UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-15283
DineEquity, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
|
95-3038279 |
|
|
|
450 North Brand Boulevard, |
|
91203-1903 |
(Address of principal executive offices) |
|
(Zip Code) |
(818) 240-6055
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was Required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
|
Outstanding as of October 23, 2009 |
|
Common Stock, $.01 par value |
|
17,580,574 |
|
DINEEQUITY, INC. AND SUBSIDIARIES
1
DINEEQUITY, INC. AND SUBSIDIARIES
(In thousands, except share and per share amounts)
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
105,075 |
|
$ |
114,443 |
|
Restricted cash |
|
75,382 |
|
83,355 |
|
||
Short-term investments, at market value |
|
280 |
|
276 |
|
||
Receivables, net |
|
77,282 |
|
117,930 |
|
||
Inventories |
|
12,086 |
|
10,959 |
|
||
Prepaid income taxes |
|
|
|
15,734 |
|
||
Prepaid expenses |
|
15,853 |
|
17,067 |
|
||
Deferred income taxes |
|
24,526 |
|
27,504 |
|
||
Assets held for sale |
|
7,314 |
|
11,861 |
|
||
Total current assets |
|
317,798 |
|
399,129 |
|
||
Non-current restricted cash |
|
50,683 |
|
53,395 |
|
||
Restricted assets related to captive insurance subsidiary |
|
4,601 |
|
5,573 |
|
||
Long-term receivables |
|
263,747 |
|
277,106 |
|
||
Property and equipment, net |
|
784,911 |
|
824,482 |
|
||
Goodwill |
|
697,470 |
|
697,470 |
|
||
Other intangible assets, net |
|
946,503 |
|
956,036 |
|
||
Other assets, net |
|
136,529 |
|
148,026 |
|
||
Total assets |
|
$ |
3,202,242 |
|
$ |
3,361,217 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Current maturities of long-term debt |
|
$ |
22,650 |
|
$ |
15,000 |
|
Accounts payable |
|
38,336 |
|
48,983 |
|
||
Accrued employee compensation and benefits |
|
29,436 |
|
44,299 |
|
||
Deferred revenue |
|
44,779 |
|
95,532 |
|
||
Accrued financing costs |
|
|
|
20,071 |
|
||
Other accrued expenses |
|
61,099 |
|
55,249 |
|
||
Accrued interest payable |
|
3,393 |
|
3,580 |
|
||
Total current liabilities |
|
199,693 |
|
282,714 |
|
||
Long-term debt, less current maturities |
|
1,711,273 |
|
1,853,367 |
|
||
Financing obligations, less current maturities |
|
312,592 |
|
318,651 |
|
||
Capital lease obligations, less current maturities |
|
155,471 |
|
161,310 |
|
||
Deferred income taxes |
|
402,385 |
|
395,448 |
|
||
Other liabilities |
|
118,480 |
|
119,910 |
|
||
Total liabilities |
|
2,899,894 |
|
3,131,400 |
|
||
Commitments and contingencies |
|
|
|
|
|
||
Preferred stock, Series A, $1 par value, 220,000 shares authorized; 190,000 shares issued and outstanding as of September 30, 2009 and December 31, 2008 |
|
187,050 |
|
187,050 |
|
||
Stockholders equity: |
|
|
|
|
|
||
Convertible preferred stock, Series B, at accreted value, 10,000,000 shares authorized; 35,000 shares issued and outstanding at September 30, 2009 and December 31, 2008 |
|
39,038 |
|
37,332 |
|
||
Common stock, $.01 par value, 40,000,000 shares authorized; September 30, 2009: 23,797,375 shares issued and 17,581,809 shares outstanding; December 31, 2008: 23,696,950 shares issued and 17,466,355 shares outstanding |
|
238 |
|
237 |
|
||
Additional paid-in-capital |
|
169,486 |
|
165,315 |
|
||
Retained earnings |
|
205,314 |
|
145,810 |
|
||
Accumulated other comprehensive loss |
|
(23,028 |
) |
(29,408 |
) |
||
Treasury stock, at cost (September 30, 2009: 6,215,566 shares; December 31, 2008: 6,230,595 shares) |
|
(275,750 |
) |
(276,519 |
) |
||
Total stockholders equity |
|
115,298 |
|
42,767 |
|
||
Total liabilities and stockholders equity |
|
$ |
3,202,242 |
|
$ |
3,361,217 |
|
See the accompanying Notes to Consolidated Financial Statements.
2
DINEEQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
||||
Franchise revenues |
|
$ |
90,198 |
|
$ |
87,429 |
|
$ |
278,922 |
|
$ |
264,784 |
|
Company restaurant sales |
|
206,357 |
|
265,919 |
|
668,149 |
|
874,337 |
|
||||
Rental revenues |
|
32,929 |
|
32,962 |
|
99,182 |
|
98,495 |
|
||||
Financing revenues |
|
4,067 |
|
4,871 |
|
12,504 |
|
20,487 |
|
||||
Total revenues |
|
333,551 |
|
391,181 |
|
1,058,757 |
|
1,258,103 |
|
||||
Costs and Expenses |
|
|
|
|
|
|
|
|
|
||||
Franchise expenses |
|
25,377 |
|
24,255 |
|
77,411 |
|
70,016 |
|
||||
Company restaurant expenses |
|
179,306 |
|
236,389 |
|
573,343 |
|
772,706 |
|
||||
Rental expenses |
|
24,264 |
|
24,488 |
|
73,081 |
|
73,758 |
|
||||
Financing expenses |
|
14 |
|
326 |
|
360 |
|
6,213 |
|
||||
General and administrative expenses |
|
35,897 |
|
41,788 |
|
117,015 |
|
138,622 |
|
||||
Interest expense |
|
45,231 |
|
50,490 |
|
139,611 |
|
152,698 |
|
||||
Impairment and closure charges |
|
4,471 |
|
28,466 |
|
6,472 |
|
69,898 |
|
||||
Amortization of intangible assets |
|
3,019 |
|
3,077 |
|
9,056 |
|
9,056 |
|
||||
Gain on extinguishment of debt |
|
|
|
(2,434 |
) |
(38,803 |
) |
(2,434 |
) |
||||
Gain on disposition of assets |
|
(2,111 |
) |
(274 |
) |
(7,253 |
) |
(432 |
) |
||||
Other expense (income), net |
|
888 |
|
(429 |
) |
1,017 |
|
(2,153 |
) |
||||
Total costs and expenses |
|
316,356 |
|
406,142 |
|
951,310 |
|
1,287,948 |
|
||||
Income (loss) before income taxes |
|
17,195 |
|
(14,961 |
) |
107,447 |
|
(29,845 |
) |
||||
(Provision) benefit for income taxes |
|
(3,690 |
) |
3,157 |
|
(31,987 |
) |
12,510 |
|
||||
Net income (loss) |
|
$ |
13,505 |
|
$ |
(11,804 |
) |
$ |
75,460 |
|
$ |
(17,335 |
) |
Net income (loss) |
|
$ |
13,505 |
|
$ |
(11,804 |
) |
$ |
75,460 |
|
$ |
(17,335 |
) |
Less: Series A preferred stock dividends |
|
(4,750 |
) |
(4,750 |
) |
(14,250 |
) |
(14,250 |
) |
||||
Less: Accretion of Series B preferred stock |
|
(577 |
) |
(544 |
) |
(1,706 |
) |
(1,600 |
) |
||||
Less: Net (income) loss allocated to unvested participating restricted stock |
|
(301 |
) |
687 |
|
(2,211 |
) |
1,191 |
|
||||
Net income (loss) available to common stockholders |
|
$ |
7,877 |
|
$ |
(16,411 |
) |
$ |
57,293 |
|
$ |
(31,994 |
) |
Net income (loss) available to common stockholders per share |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.46 |
|
$ |
(0.98 |
) |
$ |
3.39 |
|
$ |
(1.91 |
) |
Diluted |
|
$ |
0.46 |
|
$ |
(0.98 |
) |
$ |
3.34 |
|
$ |
(1.91 |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
16,942 |
|
16,786 |
|
16,904 |
|
16,752 |
|
||||
Diluted |
|
16,942 |
|
16,786 |
|
17,717 |
|
16,752 |
|
||||
Dividends declared per common share |
|
$ |
|
|
$ |
0.25 |
|
$ |
|
|
$ |
0.75 |
|
Dividends paid per common share |
|
$ |
|
|
$ |
0.25 |
|
$ |
|
|
$ |
0.75 |
|
See the accompanying Notes to Consolidated Financial Statements.
3
DINEEQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Nine Months Ended September 30, |
|
||||
|
|
2009 |
|
2008 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income (loss) |
|
$ |
75,460 |
|
$ |
(17,335 |
) |
Adjustments to reconcile net income (loss) to cash flows provided by operating activities |
|
|
|
|
|
||
Depreciation and amortization |
|
48,406 |
|
53,532 |
|
||
Non-cash interest expense |
|
29,338 |
|
28,947 |
|
||
Gain on extinguishment of debt |
|
(38,803 |
) |
(2,434 |
) |
||
Impairment and closure charges |
|
6,472 |
|
69,898 |
|
||
Deferred income taxes |
|
5,723 |
|
(48,585 |
) |
||
Stock-based compensation expense |
|
7,367 |
|
10,237 |
|
||
Tax benefit from stock-based compensation |
|
472 |
|
1,463 |
|
||
Excess tax benefit from stock options exercised |
|
(48 |
) |
(315 |
) |
||
Gain on disposition of assets |
|
(7,253 |
) |
(432 |
) |
||
Other |
|
(5,628 |
) |
97 |
|
||
Changes in operating assets and liabilities |
|
|
|
|
|
||
Receivables |
|
39,704 |
|
35,858 |
|
||
Inventories |
|
(1,323 |
) |
149 |
|
||
Prepaid expenses |
|
5,950 |
|
9,552 |
|
||
Accounts payable |
|
(9,194 |
) |
(36,768 |
) |
||
Accrued employee compensation and benefits |
|
(14,863 |
) |
(4,748 |
) |
||
Deferred revenues |
|
(50,753 |
) |
(37,202 |
) |
||
Other accrued expenses |
|
11,901 |
|
(638 |
) |
||
Cash flows provided by operating activities |
|
102,928 |
|
61,276 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Additions to property and equipment |
|
(9,513 |
) |
(26,951 |
) |
||
Reductions (additions) to long-term receivables |
|
1,937 |
|
(555 |
) |
||
Payment of accrued acquisition costs |
|
|
|
(10,247 |
) |
||
Collateral released by captive insurance subsidiary |
|
1,011 |
|
4,042 |
|
||
Proceeds from sale of property and equipment and assets held for sale |
|
16,132 |
|
40,158 |
|
||
Principal receipts from notes and equipment contracts receivable |
|
11,419 |
|
12,359 |
|
||
Other |
|
(89 |
) |
(380 |
) |
||
Cash flows provided by investing activities |
|
20,897 |
|
18,426 |
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from issuance of long-term debt |
|
10,000 |
|
35,000 |
|
||
Proceeds from financing obligations |
|
|
|
369,991 |
|
||
Repayment of long-term debt |
|
(108,463 |
) |
(381,236 |
) |
||
Principal payments on capital lease and financing obligations |
|
(10,722 |
) |
(6,528 |
) |
||
Dividends paid |
|
(14,250 |
) |
(24,243 |
) |
||
Payment of preferred stock issuance costs |
|
|
|
(1,500 |
) |
||
Repurchase of restricted stock |
|
(426 |
) |
(458 |
) |
||
Reissuance of treasury stock |
|
|
|
1,135 |
|
||
Proceeds from stock options exercised |
|
324 |
|
989 |
|
||
Excess tax benefit from stock options exercised |
|
48 |
|
315 |
|
||
Payment of accrued debt issuance costs |
|
(20,257 |
) |
(48,403 |
) |
||
Payment of early debt extinguishment costs |
|
(123 |
) |
|
|
||
Restricted cash related to securitization |
|
10,676 |
|
48,542 |
|
||
Cash flows used in financing activities |
|
(133,193 |
) |
(6,396 |
) |
||
Net change in cash and cash equivalents |
|
(9,368 |
) |
73,306 |
|
||
Cash and cash equivalents at beginning of year |
|
114,443 |
|
26,838 |
|
||
Cash and cash equivalents at end of period |
|
$ |
105,075 |
|
$ |
100,144 |
|
Supplemental disclosures |
|
|
|
|
|
||
Interest paid |
|
$ |
124,493 |
|
$ |
149,131 |
|
Income taxes paid |
|
$ |
15,716 |
|
$ |
33,411 |
|
See the accompanying Notes to Consolidated Financial Statements.
4
DINEEQUITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements of DineEquity, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
The consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
2. Basis of Presentation
The Companys fiscal quarters end on the Sunday closest to the last day of each quarter. For convenience, the fiscal quarters are reported as ending on March 31, June 30, September 30 and December 31. The first three fiscal quarters of 2009 ended March 29, June 28 and September 27, while the first three fiscal quarters of 2008 ended March 30, June 29 and September 28.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated in consolidation. However, the subsidiaries have not guaranteed the obligations of the Company, and the assets of the subsidiaries generally are not available to pay creditors of the Company. Also, the Company has not guaranteed the obligations of the subsidiaries, and the assets of the Company generally are not available to pay creditors of the subsidiaries.
The preparation of financial statements in conformity with U.S. GAAP requires the Companys management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to provisions for doubtful accounts, legal contingencies, income taxes, long-lived assets, goodwill and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Subsequent events have been evaluated through October 27, 2009, the date the financial statements are considered issued.
Reclassifications
Certain reclassifications have been made to prior year information to conform to the current year presentation. The most significant reclassification relates to certain operations acquired with Applebees International, Inc. (Applebees), a wholly-owned subsidiary of the Company, that were previously reported as discontinued operations. The amounts of $93,000 and $295,000, respectively, for the three-month and nine-month periods ended September 30, 2008, that were previously reported as losses from discontinued operations have been reclassified as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||
|
|
(In thousands) |
|
||||
Reclassified to: |
|
|
|
|
|
||
Total revenues |
|
$ |
|
|
$ |
|
|
Company restaurant expenses |
|
33 |
|
81 |
|
||
Loss on disposition of assets |
|
|
|
8 |
|
||
Impairment and closure charges |
|
121 |
|
398 |
|
||
Income (loss) before income taxes |
|
(154 |
) |
(487 |
) |
||
Benefit for income taxes |
|
61 |
|
192 |
|
||
Reclassified from loss on discontinued operations |
|
(93 |
) |
(295 |
) |
||
Net income (loss) |
|
$ |
|
|
$ |
|
|
These reclassifications had no effect on the net income or financial position previously reported.
5
3. Accounting Policies
Recently Adopted Accounting Standards
In September 2006, the Financial Accounting Standards Board (the FASB) amended U.S. GAAP with respect to fair value measurements. These amendments, among other things, defined fair value, established a framework for measuring fair value and expanded disclosures about fair value measurements. In February 2008, the FASB delayed for one year the applicability of the amended fair-value measurement requirements to certain nonfinancial assets and liabilities. The Company adopted the requirements that had been deferred on January 1, 2009. The adoption did not have a material impact on the Companys financial condition, results of operations or cash flows.
In December 2007, the FASB amended U.S. GAAP with respect to business combinations. These amendments, among other things, established principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. These amendments also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The amendments are effective for fiscal years beginning after December 15, 2008. The Company adopted the amended requirements for business combinations on January 1, 2009 and will apply the requirements prospectively.
In March 2008, the FASB amended U.S. GAAP with respect to derivative instruments and hedging activities. These amendments, among other things, require companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect a companys financial position, financial performance and cash flows. The Company adopted the new disclosure requirements on January 1, 2009. As the amendments did not change current accounting practice, there was no impact of the adoption on the Companys results of operations and financial condition.
In April 2008, the FASB amended U.S. GAAP with respect to the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the amendments is to improve the consistency between the useful life of a recognized intangible asset under previously existing U.S. GAAP related to goodwill and other intangible assets and the period of expected cash flows used to measure the fair value of the asset under U.S. GAAP with respect to business combinations. The Company adopted the amended requirements on January 1, 2009, and will apply the provisions prospectively to any intangible assets acquired after the effective date.
In June 2008, the FASB amended U.S. GAAP with respect to determining if an instrument granted in a share-based payment transaction is a participating security. These amendments, among other things, require unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class method of computing earnings per share. The Company retroactively adopted these amendments on January 1, 2009. The impact of the adoption on earnings per share as previously reported for the three- and nine-month periods ended September 30, 2008 was not material.
In April 2009, the FASB amended U.S. GAAP to address concerns regarding (a) determining whether a market is not active and a transaction is not orderly, (b) recognition and presentation of other-than-temporary impairments and (c) interim disclosures of fair values of financial instruments. The Company adopted these amendments effective April 1, 2009. There was no impact of the adoption on the Companys consolidated financial statements.
In May 2009, the FASB amended U.S. GAAP with respect to subsequent events. These amendments, among other things, established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted these amendments effective April 1, 2009. There was no impact of the adoption on the Companys consolidated financial statements.
In June 2009, the FASB established the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (the SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification became effective for the Company in the third fiscal quarter of 2009. Adoption of the Codification did not have a material effect on the Companys financial statements.
6
3. Accounting Policies, continued
New Accounting Pronouncements
In June 2009, the FASB amended U.S. GAAP with respect to the accounting for transfers of financial assets. These amendments, among other things, clarified that the objective of U.S. GAAP is to determine whether a transferor and all of the entities included in the transferors financial statements being presented have surrendered control over transferred financial assets; limited the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset; and removed the concept of a qualifying special-purpose entity. The Company will be required to adopt these amendments effective January 1, 2010, and is currently evaluating the potential impact, if any, on its consolidated financial statements.
In June 2009, the FASB amended U.S. GAAP with respect to the consolidation of variable interest entities (VIEs). These amendments, among other things, (i) change existing guidance for determining whether an entity is a VIE; (ii) require ongoing reassessments of whether an entity is the primary beneficiary of a VIE; and (iii) require enhanced disclosures about an entitys involvement in a VIE. The Company will be required to adopt these amendments effective January 1, 2010, and is currently evaluating the potential impact, if any, on its consolidated financial statements.
In August 2009, the FASB amended U.S. GAAP with respect to measuring liabilities at fair value. These amendments provide clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. The Company will be required to adopt these amendments in the fourth quarter of fiscal year 2009 and is currently evaluating the impact of adoption on its consolidated financial statements.
4. Impairment and Closure Charges
The Company assesses long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. For the nine months ended September 30, 2009, the Company recognized impairment charges of $5.9 million and closure charges of $0.6 million. The impairment charges for the three months ended September 30, 2009 totaled $3.9 million and related primarily to four parcels of real estate and one Applebees restaurant. The Company had fee ownership of the properties on which four Applebees company-operated restaurants were located. These restaurants were franchised in the fourth quarter of 2008 but the Company retained ownership of the land and continued to lease the property to the franchisee. The Companys strategy does not contemplate retaining such properties as a lessor on a long-term basis. During the third quarter of 2009, the Company determined the properties met the requirements under U.S. GAAP to be reclassified as assets held for sale. The properties were written down to the estimated fair value that will be received upon sale, and an impairment of $2.8 million was recognized. As part of the Companys quarterly assessment of the recoverability of long-lived assets, an impairment of $1.1 million was recognized related to one Applebees company-operated restaurant whose carrying value was not considered recoverable from undiscounted future cash flows. The closure costs of $0.6 million related to changes in sublease revenue assumptions for a single Applebees restaurant that had been closed in 1998.
Impairment and closure charges of $2.0 million recorded in the first six months of 2009 related primarily to leasehold improvements and related assets of one IHOP restaurant closed during the period and an additional write-down to the estimated sales value, based on a current letter of intent, of one Applebees restaurant that had been closed in a prior period and was included in assets held for sale. The Company has evaluated the causal factors of all impairments recorded during the nine months ended September 30, 2009 and has concluded they are not potential indicators of an impairment of goodwill or other intangible assets.
In June 2008, the Company entered into a sale-leaseback transaction relating to 181 parcels of real estate comprising land, buildings and improvements. The net book value of the real estate exceeded the proceeds received by $40.6 million. All of the parcels involved in the transactions had been acquired in the November 29, 2007 acquisition of Applebees and their estimated fair value was assigned as part of the purchase price allocation as of that date. The Company evaluated events subsequent to November 29, 2007 and noted a deterioration in both the domestic real estate and credit markets between the date of the purchase price allocation and the June 2008 closing date of the sale-leaseback transactions. In the absence of objective evidence to the contrary, the Company concluded that the estimated fair value of the real estate determined in the purchase price allocation had been reasonable and the decline in value related primarily to market events subsequent to the acquisition date and therefore was not to an adjustment to the allocated purchase price. Accordingly, the Company recognized an impairment loss of $40.6 million in the Consolidated Statement of Operations for the three-month and six-month periods ended June 30, 2008.
As part of the Companys quarterly assessment of the recoverability of its long-lived assets, the Company recorded impairment charges of $28.5 million for the three-month period ended September 30, 2008. Of that amount, $26.8 million related to Applebees properties and primarily resulted from continuing deterioration in credit markets in general and a decline in operating
7
4. Impairment and Closure Charges, continued
results of Applebees company-operated restaurants expected to be franchised in particular geographic areas. The remainder of the impairment related to an individual underperforming IHOP property whose estimates of future cash flows indicated the carrying value would not be recovered.
5. Assets Held for Sale
The Company classifies assets as held for sale and ceases the depreciation and amortization of the assets when there is a plan for disposal of the assets and those assets meet the held for sale criteria, as defined in applicable U.S. GAAP. The balance of assets held for sale at December 31, 2008 of $11.9 million was primarily comprised of seven Applebees company-operated restaurants in New Mexico expected to be franchised, four parcels of land previously acquired and held for future development, and property and equipment from closed stores.
The sale of five of the seven restaurants in New Mexico was completed in the first fiscal quarter of 2009. During the second fiscal quarter of 2009, the Company sold certain property and equipment associated with closed restaurants and recognized an additional impairment on a previously closed restaurant. During the third fiscal quarter of 2009, the Company sold the remaining two of seven restaurants in New Mexico and reclassified the fair value of four parcels of land as discussed in Note 4, Impairment and Closure Charges. The balance of assets held for sale at September 30, 2009 of $7.3 million was primarily comprised of four parcels of land previously acquired and held for future development, four parcels of land on which Applebees franchised restaurants are situated and property and equipment from one closed Applebees restaurant.
The following table summarizes the changes in the balance of assets held for sale during 2009:
|
|
(In millions) |
|
|
Balance December 31, 2008 |
|
$ |
11.9 |
|
Assets sold |
|
(6.6 |
) |
|
Impairment charges |
|
(1.0 |
) |
|
Assets reclassified to held for sale |
|
3.0 |
|
|
Balance September 30, 2009 |
|
$ |
7.3 |
|
6. Long-Term Debt
Long-term debt consists of the following components:
|
|
September 30, 2009 |
|
December 31, |
|
||
|
|
(In millions) |
|
||||
Series 2007-1 Class A-2-II-A Fixed Rate Term Senior Notes due December 2037, at a fixed rate of 7.1767% (inclusive of an insurance premium of 0.75%) |
|
$ |
599.1 |
|
$ |
640.6 |
|
Series 2007-1 Class A-2-II-X Fixed Rate Term Senior Notes due December 2037, at a fixed rate of 7.0588% |
|
504.7 |
|
604.3 |
|
||
Series 2007-1 Class M-1 Fixed Rate Term Subordinated Notes due December 2037, at a fixed rate of 8.4044% |
|
107.8 |
|
119.0 |
|
||
Series 2007-1 Class A-1 Variable Funding Senior Notes, final maturity date December 2037, at a rate of 2.90% and 3.86% as of September 30, 2009 and December 31, 2008, respectively |
|
100.0 |
|
100.0 |
|
||
Series 2007-1 Fixed Rate Notes due March 2037, at a fixed rate of 5.744% (inclusive of an insurance premium of 0.60%) |
|
175.0 |
|
175.0 |
|
||
Series 2007-2 Variable Funding Notes, final maturity date March 2037, at a rate of 0.36% and 2.1% as of September 30, 2009 and December 31, 2008, respectively |
|
25.0 |
|
15.0 |
|
||
Series 2007-3 Fixed Rate Term Notes due December 2037, at a fixed rate of 7.0588% |
|
245.0 |
|
245.0 |
|
||
Discount on Fixed Rate Notes |
|
(22.6 |
) |
(30.5 |
) |
||
Total debt |
|
1,734.0 |
|
1,868.4 |
|
||
Less current maturities |
|
(22.7 |
) |
(15.0 |
) |
||
Long-term debt |
|
$ |
1,711.3 |
|
$ |
1,853.4 |
|
8
6. Long-Term Debt, continued
For a description of the respective instruments, refer to Note 10 of the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
During the nine months ended September 30, 2009, the Company retired Series 2007-1 Class A-2-II-X Fixed Rate Term Senior Notes due December 2037 with a face amount of $94.0 million and Series 2007-1 Class A-2-II-A Fixed Rate Term Senior Notes due December 2037 with a face amount of $35.2 million for cash payments totaling $85.4 million. The Company recognized a gain on extinguishment of this debt of $38.8 million after the write-off of the discount and deferred financing costs related to the debt retired.
During the nine months ended September 30, 2009, the Company received proceeds from disposition of assets and release of certain reserve funds totaling $11.8 million. As required by the terms of the Applebees securitization agreements, these funds were used to retire Series 2007-1 Class A-2-II-X Fixed Rate Term Senior Notes and Series 2007-1 Class A-2-II-A Fixed Rate Term Senior Notes at face values of $5.5 million and $6.3 million, respectively.
In January 2009, the Company began making scheduled monthly payments on the Series 2007-1 Class M-1 Fixed Rate Term Subordinated Notes due December 2037. Scheduled payments totaled $11.2 million during the nine months ended September 30, 2009.
7. Financing Obligations
As of September 30, 2009, future minimum lease payments under financing obligations during the initial terms of the leases related to sale-leaseback transactions are as follows:
Fiscal Years |
|
(In millions) |
|
|
Remainder of 2009 |
|
$ |
7.8 |
|
2010 |
|
31.5 |
|
|
2011 |
|
31.9 |
|
|
2012 |
|
31.9 |
|
|
2013 |
|
32.0 |
|
|
Thereafter |
|
447.3 |
|
|
Total minimum lease payments |
|
582.4 |
|
|
Less interest |
|
(261.2 |
) |
|
Total financing obligations |
|
321.2 |
|
|
Less current portion(1) |
|
(8.6 |
) |
|
Long-term financing obligations |
|
$ |
312.6 |
|
(1) Included in other accrued expenses on the consolidated balance sheet.
8. Segments
The Companys revenues and expenses are recorded in four segments: franchise operations, company restaurant operations, rental operations and financing operations.
As of September 30, 2009, the franchise operations segment consisted of (i) 1,603 restaurants operated by Applebees franchisees in the United States, 14 countries outside the United States and one U.S. territory and (ii) 1,422 restaurants operated by IHOP franchisees and area licensees in the United States, Canada and Mexico. Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products, certain franchise advertising fees and the portion of the franchise fees allocated to intellectual property. Franchise operations expenses include advertising expense, the cost of proprietary products, pre-opening training expenses and costs related to intellectual property provided to certain franchisees.
As of September 30, 2009, the company restaurant operations segment consisted of 398 company-operated Applebees restaurants in the United States, one company-operated Applebees restaurant in China and 11 company-operated IHOP restaurants. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, benefits, utilities, rent and other restaurant operating costs.
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 on capital leases on franchisee-operated restaurants.
9
8. Segments, continued
Financing operations revenue consists of the portion of franchise fees not allocated to intellectual property, sales of equipment and interest income from the financing of franchise fees and equipment leases. Financing expenses are primarily the costs of restaurant equipment.
Information on segments is as follows:
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(In millions) |
|
||||||||||
Revenues from external customers |
|
|
|
|
|
|
|
|
|
||||
Franchise operations |
|
$ |
90.2 |
|
$ |
87.4 |
|
$ |
278.9 |
|
$ |
264.8 |
|
Company restaurants |
|
206.4 |
|
265.9 |
|
668.2 |
|
874.3 |
|
||||
Rental operations |
|
32.9 |
|
33.0 |
|
99.2 |
|
98.5 |
|
||||
Financing operations |
|
4.1 |
|
4.9 |
|
12.5 |
|
20.5 |
|
||||
Total |
|
$ |
333.6 |
|
$ |
391.2 |
|
$ |
1,058.8 |
|
$ |
1,258.1 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
||||
Company restaurants |
|
$ |
0.2 |
|
$ |
0.2 |
|
$ |
0.7 |
|
$ |
0.7 |
|
Rental operations |
|
4.9 |
|
5.0 |
|
14.8 |
|
15.2 |
|
||||
Corporate |
|
45.2 |
|
50.5 |
|
139.6 |
|
152.7 |
|
||||
Total |
|
$ |
50.3 |
|
$ |
55.7 |
|
$ |
155.1 |
|
$ |
168.6 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
||||
Franchise operations |
|
$ |
2.4 |
|
$ |
2.5 |
|
$ |
7.4 |
|
$ |
7.5 |
|
Company restaurants |
|
7.2 |
|
8.5 |
|
22.1 |
|
28.7 |
|
||||
Rental operations |
|
2.9 |
|
3.0 |
|
8.7 |
|
9.0 |
|
||||
Corporate |
|
3.5 |
|
3.2 |
|
10.2 |
|
8.3 |
|
||||
Total |
|
$ |
16.0 |
|
$ |
17.2 |
|
$ |
48.4 |
|
$ |
53.5 |
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
||||
Franchise operations |
|
$ |
64.8 |
|
$ |
63.2 |
|
$ |
201.5 |
|
$ |
194.8 |
|
Company restaurants |
|
27.1 |
|
29.5 |
|
94.8 |
|
101.6 |
|
||||
Rental operations |
|
8.7 |
|
8.5 |
|
26.1 |
|
24.7 |
|
||||
Financing operations |
|
4.1 |
|
4.6 |
|
12.2 |
|
14.3 |
|
||||
Corporate |
|
(87.5 |
) |
(120.8 |
) |
(227.2 |
) |
(365.2 |
) |
||||
Total |
|
$ |
17.2 |
|
$ |
(15.0 |
) |
$ |
107.4 |
|
$ |
(29.8 |
) |
9. Income Taxes
The Company or one of its subsidiaries files Federal income tax returns and income tax returns in various state and foreign jurisdictions. The Company is no longer subject to Federal income tax examinations for years before 2006, except for the 2004 year. With few exceptions, the Company is no longer subject to state and non-U.S. income tax examinations by tax authorities for years before 2000.
At September 30, 2009, the Company had a liability for unrecognized tax benefits including potential interest and penalties, net of related tax benefit, totaling $15.8 million, of which approximately $2.2 million is expected to be paid within one year. For the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur.
The total unrecognized tax benefit as of September 30, 2009 and December 31, 2008 was $11.0 million and $18.6 million, respectively, excluding interest, penalties and related income tax benefits. The decrease was due primarily to settlements with taxing authorities resulting in a decrease in unrecognized tax benefits related to prior year positions. The entire $11.0 million will be included in the Companys effective income tax rate if recognized. The Company estimates the unrecognized tax benefits may decrease over the upcoming 12 months by an amount up to $2.2 million related to settlements with taxing authorities and the lapse of the statute of limitations.
As of September 30, 2009, the accrued interest and penalties were $11.3 million and $1.6 million, respectively, excluding any related income tax benefits. As of December 31, 2008, the accrued interest and penalties were $13.7 million and $2.9 million, respectively, excluding any related income tax benefits. The decrease of $2.4 million of accrued interest is primarily related to the decrease of unrecognized tax benefits due to settlements with taxing authorities, partially offset by the accrual of interest during the nine months ended September 30, 2009. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of income tax expense which is recognized in the Consolidated Statements of Operations.
10
9. Income Taxes, continued
The Company has various state net operating loss carryovers representing $1.5 million of state taxes as of December 31, 2008. The net operating loss carryovers will expire, if unused, during the period from 2009 through 2027.
The effective tax rate was 29.8% for the nine-month period ended September 30, 2009. The effective tax rate is lower than the federal statutory rate of 35% primarily due to tax credits and favorable settlements with taxing authorities, partially offset by state income taxes. The tax credits are primarily FICA tip and other compensation-related tax credits associated with Applebees company-owned restaurant operations.
10. Stock-Based Compensation
From time to time, the Company grants stock options and restricted stock to officers and employees of the Company under the 2001 Stock Incentive Plan (the 2001 Plan) and restricted stock to non-employee directors of the Company under the 2005 Stock Incentive Plan for Non-Employee Directors (the 2005 Plan). The stock options generally vest over a three-year period and have a term of ten years from the issuance date. Option exercise prices equal the closing price of the Companys common stock on the New York Stock Exchange on the date of grant. Restricted stock provides for the issuance of shares of the Companys common stock at no cost to the holder and vests over terms determined by the Compensation Committee of the Companys Board of Directors, generally three years. Restricted stock granted to officers and employees generally vests only if the officer or employee is actively employed by the Company on the vesting date, and unvested restricted shares are forfeited upon either termination, retirement before age 65, death or disability, unless the Compensation Committee of the Companys Board of Directors determines otherwise. When vested options are exercised and restricted stock is issued, the Company generally issues new shares from its authorized but unissued share pool or utilizes treasury stock.
The following table summarizes the components of the Companys stock-based compensation expense included in general and administrative expenses in the consolidated financial statements:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(In millions) |
|
||||||||||
Total Stock-Based Compensation: |
|
|
|
|
|
|
|
|
|
||||
Pre-tax compensation expense |
|
$ |
2.1 |
|
$ |
3.2 |
|
$ |
7.4 |
|
$ |
10.2 |
|
Tax provision (benefit) |
|
(0.7 |
) |
0.2 |
|
(2.3 |
) |
(4.3 |
) |
||||
Total stock-based compensation expense, net of tax |
|
$ |
1.4 |
|
$ |
3.4 |
|
$ |
5.1 |
|
$ |
5.9 |
|
At September 30, 2009, $9.6 million and $7.3 million (including estimated forfeitures) of total unrecognized compensation cost related to restricted stock and stock options, respectively, is expected to be recognized over a weighted average period of 1.66 years for restricted stock and 2.26 years for stock options.
The estimated fair values of the options granted year-to-date in 2009 were calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model:
Risk-free interest rate |
|
1.95 |
% |
|
Weighted average historical volatility |
|
72.3 |
% |
|
Dividend yield |
|
|
|
|
Expected years until exercise |
|
5.0 |
|
|
Forfeitures |
|
11.0 |
% |
|
Weighted average fair value of options granted |
|
$ |
5.03 |
|
11
10. Stock-Based Compensation, continued
Option activity under the Companys stock option plan as of September 30, 2009, and changes during the nine-month period then ended were as follows:
|
|
Shares |
|
Weighted |
|
Weighted Average |
|
Aggregate |
|
||
Outstanding at December 31, 2008 |
|
933,939 |
|
$ |
36.37 |
|
|
|
|
|
|
Granted |
|
1,016,750 |
|
$ |
8.22 |
|
|
|
|
|
|
Exercised |
|
(15,500 |
) |
$ |
20.87 |
|
|
|
|
|
|
Expired |
|
(17,166 |
) |
$ |
41.98 |
|
|
|
|
|
|
Forfeited |
|
(213,690 |
) |
$ |
20.85 |
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
1,704,333 |
|
$ |
21.61 |
|
7.89 |
|
$ |
17,972,000 |
|
Vested at September 30, 2009 and Expected to Vest |
|
1,449,676 |
|
$ |
22.69 |
|
7.65 |
|
$ |
14,378,000 |
|
Exercisable at September 30, 2009 |
|
507,582 |
|
$ |
38.65 |
|
4.66 |
|
$ |
374,000 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Companys closing stock price on the last trading day of the third quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. The amount of aggregate intrinsic value will change based on the fair market value of the Companys stock and the number of in-the-money options.
A summary of restricted stock activity for the nine months ended September 30, 2009 is presented below:
|
|
Shares |
|
Weighted Average |
|
|
Unvested at December 31, 2008 |
|
671,480 |
|
$ |
45.07 |
|
Granted |
|
233,575 |
|
$ |
10.58 |
|
Released |
|
(120,399 |
) |
$ |
49.28 |
|
Forfeited |
|
(105,958 |
) |
$ |
34.18 |
|
Unvested at September 30, 2009 |
|
678,698 |
|
$ |
34.15 |
|
11. Other Comprehensive Income (Loss)
The components of comprehensive income (loss), net of taxes, are as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(In millions) |
|
||||||||||
Net income (loss) |
|
$ |
13.5 |
|
$ |
(11.8 |
) |
$ |
75.5 |
|
$ |
(17.3 |
) |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
||||
Interest rate swap |
|
2.2 |
|
2.0 |
|
6.3 |
|
5.7 |
|
||||
Temporary decline in available-for-sale securities |
|
0.1 |
|
|
|
0.1 |
|
(0.3 |
) |
||||
Total comprehensive income (loss) |
|
$ |
15.8 |
|
$ |
(9.8 |
) |
$ |
81.9 |
|
$ |
(11.9 |
) |
The amount of income tax benefit allocated to the interest rate swap was $1.4 million and $0.1 million for the three months ended September 30, 2009 and 2008, respectively. The amount of income tax benefit allocated to the interest rate swap was $4.2 million and $2.4 million for the nine months ended September 30, 2009 and 2008, respectively. The amount of income tax benefit allocated to the temporary decline in securities was $0.1 million for the nine months ended September 30, 2008.
The loss related to an interest rate swap designated as a cash flow hedge is being reclassified into earnings over the expected life of the related debt. Approximately $9.2 million, net of tax, is expected to be reclassified over the next 12 months.
12
11. Other Comprehensive Income, continued
The accumulated comprehensive loss of $23.0 million (net of tax) as of September 30, 2009 is comprised of $22.7 million related to a terminated interest rate swap and $0.3 million related to a temporary decline in available-for-sale securities. The accumulated comprehensive loss of $29.4 million (net of tax) as of December 31, 2008 is comprised of $29.0 million related to a terminated interest rate swap and $0.4 million related to a temporary decline in available-for-sale securities.
12. Net Income (Loss) Per Share
The computation of the Companys basic and diluted net income per share is as follows:
|
|
Three Months Ended September 30, |
|||||
|
|
2009 |
|
2008 |
|
||
|
|
(In thousands, except per share data) |
|
||||
Numerator for basic and dilutive incomeper common share: |
|
|
|
|
|
||
Net income (loss) |
|
$ |
13,505 |
|
$ |
(11,804 |
) |
Less: Series A Preferred Stock dividends |
|
(4,750 |
) |
(4,750 |
) |
||
Less: Accretion of Series B Preferred Stock |
|
(577 |
) |
(544 |
) |
||
Less: Net (income) loss allocated to unvested participating restricted stock |
|
(301 |
) |
687 |
|
||
Net income (loss) available to common stockholders basic |
|
7,877 |
|
(16,411 |
) |
||
Effect of unvested participating restricted stock in two-class calculation |
|
|
|
|
|
||
Accretion of Series B Preferred Stock* |
|
|
|
|
|
||
Net income (loss) available to common stockholders diluted |
|
$ |
7,877 |
|
$ |
(16,411 |
) |
Denominator: |
|
|
|
|
|
||
Weighted average outstanding shares of common stock |
|
16,942 |
|
16,786 |
|
||
Dilutive effect of: |
|
|
|
|
|
||
Stock options |
|
|
|
|
|
||
Convertible Series B Preferred Stock * |
|
|
|
|
|
||
Common stock and common stock equivalents |
|
16,942 |
|
16,786 |
|
||
Net income (loss) per common share: |
|
|
|
|
|
||
Basic |
|
$ |
0.46 |
|
$ |
(0.98 |
) |
Diluted |
|
$ |
0.46 |
|
$ |
(0.98 |
) |
|
|
Nine Months Ended September 30, |
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
(In thousands, except per share data) |
|
||||
Numerator for basic and dilutive incomeper common share: |
|
|
|
|
|
||
Net income (loss) |
|
$ |
75,460 |
|
$ |
(17,335 |
) |
Less: Series A Preferred Stock dividends |
|
(14,250 |
) |
(14,250 |
) |
||
Less: Accretion of Series B Preferred Stock |
|
(1,706 |
) |
(1,600 |
) |
||
Less: Net (income) loss allocated to unvested participating restricted stock |
|
(2,211 |
) |
1,191 |
|
||
Net income (loss) available to common stockholders basic |
|
57,293 |
|
(31,994 |
) |
||
Effect of unvested participating restricted stock in two-class calculation |
|
99 |
|
|
|
||
Accretion of Series B Preferred Stock* |
|
1,706 |
|
|
|
||
Net income (loss) available to common stockholders diluted |
|
$ |
59,098 |
|
$ |
(31,994 |
) |
Denominator: |
|
|
|
|
|
||
Weighted average outstanding shares of common stock |
|
16,904 |
|
16,752 |
|
||
Dilutive effect of: |
|
|
|
|
|
||
Stock options |
|
249 |
|
|
|
||
Convertible Series B Preferred Stock * |
|
564 |
|
|
|
||
Common stock and common stock equivalents |
|
17,717 |
|
16,752 |
|
||
Net income (loss) per common share: |
|
|
|
|
|
||
Basic |
|
$ |
3.39 |
|
$ |
(1.91 |
) |
Diluted |
|
$ |
3.34 |
|
$ |
(1.91 |
) |
* The effect of adding shares from the assumed conversion of Series B Convertible Preferred Stock (Series B) to the denominator and the related add-back of the Series B dividends to the numerator is anti-dilutive for the three months ended September 30, 2009 and the three months and nine months ended September 30, 2008.
13
13. Financial Instruments
We believe the fair values of cash equivalents, accounts receivable, accounts payable and the current portion of long-term debt approximate their carrying amounts due to their short duration.
Restricted assets related to a captive insurance subsidiary are carried at fair value and consist of $0.8 million of cash held in escrow, $1.2 million in money market funds invested in U.S. government securities, $2.0 million in mutual funds invested in auction-rate securities and one auction-rate security of $0.6 million. The auction rate security and the mutual funds invested in auction-rate securities are considered available for sale. The following table summarizes cost and market value of our available-for-sale securities at September 30, 2009:
(in millions) |
|
Cost |
|
Gross |
|
Gross
Unrealized |
|
Market Value |
|
|||
Available-for-sale securities |
|
$ |
2.9 |
|
|
|
$ |
(0.3 |
) |
$ |
2.6 |
|
Earnings for the three months and nine months ended September 30, 2009 included realized losses of $51,000. The scheduled maturity of the auction-rate security is December, 2030.
The fair values of non-current financial liabilities are shown in the following table:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||||
|
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
|
||||
|
|
(in millions) |
|
||||||||||
Long-term debt, less current maturities |
|
$ |
1,711.3 |
|
$ |
1,394.2 |
|
$ |
1,853.4 |
|
$ |
1,177.2 |
|
Series A Preferred Stock |
|
$ |
187.1 |
|
$ |
160.2 |
|
$ |
187.1 |
|
$ |
131.2 |
|
At September 30, 2009 and December 31, 2008, the fair value of the non-current financial liabilities was determined based on Level 3 inputs using a risk-adjusted discounted cash flow model under the income approach. The change in fair value as of September 30, 2009, compared to the fair value as of December 31, 2008 was due to a change in the discount rate assumption utilized in the risk-adjusted discounted cash flow model.
14. Fair Value Measurements
The Company has one group of financial instruments, investments held by Applebees captive insurance subsidiary, which is required under U.S. GAAP to be measured on a recurring basis at fair value. None of the Companys non-financial assets or non-financial liabilities is required to be measured at fair value on a recurring basis. The Company has not elected to use fair value measurement, as provided under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required.
U.S. GAAP establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions.
The fair value of available-for-sale securities held by the captive insurance company at September 30, 2009 was $2.6 million and was determined based on Level 3 inputs using a risk-adjusted discounted cash flow model under the income approach.
14
15. Consolidation of Variable Interest Entities
U.S. GAAP prescribes the accounting for certain entities, called variable interest entities (VIEs), in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Under U.S. GAAP, an enterprise that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, is considered to be the primary beneficiary of the VIE and must consolidate the entity in its financial statements.
In February 2009, the Company and owners of Applebees and IHOP franchise restaurants formed Centralized Supply Chain Services, LLC (CSCS or the Co-op) to manage procurement activities for the Applebees and IHOP restaurants choosing to join the Co-op. CSCS meets the definition of a VIE under U.S. GAAP. Under the terms of the Co-op agreements, each member restaurant belonging to CSCS has equal and identical ownership rights and obligations. IHOP franchise restaurants to which the Company has provided financial support in the form of loans to purchase franchises and equipment are considered de facto agents of the Company for purposes of determining the primary beneficiary of the VIE. Company-owned Applebees and IHOP restaurants, in addition to the IHOP franchise restaurants deemed to be de facto agents, comprised only 33.6% of the CSCS membership as of the date of determination of the primary beneficiary of the VIE. Accordingly, the Company is not considered to be the primary beneficiary of the VIE and therefore does not consolidate the results of CSCS.
Under the Co-op agreements, the Company is obligated to make a one-time payment to CSCS for start-up costs of $6.3 million, $5.5 million of which has been paid as of September 30, 2009, with a payment of $0.8 million due in January 2010. The Company is not obligated to provide any support to the Co-op under any express or implied agreement beyond this $6.3 million.
The Co-op does not purchase items on behalf of member restaurants; rather, it facilitates purchasing agreements and distribution arrangements between suppliers and member restaurants. Because of this, it is anticipated that CSCS will acquire a minimal amount of assets and incur a minimal amount of liabilities. Each member restaurant is responsible for only the goods and services it chooses to purchase and bears no responsibility or risk of loss for goods and services purchased by other member restaurants. Based on these facts, the Company believes its maximum estimated loss related to its membership in the Co-op is de minimis.
16. Commitments and Contingencies
Litigation, Claims and Disputes
The Company is subject to various lawsuits, claims and governmental inspections or audits arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. 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 Companys business or consolidated financial statements.
Gerald Fast v. Applebees
The Company is currently defending a collective action filed under the Fair Labor Standards Act styled Gerald Fast v. Applebees International, Inc., in which named plaintiffs claim that tipped workers in company restaurants perform excessive amounts of non-tipped work for which they should be compensated at the minimum wage. The court has conditionally certified a nationwide class of servers and bartenders who have worked in company-operated Applebees restaurants since June 19, 2004. Unlike a class action, a collective action requires potential class members to opt in rather than opt out. On February 12, 2008, 5,540 opt-in forms were filed with the court.
In cases of this type, conditional certification of the plaintiff class is granted under a lenient standard. On January 15, 2009, the Company filed a motion seeking to have the class de-certified and the plaintiffs filed a motion for summary judgment, both of which were denied by the court. The parties stipulated to a bench trial which was set to begin on September 8, 2009 in Jefferson City, Missouri. Just prior to trial, however, the court vacated the trial setting in order to submit key legal issues to the 8th Circuit for review on interlocutory appeal. Briefing on the issues for interlocutory appeal was completed by the parties on October 2, 2009.
The Company believes it has strong defenses to the substantive claims asserted and intends to vigorously defend this case. An estimate of the possible loss, if any, or the range of the loss cannot be made and, therefore, the Company has not accrued a loss contingency related to this matter.
15
16. Commitments and Contingencies, continued
Lease Guarantees
As of September 30, 2009, in connection with the sale of Applebees restaurants or previous brands to franchisees and other parties, the Company has, in certain cases, guaranteed or had potential continuing liability for lease payments totaling $121.5 million. This amount represents the maximum potential liability of future payments under these leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 2009 through 2044. 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 have been recorded as of September 30, 2009.
17. Preferred Stock
The Certificate of Designations for Series A Perpetual Preferred Stock requires that upon the occurrence of a Change of Control, unless prohibited by applicable law, the Company shall redeem all then outstanding shares of the Series A Perpetual Preferred Stock for cash at a redemption price per share corresponding to the timing of such Change of Control, as specified in the Certificate of Designations. U.S. GAAP requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Series A Perpetual Preferred Stock is not included as a component of Stockholders Equity in the accompanying Consolidated Balance Sheets.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements in certain circumstances. This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially from those expressed or implied by any forward-looking statements. You can identify these forward-looking statements by words such as may, will, should, expect, anticipate, believe, estimate, intend, plan and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading Risk Factors in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the U.S. Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.
Overview
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Except where the context indicates otherwise, the words we, us, our and the Company refer to DineEquity, Inc., together with its subsidiaries that are consolidated in accordance with U.S. generally accepted accounting principles (U.S. GAAP).
The Company was incorporated under the laws of the State of Delaware in 1976. The first International House of Pancakes (IHOP) restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter the Companys predecessor began developing and franchising additional restaurants. In November 2007, the Company completed the acquisition of Applebees International, Inc. (Applebees), which became a wholly-owned subsidiary of the Company. Through various IHOP and Applebees subsidiaries we own, operate and franchise two restaurant concepts in the casual dining and family dining categories of the food service industry: Applebees Neighborhood Grill and Bar® and IHOP. Dine Equity, Inc. is the ultimate parent of the IHOP and Applebees subsidiaries. References herein to Applebees and IHOP restaurants are to these two restaurant concepts, whether operated by franchisees or the Company. References herein to system sales include retail sales at restaurants that are owned by franchisees and area licensees and are not attributable to the Company. With more than 3,400 franchised or owned-and-operated restaurants combined, we are the largest full-service restaurant company in the world.
Restaurant Concepts
Applebees
We franchise and operate restaurants in the bar and grill segment of the casual dining industry under the name Applebees Neighborhood Grill & Bar®. With 2,002 system-wide restaurants as of September 30, 2009, Applebees Neighborhood Grill & Bar is the largest casual dining concept in the world, in terms of number of restaurants and market share.
Generally, Applebees franchise arrangements consist of a development agreement and separate franchise agreements for each franchised restaurant. Development agreements grant to the franchise developer the exclusive right to develop Applebees restaurants in a designated geographic area over a specified period of time. The term of a domestic development agreement is generally 20 years. The development agreement typically provides for an initial development schedule of one to five years, as agreed upon by the Company and the franchisee. At or shortly prior to the completion of the initial development schedule or any subsequent development schedule, the Company and the franchisee generally agree upon supplemental development schedules providing for the development of additional Applebees restaurants in the franchise developers exclusive territory.
Prior to the opening of each new Applebees restaurant, the franchisee and the Company enter into a separate franchise agreement for that restaurant. Our standard franchise agreement has a term of 20 years and permits renewals for up to an additional 20 years upon payment of an additional franchise fee. Our current standard franchise arrangement calls for an initial franchise fee of $35,000 and a royalty fee equal to 4% of the restaurants monthly net sales. We have agreements with a majority of our franchisees for Applebees restaurants opened before January 1, 2000, which provide for a royalty rate of 4% and extend the initial term of the franchise agreements until 2020. The terms, royalties and advertising fees under a limited number of franchise agreements and other franchise fees under older development agreements vary from the currently offered arrangements.
We currently require domestic franchisees of Applebees restaurants to contribute 2.75% of their gross sales to a national advertising fund and to spend at least 1% of their gross sales on local marketing and promotional activities. Under most Applebees franchise agreements, we have the ability to increase the amount of the required combined contribution to the national advertising fund and the amount required to be spent on local marketing and promotional activities to a maximum of 5% of gross sales.
Since the completion of the Applebees acquisition on November 29, 2007, we have been pursuing a strategy which contemplates transitioning from our current 80% franchised system to an approximately 98% franchised system. Between November 29, 2007 and September 30, 2009 we have franchised 110 company-owned restaurants in the California, Nevada, Delaware, Texas and
17
New Mexico markets. This heavily franchised business model is expected to require less capital investment and reduce the volatility of cash flow performance over time. A range of factors, including the overall market for restaurant franchises, the availability of financing and the financial and operating performance of Applebees company-owned restaurants, can impact the likelihood and timing of the completion of this strategy as well as the ultimate proceeds the Company will receive from franchising the company-operated restaurants. The Company continues to monitor these factors and to assess their impact on possible franchise transactions. The Company may choose to suspend or revise its franchising strategy if it does not believe that conditions will lead to satisfactory proceeds from the sale of its company-operated restaurants.
IHOP
Under our current business model (the Current Business Model), which was adopted in January 2003, a potential franchisee first negotiates and enters into a single-store development agreement or a multi-store development agreement with the Company and, upon completion of a prescribed approval procedure, is primarily responsible for the development and financing of one or more new IHOP franchised restaurants. In general, we do not provide any financing with respect to the franchise fee or otherwise. The franchise developer uses its own capital and financial resources along with third party financial sources to purchase or lease a restaurant site, build and equip the business and fund its working capital needs. The principal terms of the franchise agreements entered into under the Companys business model prior to 2003 (the Previous Business Model) and the Current Business Model, including the franchise royalties and the franchise advertising fees, are substantially the same except with respect to the terms relating to the franchise fee.
The revenues received by the Company from a typical franchise development arrangement under the Current Business Model include (a) (i) a location fee equal to $15,000 upon execution of a single-store development agreement or (ii) a development fee equal to $20,000 for each IHOP restaurant that the franchisee contracts to develop upon execution of a multi-store development agreement; (b) a franchise fee equal to (i) $50,000 (against which the $15,000 location fee will be credited) for a restaurant developed under a single-store development agreement or (ii) $40,000 (against which the $20,000 development fee will be credited) for each restaurant developed under a multi-store development agreement, in each case, paid upon execution of the franchise agreement; (c) franchise royalties equal to 4.5% of weekly gross sales; (d) revenue from the sale of pancake and waffle dry-mixes; and (e) franchise advertising fees.
IHOP franchised restaurants established prior to 2003 under the Previous Business Model were generally developed by the Company. The Company was involved in all aspects of the development and financing of the restaurants. Under the Previous Business Model, the Company typically identified and leased or purchased the restaurant sites for new company-developed IHOP restaurants, built and equipped the restaurants and then franchised them to franchisees. In addition, IHOP typically financed as much as 80% of the franchise fee for periods ranging from five to eight years and leased the restaurant and equipment to the franchisee over a 25-year period.
The revenues received from a restaurant franchised under the Previous Business Model include: (a) the franchise fee, a portion of which (typically 20%) was paid upon execution of the franchise agreement; (b) interest income from the financing arrangements for the unpaid portion of the franchise fee under the franchise notes; (c) franchise royalties typically equal to 4.5% of weekly gross sales; (d) lease or sublease rents for the restaurant property and building; (e) rent under an equipment lease; (f) revenues from the sale of pancake and waffle dry-mixes; and (g) franchise advertising fees.
The franchise agreements generally provide for advertising fees comprised of (i) a local advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which was usually collected by us and then used to cover the cost of local media purchases and other local advertising expenses incurred by a local advertising cooperative, and (ii) a national advertising fee equal to 1.0% of weekly gross sales under the franchise agreement. Area licensees generally pay lesser amounts toward advertising. Beginning in 2005, the Company and the IHOP franchisees agreed to reallocate portions of the local advertising fees to purchase national broadcast, syndication and cable television time in order to reach our target audience more frequently and more cost effectively. In a few instances, we have agreed to accept reduced royalties and/or lease payments from franchisees or have provided other accommodations to franchisees for specified periods of time in order to assist them in either establishing or reinvigorating their businesses.
18
The following table summarizes Applebees restaurant development and franchising activity:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
(unaudited) |
|
||||||
Applebees Restaurant Development Activity |
|
|
|
|
|
|
|
|
|
Beginning of period |
|
1,992 |
|
1,993 |
|
2,004 |
|
1,976 |
|
New openings |
|
|
|
|
|
|
|
|
|
Company-developed |
|
|
|
|
|
|
|
1 |
|
Franchise-developed |
|
13 |
|
7 |
|
23 |
|
34 |
|
Total new openings |
|
13 |
|
7 |
|
23 |
|
35 |
|
Closings |
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
(3 |
) |
Franchise |
|
(3 |
) |
(3 |
) |
(25 |
) |
(11 |
) |
End of period |
|
2,002 |
|
1,997 |
|
2,002 |
|
1,997 |
|
Summary-end of period |
|
|
|
|
|
|
|
|
|
Franchise |
|
1,603 |
|
1,517 |
|
1,603 |
|
1,517 |
|
Company |
|
399 |
|
480 |
|
399 |
|
480 |
|
Total |
|
2,002 |
|
1,997 |
|
2,002 |
|
1,997 |
|
Restaurant Franchising Activity |
|
|
|
|
|
|
|
|
|
Domestic franchise-developed |
|
5 |
|
6 |
|
12 |
|
23 |
|
International franchise-developed |
|
8 |
|
1 |
|
11 |
|
11 |
|
Refranchised |
|
2 |
|
29 |
|
7 |
|
29 |
|
Total restaurants franchised |
|
15 |
|
36 |
|
30 |
|
63 |
|
Closings |
|
|
|
|
|
|
|
|
|
Domestic franchise |
|
(3 |
) |
(2 |
) |
(21 |
) |
(9 |
) |
International franchise |
|
|
|
(1 |
) |
(4 |
) |
(2 |
) |
Total franchise closings |
|
(3 |
) |
(3 |
) |
(25 |
) |
(11 |
) |
Net addition |
|
12 |
|
33 |
|
5 |
|
52 |
|
The increase in Applebees franchise closings in 2009 was due primarily to the closing of seven restaurants after the franchise agreements were terminated due to nonpayment of royalties and advertising fees. One of the seven restaurants re-opened under new ownership in 2009, and the Company expects two additional restaurants to re-open under new ownership in 2010. Another reason for the increase was six of the restaurants closed in 2009 were originally planned to be closed in 2008.
The following table represents Applebees restaurant development commitments for 2009 and 2010. We have disclosed development commitments for only a two-year period as the Applebees development agreements generally provide for a series of two-year development commitments after the initial development period.
|
|
Contractual |
|
||
|
|
2009 |
|
2010 |
|
Domestic development agreements |
|
19 |
|
15 |
|
International development agreements |
|
23 |
|
18 |
|
|
|
42 |
|
33 |
|
In 2009, we expect franchisees to open a total of 28 to 33 new Applebees restaurants including 16 to 18 domestic franchise restaurants and 12 to 15 international franchise restaurants. We currently do not plan to open any domestic company-operated restaurants. The actual number of openings may differ from our expectations due to various factors, including economic conditions, operating performance of existing restaurants, franchisee access to capital and the impact of currency fluctuations on our international franchisees. The timing of new restaurant openings may also be affected by various factors including weather-related and other construction delays and difficulties in obtaining regulatory approvals.
19
The following table summarizes IHOP restaurant development and franchising activity:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
(unaudited) |
|
||||||
IHOP Restaurant Development Activity |
|
|
|
|
|
|
|
|
|
Beginning of period |
|
1,421 |
|
1,361 |
|
1,396 |
|
1,344 |
|
New openings |
|
|
|
|
|
|
|
|
|
Company-developed |
|
|
|
|
|
|
|
|
|
Franchise-developed |
|
12 |
|
18 |
|
43 |
|
43 |
|
Area license |
|
1 |
|
1 |
|
4 |
|
2 |
|
Total new openings |
|
13 |
|
19 |
|
47 |
|
45 |
|
Closings |
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
(1 |
) |
Franchise |
|
(1 |
) |
(5 |
) |
(8 |
) |
(11 |
) |
Area license |
|
|
|
|
|
(2 |
) |
(2 |
) |
End of period |
|
1,433 |
|
1,375 |
|
1,433 |
|
1,375 |
|
Summary-end of period |
|
|
|
|
|
|
|
|
|
Franchise |
|
1,260 |
|
1,205 |
|
1,260 |
|
1,205 |
|
Company |
|
11 |
|
13 |
|
11 |
|
13 |
|
Area license |
|
162 |
|
157 |
|
162 |
|
157 |
|
Total |
|
1,433 |
|
1,375 |
|
1,433 |
|
1,375 |
|
Restaurant Franchising Activity |
|
|
|
|
|
|
|
|
|
Domestic franchise-developed |
|
11 |
|
17 |
|
39 |
|
41 |
|
International franchise-developed |
|
1 |
|
1 |
|
4 |
|
2 |
|
Refranchised |
|
|
|
1 |
|
1 |
|
10 |
|
Total restaurants franchised |
|
12 |
|
19 |
|
44 |
|
53 |
|
Closings |
|
|
|
|
|
|
|
|
|
Domestic franchise |
|
(1 |
) |
(5 |
) |
(8 |
) |
(10 |
) |
International franchise |
|
|
|
|
|
|
|
(1 |
) |
Total franchise closings |
|
(1 |
) |
(5 |
) |
(8 |
) |
(11 |
) |
Reacquired by the Company |
|
|
|
(4 |
) |
(1 |
) |
(13 |
) |
Net addition |
|
11 |
|
10 |
|
35 |
|
29 |
|
As of the beginning of 2009, we had signed commitments from franchisees to build 307 IHOP restaurants over the next nine years plus options for an additional 111 restaurants, comprised as follows:
|
|
|
|
Contractual Openings of |
|
||||||||
|
|
Number of Signed |
|
2009 |
|
2010 |
|
2011 |
|
2012 and |
|
Total |
|
Single-store development agreements |
|
18 |
|
12 |
|
5 |
|
1 |
|
|
|
18 |
|
Multi-store development agreements |
|
80 |
|
74 |
|
55 |
|
43 |
|
165 |
|
337 |
|
International development agreements |
|
7 |
|
8 |
|
6 |
|
5 |
|
44 |
|
63 |
|
|
|
105 |
|
94 |
|
66 |
|
49 |
|
209 |
|
418 |
|
In 2009, a total of 65 to 75 new IHOP restaurants are expected to open, consisting of 55 to 60 franchise restaurants, three to five area license restaurants in Florida, two to three domestic restaurants in non-traditional channels and five to seven restaurants outside the U.S. The actual number of openings in any period may differ from the number of signed commitments. Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be developed due to various factors including weather-related delays, other construction delays, difficulties in obtaining timely regulatory approvals and various economic factors, including operating performance of existing restaurants and franchisee access to capital financing.
20
Restaurant Data
The following table sets forth, for the three-month and nine-month periods ended September 30, 2009 and 2008, the number of effective restaurants in the Applebees and IHOP systems and information regarding the percentage change in sales at those restaurants compared to the same periods in the prior year. Effective restaurants are the number of restaurants in a given period, adjusted to account for restaurants open for only a portion of the period. Information is presented for all effective restaurants in the IHOP and Applebees systems, which includes restaurants owned by the Company, as well as those owned by franchisees and area licensees. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. 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, as well as rental payments under leases that are usually 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.
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(unaudited) |
|
||||||||||
Applebees Restaurant Data |
|
|
|
|
|
|
|
|
|
||||
Effective restaurants(a) |
|
|
|
|
|
|
|
|
|
||||
Franchise |
|
1,598 |
|
1,513 |
|
1,592 |
|
1,487 |
|
||||
Company |
|
399 |
|
481 |
|
402 |
|
501 |
|
||||
Total |
|
1,997 |
|
1,994 |
|
1,994 |
|
1,988 |
|
||||
System-wide(b) |
|
|
|
|
|
|
|
|
|
||||
Sales percentage change(c) |
|
(6.3 |
)% |
(1.5 |
)% |
(4.2 |
)% |
0.6 |
% |
||||
Domestic same-store sales percentage change(d) |
|
(6.5 |
)% |
(3.1 |
)% |
(4.5 |
)% |
(1.4 |
)% |
||||
Franchise(b)(e) |
|
|
|
|
|
|
|
|
|
||||
Sales percentage change(c)(g) |
|
(1.0 |
)% |
1.2 |
% |
2.3 |
% |
1.6 |
% |
||||
Same-store sales percentage change(d) |
|
(6.2 |
)% |
(3.1 |
)% |
(4.4 |
)% |
(1.6 |
)% |
||||
Average weekly domestic unit sales (in thousands) |
|
$ |
42.9 |
|
$ |
45.7 |
|
$ |
46.3 |
|
$ |
48.4 |
|
Company |
|
|
|
|
|
|
|
|
|
||||
Sales percentage change(c)(g) |
|
(22.7 |
)% |
(9.3 |
)% |
(23.9 |
)% |
(2.3 |
)% |
||||
Same-store sales percentage change(d) |
|
(7.6 |
)% |
(3.1 |
)% |
(5.1 |
)% |
(0.6 |
)% |
||||
Average weekly domestic unit sales (in thousands) |
|
$ |
39.0 |
|
$ |
41.9 |
|
$ |
41.9 |
|
$ |
44.3 |
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(unaudited) |
|
||||||||||
IHOP Restaurant Data |
|
|
|
|
|
|
|
|
|
||||
Effective restaurants(a) |
|
|
|
|
|
|
|
|
|
||||
Franchise |
|
1,251 |
|
1,190 |
|
1,237 |
|
1,183 |
|
||||
Company |
|
11 |
|
10 |
|
11 |
|
10 |
|
||||
Area license |
|
162 |
|
157 |
|
160 |
|
157 |
|
||||
Total |
|
1,424 |
|
1,357 |
|
1,408 |
|
1,350 |
|
||||
System-wide(b) |
|
|
|
|
|
|
|
|
|
||||
Sales percentage change(c) |
|
3.8 |
% |
3.8 |
% |
4.3 |
% |
6.1 |
% |
||||
Domestic same-store sales percentage change(d) |
|
(1.1 |
)% |
0.2 |
% |
0.2 |
% |
2.2 |
% |
||||
Franchise(b)(e) |
|
|
|
|
|
|
|
|
|
||||
Sales percentage change(c) |
|
4.2 |
% |
4.3 |
% |
4.8 |
% |
6.7 |
% |
||||
Same-store sales percentage change(d) |
|
(1.1 |
)% |
0.3 |
% |
0.1 |
% |
2.2 |
% |
||||
Average weekly unit sales (in thousands) |
|
$ |
35.1 |
|
$ |
35.4 |
|
$ |
35.6 |
|
$ |
35.5 |
|
Company(f) |
|
n.m. |
|
n.m. |
|
n.m. |
|
n.m. |
|
||||
Area License(h) |
|
|
|
|
|
|
|
|
|
||||
Sales percentage change(c) |
|
(0.7 |
)% |
0.7 |
% |
(0.4 |
)% |
2.1 |
% |
||||
21
(a) Effective restaurants are the number of restaurants 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 IHOP and Applebees systems, which includes restaurants owned by the Company as well as those owned by franchisees and area licensees.
(b) System-wide sales are retail sales at IHOP and Applebees restaurants operated by franchisees and IHOP restaurants operated by 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.
(c) Sales percentage change reflects, for each category of restaurants, the percentage change in sales in any given fiscal period compared to the prior fiscal period for all restaurants in that category.
(d) Same-store sales percentage change reflects the percentage change in sales, in any given fiscal period compared to the prior fiscal period, for restaurants that have been operated throughout both fiscal periods that are being compared and have been open for at least 18 months. Because of new unit openings and store closures, the restaurants open throughout both fiscal periods being compared may be different from period to period. Same-store sales percentage change does not include data on IHOP restaurants located in Florida.
(e) IHOP franchise restaurant sales were $570.9 million and $547.7 million for the three months ended September 30, 2009 and 2008, respectively, and $1,717.2 million and $1,638.1 million for the nine months ended September 30, 2009 and 2008, respectively. Applebees franchise restaurant sales were $818.7 million and $827.3 million for the three months ended September 30, 2009 and 2008, respectively, and $2,645.0 million and $2,584.9 million for the nine months ended September 30, 2009 and 2008, respectively.
(f) Sales percentage change and same-store sales percentage change for IHOP company-operated restaurants are not meaningful due to the relatively small number and test-market nature of the restaurants, along with the periodic inclusion of restaurants reacquired from franchisees that are temporarily operated by the Company.
(g) The sales percentage change for Applebees franchise and company-operated restaurants is impacted by the franchising of 103 company-operated restaurants during 2008 and seven company-operated restaurants in 2009.
(h) Sales at IHOP area license restaurants were $51.6 million and $52.0 million for the three months ended September 30, 2009 and 2008, respectively, and $162.6 million and $163.3 million for the nine months ended September 30, 2009 and 2008, respectively.
22
Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons of Reported or Future Results
Global Economic Contraction
Beginning in 2008 and continuing into 2009, economic conditions in both the U.S. and worldwide have experienced a downturn due to the compounded effects of the subprime lending crisis, the credit market liquidity crisis, and the collateral effects of each on the finance and banking industries. In addition, volatile energy costs, concerns about inflation and deflation, slowing economic activity, softness in both the commercial and residential real estate markets, decreased consumer confidence, reduced corporate profits and capital spending and rising unemployment have combined to create generally adverse business conditions for most industries and sectors, including the casual dining and family dining segments of the restaurant industry. While the liquidity crisis and its effects on the finance and banking industries have mitigated somewhat, we believe financial market volatility, rising unemployment, increasing foreclosures and lower valuations for residential real estate will continue to put pressure on consumer spending. These conditions make it challenging for us to accurately forecast and plan future business activities as the reduction in disposable income for discretionary spending could cause our customers to change historic purchasing behavior and choose lower-cost dining options or alternatives to dining out.
These economic developments may affect our business and operations in a number of ways, including but not limited to:
· lower profitability and cash flows from company-operated restaurants;
· reduced cash flows from franchisees due to both a lower sales base on which royalties and other payments are calculated and possible impairment of the ability of franchisees to make payments when due as a result of the economic effects cited above on their businesses;
· reduced availability of financing for franchisees to fulfill their new restaurant development commitments;
· limited or lack of credit availability for potential purchasers of Applebees company-operated restaurants;
· lower proceeds from the franchising of Applebees company-operated restaurants due to both lower restaurant sales and profitability and/or inability to consummate transactions at all; and
· lower estimated fair values for goodwill, intangible assets and long-lived assets resulting in future non-cash impairment charges.
We cannot predict the effect or duration of this economic slowdown or the timing and strength of a subsequent recovery in the economy in general or the restaurant industry in particular. If our business significantly deteriorates due to these macroeconomic effects, our financial condition and results of operations will likely be materially and adversely affected.
Securitized Debt and Related Interest Expense