely than not that the fair values of each unit exceeded the respective carrying amounts and therefore, a quantitative test of impairment was not necessary.
7. Other Intangible Assets
The significant majority of the Company's other intangible assets arose from the November 29, 2007 acquisition of Applebee's. Changes in the carrying amount of intangible assets for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Subject to Amortization
|
|
Subject to Amortization
|
|
|
|
Tradename
|
|
|
|
Other
|
|
Franchising
Rights
|
|
Reacquired Franchise Rights
|
|
Favorable Leaseholds
|
|
Total
|
|
(In millions)
|
Balance at December 31, 2017
|
$
|
479.0
|
|
|
|
|
$
|
2.4
|
|
|
$
|
99.0
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
$
|
582.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
—
|
|
|
|
|
—
|
|
|
(10.0)
|
|
|
(0.1)
|
|
|
—
|
|
|
(10.1)
|
|
Additions
|
—
|
|
|
|
|
0.3
|
|
|
—
|
|
|
11.6
|
|
|
1.3
|
|
|
13.2
|
|
Balance at December 31, 2018
|
479.0
|
|
|
|
|
2.7
|
|
|
89.0
|
|
|
11.5
|
|
|
3.6
|
|
|
585.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
—
|
|
|
|
|
—
|
|
|
(10.0)
|
|
|
(1.7)
|
|
|
(0.1)
|
|
|
(11.7)
|
|
Additions
|
—
|
|
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
1.0
|
|
Balance at December 31, 2019
|
479.0
|
|
|
|
|
3.2
|
|
|
79.0
|
|
|
9.8
|
|
|
4.1
|
|
|
575.1
|
|
Impairment
|
(11.0)
|
|
|
|
|
—
|
|
|
—
|
|
|
(3.3)
|
|
|
(0.8)
|
|
|
(15.1)
|
|
Amortization expense
|
—
|
|
|
|
|
—
|
|
|
(10.0)
|
|
|
(0.8)
|
|
|
(0.1)
|
|
|
(10.9)
|
|
Additions
|
—
|
|
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
Balance at December 31, 2020
|
$
|
468.0
|
|
|
|
|
$
|
3.8
|
|
|
$
|
69.0
|
|
|
$
|
5.7
|
|
|
$
|
3.2
|
|
|
$
|
549.7
|
|
In December 2018, the Company acquired 69 Applebee's restaurants. In its allocation of the purchase price, the Company recorded $11.6 million of reacquired franchise rights as an intangible asset. Other additions to favorable leaseholds and other intangibles for the years ended December 31, 2020, 2019 and 2018 are individually insignificant.
As discussed in Note 6 - Goodwill, the Company determined that indicators of impairment existed prior to the annual test for impairment and performed an interim quantitative test for impairment of Applebee's tradename and reacquired franchise rights in the second quarter of 2020. In performing the impairment test of the tradename, the Company 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 applied to the forecast revenue stream. As a result of performing the quantitative test of impairment, the Company recognized an impairment of $11.0 million to Applebee's tradename. The majority of the impairment was due to an increase in the assessed risk premium incorporated into the discount rate assumption. In addition, the Company determined that the carrying amounts of reacquired franchise rights and favorable leaseholds exceeded the estimated fair value by $3.3 million and $0.8 million, respectively, and recorded impairments to those intangible assets.
Annual amortization expense for the next five fiscal years is estimated to be approximately $10.7 million per year. The weighted average life of the intangible assets subject to amortization was 19.9 years and 18.5 years at December 31, 2020 and 2019, respectively.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
7. Other Intangible Assets (Continued)
Gross and net carrying amounts of intangible assets subject to amortization at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
(In millions)
|
Franchising rights
|
$
|
200.0
|
|
|
$
|
(131.0)
|
|
|
$
|
69.0
|
|
|
$
|
200.0
|
|
|
$
|
(121.0)
|
|
|
$
|
79.0
|
|
Reacquired franchise rights
|
8.3
|
|
|
(2.6)
|
|
|
5.7
|
|
|
11.6
|
|
|
(1.8)
|
|
|
9.8
|
|
Favorable leaseholds
|
3.4
|
|
|
(0.2)
|
|
|
3.2
|
|
|
$
|
4.2
|
|
|
$
|
(0.1)
|
|
|
4.1
|
|
Total
|
$
|
211.7
|
|
|
$
|
(133.7)
|
|
|
$
|
78.0
|
|
|
$
|
215.8
|
|
|
$
|
(122.9)
|
|
|
$
|
92.9
|
|
In the fourth quarter of fiscal 2020 and 2019, the Company performed a qualitative assessment of the Applebee's tradename and concluded the fair value exceeded the carrying amount.
8. Long-Term Debt
Long-term debt at December 31, 2020 and 2019 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
(In millions)
|
Series 2019-1 4.194% Fixed Rate Senior Secured Notes, Class A-2-I
|
$
|
698.3
|
|
|
$
|
700.0
|
|
Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II
|
598.5
|
|
|
600.0
|
|
|
|
|
|
Series 2019-1 Variable Funding Senior Notes Class A-1, variable interest rate of 2.42% at December 31, 2020
|
220.0
|
|
|
—
|
|
Debt issuance costs
|
(11.8)
|
|
|
(11.8)
|
|
Long-term debt, net of debt issuance costs
|
1,505.0
|
|
|
1,288.2
|
|
Current portion of long-term debt
|
(13.0)
|
|
|
—
|
|
Long-term debt
|
$
|
1,492.0
|
|
|
$
|
1,288.2
|
|
Long-Term Debt
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 (“Class A-2-I Notes”) in an initial aggregate principal amount of $700 million and the Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II (“Class A-2-II Notes”) in an initial aggregate principal amount of $600 million (the “Class A-2-II Notes” and, together with the 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.
The Co-Issuers also replaced their existing revolving financing facility, the 2018-1 Variable Funding Senior Notes, Class A-1 (“2018 Class A-1 Notes”), with a new revolving financing facility, the 2019-1 Variable Funding Senior Notes, Class A-1 (the “Revolver”), on substantially the same terms as the 2018 Class A-1 Notes in order to conform the term of the Revolver to the anticipated repayment dates for the 2019 Class A-2 Notes. The Revolver and the 2019 Class A-2 Notes are referred to collectively herein as the “New Notes.”
The New Notes were issued in a securitization transaction pursuant to which substantially all of the domestic revenue-generating assets and domestic intellectual property, as further described below, 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 New Notes.
2019 Class A-2 Notes
The New Notes were issued under a Base Indenture, dated as of September 30, 2014, amended and restated as of June 5, 2019 (the “Base Indenture”), and 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
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
intermediary. The Base Indenture and the Series 2019-1 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.
While the 2019 Class A-2 Notes are outstanding, payment of principal and interest is required to be made on the Class A-2 Notes on a quarterly basis. The payment of principal on the 2019 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. Exceeding the leverage ratio of 5.25x does not violate any covenant related to the New Notes.
The Company's leverage ratio exceeded 5.25x as of June 30, 2020 and has remained greater than 5.25x since then. As of December 31, 2020 the Company's leverage ratio was 7.20x. Accordingly, the Company began making principal payments in the fourth quarter of 2020, and will continue to make payments as long as the leverage ratio exceeds 5.25x.
The Company may voluntarily repay the New Notes at any time; however, if the Company repays the New Notes prior to certain dates, it would be required to pay make-whole premiums. As of December 31, 2020, the make-whole premium associated with voluntary prepayment of the Class A-2-I Notes was approximately $35 million; this amount declines each quarter to zero in June 2022. As of December 31, 2020, the make-whole premium associated with voluntary prepayment of the Class A-2-II Notes was approximately $74 million; this amount declines each quarter to zero in June 2024. The Company would also 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 New Notes that must be bifurcated for separate valuation. The Company estimated the fair value of these derivatives to be immaterial as of December 31, 2020, based on the probability-weighted discounted cash flows associated with either event.
The legal final maturity of the 2019 Class A-2 Notes is in June 2049, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in June 2024 (the “Class A-2-I Anticipated Repayment Date”) and the Class A-2-II Notes will be repaid in June 2026 (the “Class A-2-II Anticipated Repayment Date”). If the Co-Issuers have not repaid or refinanced the Class A-2-I Notes by the Class A-2-I Anticipated Repayment Date or the Class A-2-II Notes by the Class A-2-II Anticipated Repayment Date, then additional interest will accrue on the Class A-2-I Notes and the 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 Class A-2 Note interest rate: (x) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on the applicable anticipated repayment date of the United States Treasury Security having a term closest to 10 years plus (y) 5.0%, plus (z) 2.15% for the Class A-2-I Notes and 2.64% for the Class A-2-II Notes.
2019 Class A-1 Notes
The Co-Issuers also entered into the Revolver that allows for drawings up to $225 million of variable funding notes and the issuance of letters of credit. The Revolver Notes were issued under the Indenture. Drawings and certain additional terms related to the Revolver are governed by the 2019 Class A-1 Note Purchase Agreement, dated June 5, 2019, among the Co-Issuers, certain special-purpose, wholly-owned indirect subsidiaries of the Company, each as a Guarantor (“the Guarantors”), the Company, as manager, certain conduit investors, financial institutions and funding agents, and Barclays Bank PLC, as provider of letters of credit, swingline lender and administrative agent (the “Purchase Agreement”).
The Revolver is governed, in part, by the Purchase Agreement and by certain generally applicable terms contained in the Indenture. The applicable interest rate under the Revolver 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 Eurodollar Funding Rate, in either case, plus 2.15%. 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) 1.15% plus (b) 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) the one-month Eurodollar Funding Rate plus 1.00%. There is no upfront fee for the Revolver. There is a fee of 50 basis points on any unused portion of the Revolver. Undrawn face amounts of outstanding letters of credit that are not cash collateralized accrue a fee of 2.15% per annum. It is anticipated that the principal and interest on the Revolver will be repaid in full on or prior to the quarterly payment date in June 2024 (the “2019 Class A-1 Anticipated Repayment Date”), subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions.
Management Agreement
Under the terms of the Management Agreement, dated September 30, 2014, as amended and restated as of September 5, 2018, as further amended and restated as of June 5, 2019 and as amended by that certain Amendment No. 1 to Management Agreement dated November 21, 2019, among the Co-Issuers and the Guarantors (collectively, the “Securitization Entities”), the Company, Applebee’s Services, Inc., International House of Pancakes, LLC and the Trustee, the Company will act as the
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
manager with respect to substantially all of the assets of the Securitization Entities (the “Securitized Assets”) . The primary responsibilities of the manager will be to perform certain franchising, distribution, intellectual property and operational functions on behalf of the Securitization Entities with respect to the Securitized Assets pursuant to the Management Agreement. The manager will be entitled to the payment of the weekly management fee, as set forth in the Management Agreement and will be subject to the liabilities set forth in the Management Agreement. The Company, as Manager, voluntarily began waiving its receipt of the weekly management fee in April 2020 and this waiver remains in place as of December 31, 2020.
Covenants and Restrictions
The New 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 New 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 New Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The New Notes are subject to customary rapid amortization events provided for in the Indenture, including events tied to failure of the Securitization Entities 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 New 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 New 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 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 December 31, 2020 was approximately 3.3x.
Use of Credit Facilities
In March 2020, the Co-Issuers drew down a total of $220.0 million of the amount then available under the Revolver. Although the Company had no immediate need for additional liquidity, the Co-Issuers drew on the Revolver to increase the Company’s financial flexibility in light of then-current market conditions and uncertainty due to the COVID-19 outbreak. It is anticipated that the principal and interest on the Revolver will be repaid in full on or prior to the quarterly payment date in June 2024, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions. The current interest rate for borrowings under the Revolver is 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. The interest rate on Revolver borrowings at December 31, 2020 was 2.42%. The weighted average interest rate on Revolver borrowings for the period outstanding during the year ended December 31, 2020 was 2.72%.
At December 31, 2020, $2.8 million was pledged against the Revolver for outstanding letters of credit, leaving $2.2 million of the Revolver available for borrowing. The letters of credit are used primarily to satisfy insurance-related collateral requirements.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
Loss on Extinguishment of Debt
In connection with the repayment of the 2014 Class A-2 Notes, during the year ended December 31, 2019, the Company recognized a loss on extinguishment of debt of $8.3 million, representing the remaining unamortized costs related to the 2014 Class A-2 Notes at the time of repayment. Prior to the extinguishment on June 5, 2019, amortization costs of $1.4 million and $3.4 million associated with the 2014 Class A-2 Notes was included in interest expense for the years ended December 31, 2019 and 2018 respectively.
Debt Issuance Costs
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 $2.1 million and $1.2 million were included in interest expense for the years ended December 31, 2020 and 2019, respectively. Unamortized debt issuance costs of $9.6 million are reported as a direct reduction of the Class A-2 Notes in the Consolidated Balance Sheets.
The Company incurred costs of approximately $0.2 million in connection with the replacement of the 2018-1 Class A-1 Notes with the Revolver in 2019. These debt issuance costs have been added to the remaining unamortized costs of approximately $2.8 million related to the 2018 Class A-1 Notes, the total of which costs is now being amortized using the effective interest method over the estimated five-year life of the Revolver. Amortization costs of $0.6 million were included in interest expense for the year ended December 31, 2020. Unamortized debt issuance costs of $2.2 million are reported as a direct reduction of the Class A-1 Notes in the Consolidated Balance Sheets.
At December 31, 2019, $2.7 million of unamortized debt issuance costs related to the Revolver were classified as other long-term assets because there had been no borrowing against the Revolver.
Debt Refinancing Costs
In connection with the termination of the 2014 Purchase Agreement, the Company recognized as expense $0.9 million of unamortized debt issuance costs associated with the 2014 Variable Funding Notes during the year ended December 31, 2018. In addition, the Company incurred costs of $1.6 million associated with the evaluation of various alternatives for refinancing the Company's securitized indebtedness that were also charged to expense during the year ended December 31, 2018. These costs totaling $2.5 million were reported as “Debt refinancing costs” in the Consolidated Statements of Comprehensive (Loss) Income for the year ended December 31, 2018.
Maturities of Long-term Debt
Face-value maturities of long-term debt for each of the next five years, assuming the Company's leverage ratio remains greater than 5.25x and the Revolver is not extended beyond the 2019 Class A-1 Anticipated Repayment Date, are as follows:
|
|
|
|
|
|
|
(In millions)
|
2021
|
$
|
13.0
|
|
2022
|
13.0
|
|
2023
|
13.0
|
|
2024
|
903.3
|
|
2025
|
6.0
|
|
Thereafter
|
568.5
|
|
Total
|
$
|
1,516.8
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
9. Financing Obligations
On May 19, 2008, the Company entered into a Purchase and Sale Agreement relating to the sale and leaseback of 181 parcels of real property (the “Sale-Leaseback Transaction”), each of which is improved with a restaurant operating as an Applebee's Neighborhood Grill and Bar (the “Properties”). On June 13, 2008, the closing date of the Sale-Leaseback Transaction, the Company entered into a Master Land and Building Lease (“Master Lease”) for the Properties. The proceeds received from the transaction were $337.2 million. The Master Lease calls for an initial term of twenty years and four, five-year options to extend the term.
The Sale-Leaseback Transaction does not qualify as a sale under current U.S. GAAP. Accordingly, the Sale-Leaseback Transaction continues to be recorded under the financing method. The value of the land and leasehold improvements will remain on the Company's books and the leasehold improvements will continue to be depreciated over their remaining useful lives. The net proceeds received were recorded as a financing obligation. A portion of the lease payments is recorded as a decrease to the financing obligation and a portion is recognized as interest expense. In the event the lease obligation of any individual property or group of properties is assumed by a qualified franchisee, the portion of the transaction related to that property or group of properties is recorded as a sale in accordance with U.S. GAAP and the net book value of those properties will be removed from the Company's books, along with a ratable portion of the remaining financing obligation.
As of December 31, 2020, the portion of the original Sale-Leaseback Transaction related to 158 of the 181 Properties has qualified as a sale by assignment of the lease obligation to a qualified franchisee or a release from the lessor. In accordance with the accounting described above, the property and equipment and financing obligations have each been cumulatively reduced by approximately $284.2 million.
As of December 31, 2020, future minimum lease payments under financing obligations during the initial terms of the leases related to the sale-leaseback transactions are as follows:
|
|
|
|
|
|
Fiscal Years
|
(In millions)
|
2021
|
$
|
4.5
|
|
2022
|
4.5
|
|
2023
|
4.4
|
|
2024
|
5.0
|
|
2025
|
5.0
|
|
Thereafter
|
34.8
|
|
Total minimum lease payments
|
58.2
|
|
Less: interest
|
(24.7)
|
|
Total financing obligations
|
33.5
|
|
Less: current portion(1)
|
(0.7)
|
|
Long-term financing obligations
|
$
|
32.8
|
|
______________________________________________________________________
(1)Included in current maturities of finance lease and financing obligations on the consolidated balance sheet.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
10. Lease Disclosures
The Company engages in leasing activity as both a lessee and a lessor. The majority of the Company's lease portfolio originated when the Company was actively involved in the development and financing of IHOP restaurants prior to the franchising of the restaurant to the franchisee. This activity included the Company's purchase or leasing of the site on which the restaurant was located and subsequently leasing/subleasing the site to the franchisee. With a few exceptions, the Company ended this practice in 2003 and the Company's current lease activity is predominantly comprised of renewals of existing lease arrangements and exercises of options on existing lease arrangements.
The Company currently leases from third parties the real property on which approximately 600 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 60 IHOP restaurants and one Applebee's restaurant. The Company leases from third parties the real property on which 69 Applebee's company-operated restaurants are located. The Company also leases office space for its principal corporate office in Glendale, California and restaurant support centers in Kansas City, Missouri and Raleigh, North Carolina. 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 320 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 in 2020. Approximately 50 of the leases met the sales levels that required variable rent payments by the Company (as lessee), based on a percentage of restaurant sales in 2020.
The individual lease agreements do not provide information to determine the implicit interest rate in the agreements. The Company made significant judgments in determining the incremental borrowing rates that were used in calculating operating lease liabilities as of the adoption date. Due to the large number of leases, the Company applied a portfolio approach by grouping the leases based on the original lease term. The Company estimated the interest rate for each grouping primarily by reference to (i) yield rates on debt issuances by companies of a similar credit rating as the Company; (ii) U.S. Treasury rates as of the adoption date; and (iii) adjustments for differences in years to maturity.
The Company's lease cost for the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
Finance lease cost:
|
|
(In millions)
|
Amortization of right-of-use assets
|
|
|
$
|
5.0
|
|
|
$
|
5.3
|
|
Interest on lease liabilities
|
|
|
6.6
|
|
|
7.7
|
|
Operating lease cost
|
|
|
109.8
|
|
|
106.2
|
|
Variable lease cost
|
|
|
0.8
|
|
|
2.7
|
|
Short-term lease cost
|
|
|
0.0
|
|
|
0.0
|
|
Sublease income
|
|
|
(96.8)
|
|
|
(110.9)
|
|
Lease cost
|
|
|
$
|
25.4
|
|
|
$
|
11.0
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
10. Lease Disclosures (Continued)
Future minimum lease payments under noncancelable leases as lessee as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
Leases
|
|
Operating
Leases
|
|
(In millions)
|
2021
|
$
|
15.9
|
|
|
$
|
91.1
|
|
2022
|
14.5
|
|
|
84.7
|
|
2023
|
11.7
|
|
|
69.8
|
|
2024
|
9.7
|
|
|
64.3
|
|
2025
|
8.6
|
|
|
55.3
|
|
Thereafter
|
50.9
|
|
|
144.9
|
|
Total minimum lease payments
|
111.3
|
|
|
510.1
|
|
Less: interest/imputed interest
|
(31.7)
|
|
|
(95.2)
|
|
Total obligations
|
79.6
|
|
|
414.9
|
|
Less: current portion
|
(10.6)
|
|
|
(69.7)
|
|
Long-term lease obligations
|
$
|
69.0
|
|
|
$
|
345.2
|
|
The weighted average remaining lease term as of December 31, 2020 was 9.2 years for finance leases and 7.3 years for operating leases. The weighted average discount rate as of December 31, 2020 was 10.2% for finance leases and 5.7% for operating leases.
During the years ended December 31, 2020 and 2019, the Company made the following cash payments for leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
(In millions)
|
Principal payments on finance lease obligations
|
|
|
$
|
12.5
|
|
|
$
|
13.6
|
|
Interest payments on finance lease obligations
|
|
|
$
|
6.6
|
|
|
$
|
7.7
|
|
Payments on operating leases
|
|
|
$
|
101.1
|
|
|
$
|
91.9
|
|
Variable lease payments
|
|
|
$
|
0.7
|
|
|
$
|
2.5
|
|
The Company's income from operating leases for the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
(In millions)
|
Minimum lease payments
|
|
|
$
|
97.2
|
|
|
$
|
102.8
|
|
Variable lease income
|
|
|
5.2
|
|
|
11.5
|
|
Total operating lease income
|
|
|
$
|
102.4
|
|
|
$
|
114.3
|
|
Future minimum payments to be received as lessor under noncancelable operating leases as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2021
|
$
|
101.7
|
|
2022
|
98.8
|
|
2023
|
94.4
|
|
2024
|
86.0
|
|
2025
|
73.4
|
|
Thereafter
|
155.8
|
|
Total minimum rents receivable
|
$
|
610.1
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
10. Lease Disclosures (Continued)
The Company's income from direct financing leases at December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
(In millions)
|
Interest income
|
|
|
$
|
3.4
|
|
|
$
|
5.0
|
|
Variable lease income
|
|
|
0.3
|
|
|
1.3
|
|
Total financing lease income
|
|
|
$
|
3.7
|
|
|
$
|
6.3
|
|
Future minimum payments to be received as lessor under noncancelable direct financing leases as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2021
|
$
|
10.5
|
|
2022
|
7.7
|
|
2023
|
3.7
|
|
2024
|
1.5
|
|
2025
|
0.7
|
|
Thereafter
|
3.1
|
|
Total minimum rents receivable
|
27.2
|
|
Less: unearned income
|
(4.5)
|
|
Total direct financing leases receivable
|
22.7
|
|
Less: current portion
|
(8.4)
|
|
Long-term direct financing leases receivable
|
$
|
14.3
|
|
11. Commitments and Contingencies
Purchase Commitments
In some instances, the Company enters into commitments to purchase advertising and other items. Most of these agreements are fixed price purchase commitments. At December 31, 2020, the outstanding purchase commitments were $90.0 million, the majority of which related to advertising.
Lease Guarantees
In connection with the sale of Applebee's restaurants to franchisees and other parties, the Company has, in certain cases, guaranteed or had potential continuing liability for lease payments. The Company had outstanding lease guarantees or was contingently liable for approximately $245.6 million and $257.2 million as of December 31, 2020 and 2019 respectively. These amounts represent the maximum potential liability of future payments under these leases. Excluding unexercised option periods, the Company's potential liability for future payments under these leases as of December 31, 2020 was $36.6 million. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 2021 through 2048. In the event of default, the indemnity and default clauses in our sale or assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities for these guarantees have been recorded as of December 31, 2020.
Litigation, Claims and Disputes
The Company is subject to various lawsuits, governmental inspections, 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 to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of the Company's litigation are expensed as such fees and expenses are incurred. In the opinion of management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such a nature or involve amounts that would not have a material adverse impact on the Company's business or consolidated financial statements. Management regularly assesses the Company's insurance deductibles, analyzes litigation information with the Company's attorneys and evaluates its loss experience in connection with pending legal proceedings. While the Company does not presently believe that any of the legal proceedings to which the Company is currently a party will
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
11. Commitments and Contingencies (Continued)
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.
Letters of Credit
The Company provides letters of credit, primarily to various insurance carriers to collateralize obligations for outstanding claims. As of December 31, 2020, the Company had approximately $2.8 million of unused letters of credit outstanding that reduce the Company's available borrowing under its 2019 Class A-1 Notes. These letters of credit expire on various dates in 2021 and are automatically renewed for an additional year if no cancellation notice is submitted.
12. Stockholders' Deficit
Stock Repurchase Programs
In February 2019, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $200 million of the Company’s common stock (the “2019 Repurchase Program”) on an opportunistic basis from time to time in the open market or in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The 2019 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. In connection with the approval of the 2019 Repurchase Program, the Board of Directors terminated the prior repurchase program approved in October 2015 (the “2015 Repurchase Program”) which had authorized the Company to repurchase up to $150 million of the Company’s common stock.
A summary of shares repurchased under the 2019 Repurchase Program and the 2015 Repurchase Program, during the years ended December 31, 2020 and 2019, and cumulatively for each program, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Cost of shares
|
|
|
|
(In millions)
|
2019 Repurchase Program:
|
|
|
|
|
|
|
|
Repurchased during the year ended December 31, 2020
|
459,899
|
|
|
$
|
26.5
|
|
Repurchased during the year ended December 31, 2019
|
1,237,698
|
|
|
$
|
103.3
|
|
Cumulative (life-of-program) repurchases
|
1,697,597
|
|
|
$
|
129.8
|
|
Remaining dollar value of shares that may be repurchased
|
n/a
|
|
$
|
70.2
|
|
|
|
|
|
2015 Repurchase Program:
|
|
|
|
|
|
|
|
Repurchased during the year ended December 31, 2019
|
110,499
|
|
|
$
|
8.4
|
|
Cumulative (life-of-program) repurchases
|
1,589,995
|
|
|
$
|
126.2
|
|
Remaining dollar value of shares that may be repurchased
|
n/a
|
|
n/a
|
Dividends
On February 20, 2020, our Board of Directors approved payment of a cash dividend of $0.76 per share of common stock, payable at the close of business on April 3, 2020 to the stockholders of record as of the close of business on March 20, 2020. Dividends were not declared for the second, third and fourth quarters of 2020.
During the fiscal years ended December 31, 2020, 2019 and 2018, the Company declared and paid dividends on common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
Declaration Date
|
|
Payment Date
|
|
Dividends declared per share
|
|
Dividends paid per share
|
|
Total dividends paid(1)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Payment of prior year declaration
|
(2)
|
|
January 10, 2020
|
|
—
|
|
|
$
|
0.69
|
|
|
$
|
11.7
|
|
First quarter
|
February 20, 2020
|
|
April 3, 2020
|
|
$
|
0.76
|
|
|
0.76
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
0.76
|
|
|
$
|
1.45
|
|
|
$
|
24.4
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
12. Stockholders' Deficit (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
Declaration Date
|
|
Payment Date
|
|
Dividends declared per share
|
|
Dividends paid per share
|
|
Total dividends paid(1)
|
Payment of prior year declaration
|
(3)
|
|
January 4, 2019
|
|
—
|
|
|
$
|
0.63
|
|
|
$
|
11.4
|
|
First quarter
|
February 20, 2019
|
|
April 5, 2019
|
|
$
|
0.69
|
|
|
0.69
|
|
|
12.5
|
|
Second quarter
|
May 13, 2019
|
|
July 12, 2019
|
|
0.69
|
|
|
0.69
|
|
|
12.2
|
|
Third quarter
|
August 1, 2019
|
|
October 4, 2019
|
|
0.69
|
|
|
0.69
|
|
|
11.8
|
|
Fourth quarter
|
October 8, 2019
|
|
(2)
|
|
0.69
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
|
$
|
2.76
|
|
|
$
|
2.70
|
|
|
$
|
47.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
Payment of prior year declaration
|
(4)
|
|
January 5, 2018
|
|
$
|
—
|
|
|
$
|
0.97
|
|
|
$
|
17.7
|
|
First quarter
|
February 14, 2018
|
|
April 6, 2018
|
|
$
|
0.63
|
|
|
0.63
|
|
|
11.5
|
|
Second quarter
|
May 14, 2018
|
|
July 6, 2018
|
|
0.63
|
|
|
0.63
|
|
|
11.4
|
|
Third quarter
|
August 2, 2018
|
|
October 5, 2018
|
|
0.63
|
|
|
0.63
|
|
|
11.4
|
|
Fourth quarter
|
October 6, 2018
|
|
(3)
|
|
0.63
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
|
$
|
2.52
|
|
|
$
|
2.86
|
|
|
$
|
52.0
|
|
(1) Includes dividend equivalents paid on restricted stock units
(2) The fourth quarter 2019 dividend of $11.7 million was paid on January 10, 2020.
(3) The fourth quarter 2018 dividend of $11.4 million was paid on January 4, 2019.
(4) The fourth quarter 2017 dividend of $17.7 million was paid on January 5, 2018.
Dividends declared on common stock are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital.
Dividends recorded during the fiscal years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In millions)
|
Dividends declared from retained earnings
|
$
|
12.7
|
|
|
$
|
48.1
|
|
|
$
|
—
|
|
Dividends declared from additional paid-in capital
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44.7
|
|
Treasury Stock
Repurchases of the 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 vested 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 on the first-in, first-out (“FIFO”) method. The Company re-issued 433,477 shares, 285,302 shares and 167,396 shares, respectively, during the years ended December 31, 2020, 2019 and 2018 at a total FIFO cost of $19.4 million, $12.5 million and $6.5 million, respectively.
13. Long-lived Tangible Asset Impairment and Closure Charges
Long-lived tangible asset impairment and closure charges for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
December 31, 2020
|
|
2019
|
|
2018
|
|
(In millions)
|
Long-lived tangible asset impairment
|
$
|
22.3
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Closure charges
|
3.0
|
|
|
1.5
|
|
|
2.0
|
|
|
|
|
|
|
|
Total long-lived tangible asset impairment and closure charges
|
$
|
25.3
|
|
|
$
|
1.5
|
|
|
$
|
2.1
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Long-lived Tangible Asset Impairment and Closure Charges (continued)
Long-lived Tangible Asset Impairment
The long-lived asset impairment for the year ended December 31, 2020 related to 29 Applebee's company-operated restaurants and 41 IHOP franchisee-operated restaurants for which the carrying amount exceeded the undiscounted cash flows. The primary method of estimating fair value is based on a discounted cash flow analysis. The Company also considers factors such as the number of years the restaurant has been in operation, sales trends, cash flow trends, remaining lease life and other factors which apply on a case-by-case basis. For locations owned by the Company, current purchase offers, if any, or valuations from independent third party sources are utilized, if available. The analysis is performed at the restaurant level for indicators of permanent impairment. The impairment recorded represents the difference between the carrying value and the estimated fair value. Approximately $15.1 million of the total impairment related to operating lease right-of-use assets that had been recorded in 2019 upon adoption of new lease accounting guidance codified in ASC 842, while $7.2 million related to impairments of land, building, leasehold improvements and finance leases. The impairments by individual property varied in amount, ranging from the largest single-property impairment of $1.3 million to less than $5,000.
There were no long-lived tangible asset impairment charges for the year ended December 31, 2019. Long-lived tangible asset impairment charges for the year ended December 31, 2018 were insignificant.
Closure Charges
Approximately $1.6 million of closure charges for the year ended December 31, 2020 related to seven IHOP restaurants closed during 2020, with the remainder primarily related to adjustments to the reserve for IHOP and Applebee's restaurants closed prior to 2020. Approximately $0.5 million of closure charges for the year ended December 31, 2019 related to two IHOP restaurants and one Applebee's restaurant closed during 2019, with the remainder primarily related to adjustments to the reserve for IHOP and Applebee's restaurants closed prior to 2019. Approximately $1.8 million of closure charges for the year ended December 31, 2018 related to one IHOP franchise restaurant closed during 2018, with the remainder primarily related to adjustments to the reserve for IHOP and Applebee's restaurants closed prior to 2018.
14. Stock-Based Incentive Plans
General Description
Currently, the Company is authorized to grant stock options, stock appreciation rights, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and non-employee directors under the Dine Brands Global, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). The 2019 Plan was approved by stockholders on May 14, 2019 to permit the issuance of up to 2,050,000 shares (subject to adjustment as defined in the 2019 Plan for shares that may become available from prior plans) of the Company’s common stock for incentive stock awards. The 2019 Plan will expire in May 2029.
The Dine Brands Global, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) was adopted in 2016 to permit the issuance of up to 3,750,000 shares of the Company’s common stock for incentive stock awards. The 2016 Plan was terminated upon adoption of the 2019 Plan, but there are stock options (vested and unvested) and unvested restricted stock and restricted stock units issued under the 2016 Plan that are outstanding as of December 31, 2020.
The DineEquity, Inc. 2011 Stock Incentive Plan (the “2011 Plan”) was adopted in 2011 to permit the issuance of up to 1,500,000 shares of the Company’s common stock for incentive stock awards. The 2011 Plan was terminated upon adoption of the 2016 Plan, but there are vested stock options issued under the 2011 Plan that are outstanding as of December 31, 2020.
The 2019 Plan, 2016 Plan and the 2011 Plan are collectively referred to as the “Plans.”
Stock-Based Compensation Expense
From time to time, the Company has granted nonqualified stock options, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and non-employee directors of the Company under the Plans. The nonqualified stock options generally vest ratably over a three-year period in one-third increments and have a maturity of ten years from the grant date. Options vest immediately upon a change in control of the Company, as defined in the Plans. Option exercise prices equal the closing price of the Company's common stock on the New York Stock Exchange on the date of grant. Restricted stock and restricted stock units are issued at no cost to the holder and vest over terms determined by the Compensation Committee of the Company's Board of Directors, generally three years from the date of grant or immediately
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Stock-Based Incentive Plans (Continued)
upon a change in control of the Company, as defined in the Plans. The Company either utilizes treasury stock or issues new shares from its authorized but unissued share pool when vested stock options are exercised, when restricted stock awards are granted and when restricted stock units settle in stock upon vesting.
The following table summarizes the Company's stock-based compensation expense included as a component of general and administrative expenses in the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In millions)
|
Total stock-based compensation expense:
|
|
|
|
|
|
Equity classified awards expense
|
$
|
12.6
|
|
|
$
|
10.9
|
|
|
$
|
10.6
|
|
Liability classified awards expense
|
1.0
|
|
|
3.2
|
|
|
3.1
|
|
Total pretax stock-based compensation expense
|
13.6
|
|
14.1
|
|
13.7
|
Book income tax benefit
|
(3.4)
|
|
|
(3.5)
|
|
|
(3.5)
|
|
Total stock-based compensation expense, net of tax
|
$
|
10.2
|
|
|
$
|
10.6
|
|
|
$
|
10.2
|
|
As of December 31, 2020, total unrecognized compensation cost related to restricted stock and restricted stock units of $16.5 million and $2.6 million related to stock options is expected to be recognized over a weighted average period of approximately 1.2 years for restricted stock and restricted stock units and 1.3 years for stock options.
Equity Classified Awards - Stock Options
The per share fair values of the stock options granted have been estimated as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes model considers, among other factors, the expected life of the option and the historical volatility of the Company's stock price. The Black-Scholes model meets the requirements of U.S. GAAP, but the fair values generated by the model may not be indicative of the actual fair values of the Company's stock-based awards.
The Company granted 167,969 stock options during the year ended December 31, 2020 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Risk free interest rate
|
1.2
|
%
|
|
2.5
|
%
|
|
2.6
|
%
|
Weighted average historical volatility
|
30.5
|
%
|
|
30.3
|
%
|
|
26.1
|
%
|
Dividend yield
|
3.5
|
%
|
|
2.8
|
%
|
|
3.6
|
%
|
Expected years until exercise
|
4.6
|
|
4.7
|
|
4.6
|
|
|
|
|
|
|
Weighted average fair value of options granted
|
$
|
17.53
|
|
|
$
|
21.93
|
|
|
$
|
11.94
|
|
The Company granted 25,330 performance-based stock options and 55,245 performance-based restricted stock units during the year ended December 31, 2018, with performance periods ranging from 36 to 40 months. The following summarizes the assumptions used in estimating the fair values:
|
|
|
|
|
|
|
|
|
2018
|
Risk free interest rate
|
|
2.5
|
%
|
Weighted average historical volatility
|
|
34.4
|
%
|
Dividend yield
|
|
3.4
|
%
|
Expected years until exercise
|
|
3.0
|
Weighted average fair value of options granted
|
|
$
|
9.79
|
|
Weighted average fair value of restricted stock units granted
|
|
$
|
53.72
|
|
As of December 31, 2020, all of the stock options and 26,670 of the restricted stock units have been forfeited.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Stock-Based Incentive Plans (Continued)
Stock option activity for the years ended December 31, 2020, 2019 and 2018 is summarized 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, 2017
|
1,272,048
|
|
|
$
|
61.44
|
|
|
|
|
|
Granted
|
248,899
|
|
|
69.12
|
|
|
|
|
|
Exercised
|
(74,930)
|
|
|
52.43
|
|
|
|
|
|
Forfeited
|
(6,309)
|
|
|
68.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
1,439,708
|
|
|
63.21
|
|
|
|
|
|
Granted
|
132,832
|
|
|
98.97
|
|
|
|
|
|
Exercised
|
(211,352)
|
|
|
57.36
|
|
|
|
|
|
Forfeited
|
(106,745)
|
|
|
72.19
|
|
|
|
|
|
Expired
|
(37,005)
|
|
|
93.06
|
|
|
|
|
|
Outstanding at December 31, 2019
|
1,217,438
|
|
|
66.43
|
|
|
|
|
|
Granted
|
167,969
|
|
|
87.17
|
|
|
|
|
|
Exercised
|
(270,024)
|
|
|
76.01
|
|
|
|
|
|
Forfeited
|
(45,247)
|
|
|
86.39
|
|
|
|
|
|
Expired
|
(55,466)
|
|
|
107.78
|
|
|
|
|
|
Outstanding at December 31, 2020
|
1,014,670
|
|
|
$
|
64.16
|
|
|
6.4
|
|
$
|
7.0
|
|
Vested and Expected to Vest at December 31, 2020
|
996,118
|
|
|
$
|
63.71
|
|
|
6.4
|
|
$
|
7.0
|
|
Exercisable at December 31, 2020
|
415,914
|
|
|
$
|
70.43
|
|
|
5.0
|
|
$
|
0.9
|
|
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $4.3 million, $6.9 million and $2.4 million, respectively.
Cash received from options exercised under all stock-based payment arrangements for the years ended December 31, 2020, 2019 and 2018 was $20.5 million, $12.0 million and $3.9 million, respectively. The actual tax benefit realized for the tax deduction from option exercises under the stock-based payment arrangements totaled $1.1 million, $1.8 million and $0.6 million, respectively, for the years ended December 31, 2020, 2019 and 2018.
Equity Classified Awards - Restricted Stock and Restricted Stock Units
Activity in equity classified awards of restricted stock and restricted stock units for the years ended December 31, 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Restricted Stock
|
|
Weighted
Average
Grant-Date Per
Share
Fair Value
|
|
Restricted
Stock Units
|
|
Weighted
Average
Grant-Date
Per Share
Fair Value
|
Outstanding at December 31, 2017
|
275,191
|
|
|
$
|
65.97
|
|
|
303,348
|
|
|
$
|
28.39
|
|
Granted
|
92,466
|
|
|
69.20
|
|
|
86,990
|
|
|
57.21
|
|
Released
|
(74,253)
|
|
|
81.07
|
|
|
(15,737)
|
|
|
98.54
|
|
Forfeited
|
(26,162)
|
|
|
61.27
|
|
|
(72)
|
|
|
53.49
|
|
Outstanding at December 31, 2018
|
267,242
|
|
|
64.21
|
|
|
374,529
|
|
|
31.05
|
|
Granted
|
75,556
|
|
|
96.86
|
|
|
23,427
|
|
|
95.77
|
|
Released
|
(76,962)
|
|
|
76.25
|
|
|
(12,347)
|
|
|
90.34
|
|
Forfeited
|
(41,321)
|
|
|
67.20
|
|
|
(27,802)
|
|
|
34.53
|
|
Outstanding at December 31, 2019
|
224,515
|
|
|
70.52
|
|
|
357,807
|
|
|
30.35
|
|
Granted
|
163,522
|
|
|
73.68
|
|
|
30,997
|
|
|
77.33
|
|
Released
|
(95,211)
|
|
|
55.75
|
|
|
(33,234)
|
|
|
63.98
|
|
Forfeited
|
(38,495)
|
|
|
85.03
|
|
|
—
|
|
|
—
|
|
Outstanding at December 31, 2020
|
254,331
|
|
|
$
|
76.50
|
|
|
355,570
|
|
|
$
|
28.01
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Stock-Based Incentive Plans (Continued)
Liability Classified Awards - Cash-settled Restricted Stock Units
The Company has granted cash-settled restricted stock units to certain employees. These instruments are recorded as liabilities at fair value as of the respective period end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled Restricted
Stock Units
|
|
|
Outstanding at December 31, 2019
|
|
63,852
|
|
|
|
Granted
|
|
2,658
|
|
|
|
Released
|
|
(1,426)
|
|
|
|
Forfeited
|
|
(12,128)
|
|
|
|
Outstanding at December 31, 2020
|
|
52,956
|
|
|
|
For the years ended December 31, 2020, 2019 and 2018, $0.3 million, $1.6 million and, $0.8 million respectively, 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 to certain employees (“LTIP awards”). Annual LTIP awards vest over a three-year period and are determined using a multiplier from 0% to 200% of the target award based on the total stockholder return of the Company's common stock compared to the total stockholder returns of a peer group of companies. Though LTIP awards are only paid in cash, since the multiplier is primarily based on the price of the Company's common stock, the awards are considered stock-based compensation in accordance with U.S. GAAP and are classified as liabilities. For the years ended December 31, 2020, 2019 and 2018, expense of $0.7 million, $1.7 million and $2.3 million, respectively, was included in stock-based compensation expense related to the LTIP awards. At December 31, 2020 and 2019, liabilities of $2.1 million and $2.9 million, respectively, were included as accrued employee compensation and benefits in the Consolidated Balance Sheets.
15. Employee Benefit Plans
401(k) Savings and Investment Plan
Effective January 1, 2013, the Company amended the Dine Brands Global, Inc. 401(k) Plan to (i) modify the Company matching formula and (ii) eliminate the one-year completed service requirement that previously had to be met to become eligible for Company matching contributions. As amended, the Company matches 100% of the first four percent of the employee's eligible compensation deferral and 50% of the next two percent of the employee's eligible compensation deferral. All contributions under this plan vest immediately. Company common stock is not an investment option for employees in the 401(k) Plan, other than shares transferred from a prior employee stock ownership plan. Substantially all of the administrative cost of the 401(k) plan is borne by the Company. The Company's matching contribution expense was $2.8 million, $3.0 million and $2.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
16. Income Taxes
The (benefit) provision for income taxes for the years ended December 31, 2020, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
(Benefit) provision for income taxes:
|
(In millions)
|
Current
|
|
|
|
|
|
Federal
|
$
|
11.0
|
|
|
$
|
31.2
|
|
|
$
|
33.6
|
|
State
|
3.1
|
|
|
6.5
|
|
|
6.4
|
|
Foreign
|
1.3
|
|
|
1.9
|
|
|
2.1
|
|
|
15.4
|
|
|
39.6
|
|
|
42.1
|
|
Deferred
|
|
|
|
|
|
Federal
|
(17.3)
|
|
|
(3.8)
|
|
|
(7.8)
|
|
State
|
(2.7)
|
|
|
(1.7)
|
|
|
(4.0)
|
|
|
(20.0)
|
|
|
(5.5)
|
|
|
(11.8)
|
|
(Benefit) provision for income taxes
|
$
|
(4.6)
|
|
|
$
|
34.1
|
|
|
$
|
30.3
|
|
The (benefit) provision for income taxes differs from the expected federal income tax rates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Non-deductibility of goodwill impairment
|
(17.9)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
State and other taxes, net of federal tax benefit
|
1.2
|
|
|
2.8
|
|
|
3.6
|
|
Change in unrecognized tax benefits
|
2.0
|
|
|
1.8
|
|
|
3.3
|
|
Change in valuation allowance
|
(1.5)
|
|
|
0.5
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in tax rates and state tax laws
|
(0.4)
|
|
|
(0.5)
|
|
|
(1.6)
|
|
Change in accounting for excess tax deficiencies/benefits
|
0.1
|
|
|
(0.6)
|
|
|
0.1
|
|
General business credits
|
0.8
|
|
|
(1.3)
|
|
|
(0.2)
|
|
Other
|
(1.1)
|
|
|
0.9
|
|
|
0.8
|
|
Effective tax rate
|
4.2
|
%
|
|
24.6
|
%
|
|
27.4
|
%
|
The Company recognized $92.2 million impairment of goodwill during the second quarter of 2020 that was not deductible for federal income tax purposes and therefore had no associated tax benefit. The impairment of goodwill lowered the 2020 effective tax rate by 17.9% when compared to the U.S. statutory rate.
The difference in the 2019 overall effective tax rate from the U.S. statutory rate was primarily attributed to state taxes and unrecognized tax benefits offset by benefits associated with an increase in general business credits.
The Company applied a lower state tax rate to the deferred tax balances during fourth quarter of 2018, a result of the state legislative changes and the acquisition of 69 Applebee’s restaurants in December 2018. The change in the state tax rate applied to the deferred tax balances lowered the 2018 effective tax rate by 1.6%.
The Company files federal income tax returns and the Company or one of its subsidiaries file income tax returns in various state and international jurisdictions. The Internal Revenue Service examination of tax years 2014 to 2016 concluded during the fourth quarter of 2020, and the Company received a refund of $12.3 million, inclusive of interest income of $1.1 million. With few exceptions, the Company is no longer subject to federal tax examinations by tax authorities for years before 2017 and state or non-United States tax examinations by tax authorities for years before 2011. The Company believes that adequate reserves have been recorded relating to all matters contained in the tax periods open to examination.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 16. Income Taxes (Continued)
Net deferred tax assets (liabilities) at December 31, 2020 and 2019 consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Lease liability (1)
|
$
|
119.6
|
|
|
$
|
125.9
|
|
Employee compensation
|
7.5
|
|
|
9.2
|
|
|
|
|
|
Revenue recognition
|
36.6
|
|
|
32.8
|
|
|
|
|
|
|
|
|
|
Other
|
10.2
|
|
|
5.9
|
|
Deferred tax assets
|
173.9
|
|
|
173.8
|
|
Valuation allowance
|
(3.0)
|
|
|
(1.5)
|
|
Total deferred tax assets after valuation allowance
|
170.9
|
|
|
172.3
|
|
Recognition of franchise and equipment sales
|
(10.7)
|
|
|
(13.7)
|
|
Capitalization and depreciation (2)
|
(123.2)
|
|
|
(130.8)
|
|
Lease assets (1)
|
(114.2)
|
|
|
(125.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
(1.1)
|
|
|
(0.5)
|
|
Deferred tax liabilities
|
(249.2)
|
|
|
(270.8)
|
|
Net deferred tax liabilities
|
$
|
(78.3)
|
|
|
$
|
(98.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Primarily related to the adoption of ASC 842
(2) Primarily related to the 2007 Applebee's acquisition.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2020, management determined it is more likely than not that the benefit from foreign tax credit carryforward and certain state deferred tax assets, including net operating loss carryforwards from the Applebee’s company-operated restaurants, will not be realized. In recognition of this risk, the Company provided a valuation allowance of $3.0 million.
The Company had gross operating loss carryforwards for state tax purposes of $13.3 million and $0.5 million as of December 31, 2020 and 2019, respectively. The net operating loss carryforwards begin to expire in 2032 if not utilized.
The total gross unrecognized tax benefit as of December 31, 2020 and 2019 was $2.2 million and $7.6 million, respectively, excluding interest, penalties and related income tax benefits. If recognized, these amounts would affect the Company's effective income tax rates.
The Company estimates the unrecognized tax benefits may decrease over the upcoming 12 months by an amount up to $0.8 million related to settlements with taxing authorities, statutes of limitations expirations and method changes. For the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to make a reasonable estimate as to when cash settlement with a taxing authority will occur. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In millions)
|
Unrecognized tax benefit as of January 1
|
$
|
7.6
|
|
|
$
|
5.2
|
|
|
$
|
5.9
|
|
Changes for tax positions of prior years
|
—
|
|
|
2.1
|
|
|
3.8
|
|
Increases for tax positions related to the current year
|
0.2
|
|
|
0.5
|
|
|
0.4
|
|
Decreases relating to settlements and lapsing of statutes of limitations
|
(5.6)
|
|
|
(0.2)
|
|
|
(4.9)
|
|
Unrecognized tax benefit as of December 31
|
$
|
2.2
|
|
|
$
|
7.6
|
|
|
$
|
5.2
|
|
As of December 31, 2020, the accrued interest was $0.9 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. As of December 31, 2019, the accrued interest and penalties were $2.5 million and less than $0.1 million, respectively, excluding any related income tax benefits. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of the income tax provision recognized in the Consolidated Statements of Comprehensive (Loss) Income.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act did not result in a material impact on our income tax benefit for the year ended December 31, 2020.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. Net (Loss) Income Per Share
The computation of the Company's basic and diluted net (loss) income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands, except per share data)
|
Numerator for basic and diluted (loss) income per common share:
|
|
|
|
|
|
Net (loss) income
|
$
|
(103,994)
|
|
|
$
|
104,346
|
|
|
$
|
80,354
|
|
Less: Net income allocated to unvested participating restricted stock
|
(420)
|
|
|
(3,532)
|
|
|
(2,711)
|
|
Net (loss) income available to common stockholders - basic
|
(104,414)
|
|
|
100,814
|
|
|
77,643
|
|
Effect of unvested participating restricted stock
|
—
|
|
|
33
|
|
|
16
|
|
Numerator - (loss) income available to common shareholders - diluted
|
$
|
(104,414)
|
|
|
$
|
100,847
|
|
|
$
|
77,659
|
|
Denominator:
|
|
|
|
|
|
Weighted average outstanding shares of common stock - basic
|
16,230
|
|
|
16,934
|
|
|
17,533
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options
|
—
|
|
|
311
|
|
|
256
|
|
Weighted average outstanding shares of common stock - diluted
|
16,230
|
|
|
17,245
|
|
|
17,789
|
|
Net (loss) income per common share:
|
|
|
|
|
|
Basic
|
$
|
(6.43)
|
|
|
$
|
5.95
|
|
|
$
|
4.43
|
|
Diluted
|
$
|
(6.43)
|
|
|
$
|
5.85
|
|
|
$
|
4.37
|
|
For the year ended December 31, 2020, diluted loss per common share was computed using the basic weighted average number of shares outstanding during the period as the 100,056 shares from common stock equivalents would have been antidilutive.
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
18. Segment Reporting
Information on segments and a reconciliation of gross profit to income before income tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
|
|
(In millions)
|
|
|
Franchise operations
|
$
|
469.5
|
|
|
$
|
651.2
|
|
|
$
|
643.9
|
|
Rental operations
|
105.9
|
|
|
120.7
|
|
|
121.9
|
|
Company restaurants
|
108.1
|
|
|
131.2
|
|
|
7.1
|
|
Financing operations
|
5.8
|
|
|
7.1
|
|
|
8.0
|
|
Total
|
$
|
689.3
|
|
|
$
|
910.2
|
|
|
$
|
780.9
|
|
|
|
|
|
|
|
Gross profit (loss), by segment
|
|
|
|
|
|
Franchise operations
|
$
|
230.5
|
|
|
$
|
338.4
|
|
|
$
|
313.3
|
|
Rental operations
|
16.4
|
|
|
29.9
|
|
|
31.2
|
|
Company restaurants
|
(3.5)
|
|
|
8.0
|
|
|
1.2
|
|
Financing operations
|
5.3
|
|
|
6.5
|
|
|
7.4
|
|
Total gross profit
|
248.7
|
|
|
382.8
|
|
|
353.1
|
|
Corporate and unallocated expenses, net
|
(357.3)
|
|
|
(244.3)
|
|
|
(242.5)
|
|
(Loss) income before income taxes
|
$
|
(108.6)
|
|
|
$
|
138.5
|
|
|
$
|
110.6
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
Rental operations
|
$
|
6.3
|
|
|
$
|
7.7
|
|
|
$
|
9.2
|
|
Company restaurants
|
2.7
|
|
|
2.1
|
|
|
0.1
|
|
Corporate
|
66.9
|
|
|
60.4
|
|
|
61.7
|
|
Total
|
$
|
75.9
|
|
|
$
|
70.2
|
|
|
$
|
71.0
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
Franchise operations
|
$
|
10.1
|
|
|
$
|
10.3
|
|
|
$
|
10.5
|
|
Rental operations
|
12.3
|
|
|
13.4
|
|
|
11.7
|
|
Company restaurants
|
7.0
|
|
|
6.4
|
|
|
0.4
|
|
Corporate
|
13.4
|
|
|
12.4
|
|
|
9.6
|
|
Total
|
$
|
42.8
|
|
|
$
|
42.5
|
|
|
$
|
32.2
|
|
|
|
|
|
|
|
Impairment of goodwill and intangible assets, closure and other impairment charges
|
|
|
|
|
|
Franchise operations
|
$
|
122.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Company restaurants
|
10.5
|
|
|
1.5
|
|
|
2.1
|
|
|
|
|
|
|
|
Total
|
$
|
132.6
|
|
|
$
|
1.5
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
Franchise operations
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
Company restaurants
|
2.7
|
|
|
3.2
|
|
|
—
|
|
Corporate
|
8.2
|
|
|
15.6
|
|
|
14.3
|
|
Total
|
$
|
10.9
|
|
|
$
|
19.4
|
|
|
$
|
14.3
|
|
|
|
|
|
|
|
Goodwill (franchise segment)
|
$
|
251.6
|
|
|
$
|
343.9
|
|
|
$
|
345.3
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
Franchise operations
|
$
|
997.7
|
|
|
$
|
1,116.2
|
|
|
$
|
1,152.1
|
|
Rental operations
|
451.5
|
|
|
503.8
|
|
|
255.6
|
|
Company restaurants
|
121.1
|
|
|
134.3
|
|
|
66.5
|
|
Financing operations
|
49.9
|
|
|
72.0
|
|
|
73.7
|
|
Corporate
|
454.7
|
|
|
223.2
|
|
|
226.8
|
|
Total
|
$
|
2,074.9
|
|
|
$
|
2,049.5
|
|
|
$
|
1,774.7
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
19. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Gross Profit
|
|
Net Income (Loss)
|
|
Net Income
Per Share—
Basic(2)
|
|
Net Income
Per Share—
Diluted(2)
|
|
(In thousands, except per share amounts)
|
2020
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
$
|
206,884
|
|
|
$
|
84,427
|
|
|
$
|
22,328
|
|
|
$
|
1.33
|
|
|
$
|
1.31
|
|
2nd Quarter(1)
|
109,712
|
|
|
30,122
|
|
|
(134,779)
|
|
|
(8.33)
|
|
|
(8.33)
|
|
3rd Quarter
|
176,643
|
|
|
66,784
|
|
|
10,018
|
|
|
0.60
|
|
|
0.60
|
|
4th Quarter
|
196,029
|
|
|
67,383
|
|
|
(1,561)
|
|
|
(0.10)
|
|
|
(0.10)
|
|
2019
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
$
|
237,182
|
|
|
$
|
102,571
|
|
|
$
|
31,643
|
|
|
$
|
1.76
|
|
|
$
|
1.73
|
|
2nd Quarter
|
228,080
|
|
|
94,855
|
|
|
21,390
|
|
|
1.20
|
|
|
1.18
|
|
3rd Quarter
|
217,405
|
|
|
89,720
|
|
|
23,917
|
|
|
1.38
|
|
|
1.36
|
|
4th Quarter
|
227,511
|
|
|
95,668
|
|
|
27,396
|
|
|
1.61
|
|
|
1.59
|
|
______________________________________________________________________________________________________
(1) The Company recognized a pretax charge of $123.7 million for impairments of goodwill, intangible assets and long-lived assets in the second quarter of 2020. See Note 6 - Goodwill, Note 7 - Other Intangible Assets and Note 13 - Long-lived Tangible Asset Impairment and Closure Charges, of Notes to the Consolidated Financial Statements.
(2) The quarterly amounts of earnings per share may not add to the full year amount as each quarterly calculation is discrete from the full-year calculation.