DineEquity, Inc. Reports Third Quarter Results

DineEquity, Inc. Reports Third Quarter Results

Completes Applebee's Refranchising Initiative

Significantly Reduces Total Debt by $167 Million


GLENDALE, Calif.--(BUSINESS WIRE)-- DineEquity, Inc. (NYS: DIN) , the parent company of Applebee's Neighborhood Grill & Bar and IHOP Restaurants, today announced financial results for the third quarter of 2012.

"We are pleased with our results for the third quarter, which was highlighted by the great progress we made against our long-term strategic goals. Earlier this month, we achieved a significant milestone with the completion of our transition to a fully-franchised restaurant system. Our more efficient business model continued to generate strong free cash flow, enabling further debt reduction as we optimize our G&A structure to create additional value for our stockholders," said Julia A. Stewart, Chairman and Chief Executive Officer of DineEquity, Inc. "Our strategy at Applebee's yielded solid performance in the third quarter, where our revitalization initiatives continue to fuel momentum. We continued the hard work already underway at IHOP to restore same-restaurant sales growth. Most importantly, we have strong alignment with our IHOP franchisees to execute on our plan for improvement."

Third Quarter 2012 Financial Highlights

  • Total debt was reduced by $167.2 million in the third quarter of 2012 as a result of net cash proceeds and financing obligation reductions from the refranchise and sale of Applebee's company-operated restaurants and free cash flow. The Company reduced Term Loan balances by $106.1 million and financing and capital lease obligations by $61.1 million.

  • Adjusted net income available to common stockholders was $18.9 million, representing adjusted earnings per diluted share of $1.03 for the third quarter of 2012. This compares to $19.1 million, or adjusted earnings per diluted share of $1.04, for the same quarter in 2011. The decrease in adjusted earnings was due to, as expected, lower segment profit caused by the execution of our strategy to refranchise Applebee's company-operated restaurants. This item was partially offset by lower cash interest expense. (See "Non-GAAP Financial Measures" below.)

  • GAAP net income available to common stockholders was $58.7 million, or earnings per diluted share of $3.14 for the third quarter of 2012, compared to $15.5 million, or earnings per diluted share of $0.85, for the same quarter in 2011. The increase was primarily due to a higher gain on the refranchise and sale of Applebee's company-operated restaurants and lower interest expense. These items were partially offset by higher income taxes, an increase in general and administrative expenses, and, as expected, lower segment profit due to the refranchise and sale of Applebee's company-operated restaurants.

  • Consolidated general and administrative expenses were $48.7 million for the third quarter of 2012 compared to $38.7 million in the third quarter of 2011. The increase was primarily due to a $9 million non-recurring litigation settlement and net severance charges associated with the Company's previously announced restructuring initiative to lower general and administrative expenses by approximately $10 million to $12 million on an annualized basis. These items were partially offset by the savings in employee compensation associated with the workforce reduction.

  • Applebee's company-operated restaurant operating margin was 15.5% for the third quarter of 2012 compared to 14.2% for the same quarter in 2011, an increase of 130 basis points. The increase was primarily due to cessation of depreciation on restaurants held for sale, the refranchising of lower margin company-operated restaurants, and lower advertising expense. These items were partially offset by higher labor expense and commodity inflation.

First Nine Months of 2012 Highlights

  • Total debt was reduced by $255.5 million in the first nine months of 2012 as a result of net cash proceeds and financing obligation reductions from the refranchise and sale of Applebee's company-operated restaurants and free cash flow. The Company reduced Term Loan balances by $175.2 million, Senior Notes by $3.6 million, and financing and capital lease obligations by $76.7 million.

  • Adjusted net income available to common stockholders was $62.6 million in the first nine months of 2012, representing adjusted earnings per diluted share of $3.44. This compares to $61.7 million, or adjusted earnings per diluted share of $3.37, for the same period in 2011. The increase in adjusted earnings was due to lower cash interest expense, partially offset by, as expected, lower segment profit due to the refranchise and sale of Applebee's company-operated restaurants and lower income taxes. (See "Non-GAAP Financial Measures" below.)

  • GAAP net income available to common stockholders was $104.3 million in the first nine months of 2012, or earnings per diluted share of $5.66, compared to $43.4 million, or earnings per diluted share of $2.38 for the same period in 2011. The increase was primarily due to a higher gain on the refranchise and sale of Applebee's company-operated restaurants, lower impairment and closure charges, and lower interest expense. These items were partially offset by higher income tax expense, an increase in general and administrative expenses, and, as expected, lower segment profit due to refranchising.

  • EBITDA was $226.3 million for the first nine months of 2012. (See "Non-GAAP Financial Measures" below.)

  • For the first nine months of 2012, cash flows from operating activities were $68.1 million, capital expenditures were $13.5 million, and free cash flow was $64.9 million. (See "Non-GAAP Financial Measures" below.)

  • Applebee's company-operated restaurant operating margin was 16.8% for the first nine months of 2012 compared to 14.4% for the same period in 2011. The increase of 240 basis points was primarily due to lower depreciation expense, improved control of waste, and the refranchising of lower margin company-operated restaurants. These items were partially offset by commodity inflation, new menu related expense, and higher labor expense.

Refranchise and Sale of Applebee's Company-Operated Restaurants

During the third quarter of 2012, DineEquity completed the sale of 33 and 65 Applebee's company-operated restaurants to American Franchise Capital, LLC and TSFR Apple Venture, respectively. After-tax net proceeds of approximately $87 million were used to retire debt.

On October 3, 2012, DineEquity completed the sale of 39Applebee's company-operated restaurants located in Virginia to Potomac Family Dining Group, LLC. After-tax net proceeds of approximately $24 million were used to further reduce debt.

DineEquity has now completed its Applebee's refranchising program and transitioned to a 99% franchised restaurant system and is now considered to be fully franchised. As a result, DineEquity's business model is less capital intensive with higher operating margins and the Company expects to have cash flow with substantially reduced volatility over time. The Company currently retains 23 Applebee's company-operated restaurants in the Kansas City area for test market purposes.

Same-Restaurant Sales Performance

Third Quarter 2012

  • Applebee's domestic system-wide same-restaurant sales increased 2.0% for the third quarter of 2012 compared to the third quarter of 2011. The increase in same-restaurant sales reflected a higher average guest check, partially offset by a decline in traffic compared to the third quarter of 2011.

  • IHOP's domestic system-wide same restaurant sales decreased 2.0% for the third quarter of 2012 compared to the third quarter of 2011. The decline in same-restaurant sales reflected a decline in traffic, partially offset by a slightly higher average guest check compared to the third quarter of 2011.

First Nine Months of 2012

  • Applebee's domestic system-wide same-restaurant sales increased 1.3% in the first nine months of 2012 compared to the same period in 2011. The increase in same-restaurant sales was mainly driven by a higher average guest check, partially offset by a decline in traffic compared to the first nine months of 2011.

  • IHOP's domestic system-wide same-restaurant sales declined 1.3% in the first nine months of 2012 compared to the same period in 2011. The decline in same-restaurant sales reflected a decline in traffic, partially offset by a higher average guest check compared to the first nine months of 2011.

Investor Conference Call Today

The Company will host an investor conference call today (Tuesday, October 30, 2012, at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time) to discuss its third quarter results. To participate on the call, please dial (888) 679-8038 and reference pass code 80617185. International callers, please dial (617) 213-4850 and reference pass code 80617185. Participants may also pre-register to obtain a unique pin number to join the live call without operator assistance by visiting the following Web site:

https://www.theconferencingservice.com/prereg/key.process?key=PXPLWDFMU

A live webcast of the call will be available on DineEquity's Web site at www.dineequity.com, and may be accessed by visiting Calls & Presentations under the site's Investor Information section. Participants should allow approximately ten minutes prior to the call's start time to visit the site and download any streaming media software needed to listen to the webcast. A telephonic replay of the call may be accessed through 11:59 p.m. Eastern Time (8:59 p.m. Pacific Time) on November 6, 2012 by dialing (888) 286-8010 and referencing pass code 77612832. International callers, please dial (617) 801-6888 and reference pass code 77612832. An online archive of the webcast also will be available on the Investor Information section of DineEquity's Web site.

About DineEquity, Inc.

Based in Glendale, California, DineEquity, Inc., through its subsidiaries, franchises and operates under the Applebee's Neighborhood Grill & Bar and IHOP brands. With more than 3,500 restaurants combined in 18 countries, over 400 franchisees and approximately 200,000 team members (including franchisee- and company-operated restaurant employees), DineEquity is one of the largest full-service restaurant companies in the world. For more information on DineEquity, visit the Company's Web site located at www.dineequity.com.

Forward-Looking Statements

Statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by words such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. These factors include, but are not limited to: the effect of general economic conditions; the Company's substantial indebtedness; risk of future impairment charges; the Company's results in any given period differing from guidance provided to the public; the highly competitive nature of the restaurant business; the Company's business strategy failing to achieve anticipated results; risks associated with the restaurant industry; shortages or interruptions in the supply or delivery of food; changing health or dietary preferences; our dependence upon our franchisees; our engagement in business in foreign markets; harm to our brands' reputation; litigation; environmental liability; liability relating to employees; failure to comply with applicable laws and regulations; failure to effectively implement restaurant development plans; concentration of Applebee's franchised restaurants in a limited number of franchisees; credit risk from IHOP franchisees operating under our previous business model; termination or non-renewal of franchise agreements; franchisees breaching their franchise agreements; insolvency proceedings involving franchisees; changes in the number and quality of franchisees; inability of franchisees to fund capital expenditures; third-party claims with respect to intellectual property assets; heavy dependence on information technology; failure to protect the integrity and security of individually identifiable information; failure to execute on a business continuity plan; inability to attract and retain talented employees; risks associated with retail brand initiatives; failure of our internal controls; and other factors discussed from time to time in the Company's Annual and Quarterly Reports on Forms 10-K and 10-Q and in the Company's other filings with the Securities and Exchange Commission. The forward-looking statements contained in this release are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.

Non-GAAP Financial Measures

This news release includes references to the Company's non-GAAP financial measures "adjusted net income available to common stockholders (adjusted EPS)," "EBITDA," "free cash flow," and "segment EBITDA." "Adjusted EPS" is computed for a given period by deducting from net income (loss) available to common stockholders for such period the effect of any impairment and closure charges, any gain or loss related to debt extinguishment, any intangible asset amortization, any non-cash interest expense, any debt modification costs, any one-time litigation settlement charges, any general and administrative restructuring costs, net of savings, any gain or loss related to the disposition of assets, and any state income tax impact of deferred taxes due to refranchising incurred in such period. This is presented on an aggregate basis and a per share (diluted) basis. The Company defines "EBITDA" for a given period is defined as income before income taxes less interest expense, loss on retirement of debt, depreciation and amortization, impairment and closure charges, non-cash stock-based compensation, gain/loss on disposition of assets and other charge backs as defined by its credit agreement. "Free cash flow" for a given period is defined as cash provided by operating activities, plus receipts from notes and equipment contracts receivable ("long-term notes receivable"), less dividends paid and capital expenditures. "Segment EBITDA" for a given period is defined as gross segment profit plus depreciation and amortization as well as interest charges related to the segment. Management utilizes EBITDA for debt covenant purposes and free cash flow to determine the amount of cash remaining for general corporate and strategic purposes after the receipts from long-term notes receivable, and the funding of operating activities, capital expenditures and preferred dividends. Management believes this information is helpful to investors to determine the Company's adherence to debt covenants and the Company's cash available for these purposes. Adjusted EPS, EBITDA, free cash flow and segment EBITDA are supplemental non-GAAP financial measures and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with United States generally accepted accounting principles.

DineEquity, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2012

2011

2012

2011

Segment Revenues:

Franchise revenues

$

102,674

$

97,679

$

313,542

$

300,782

Company restaurant sales

79,572

131,618

274,259

420,955

Rental revenues

30,920

31,163

92,096

95,003

Financing revenues

3,152

4,021

11,394

16,279

Total segment revenues

216,318

264,481

691,291

833,019

Segment Expenses:

Franchise expenses

27,148

25,006

81,126

78,656

Company restaurant expenses

68,541

113,976

232,298

363,021

Rental expenses

24,237

24,521

73,075

73,734

Financing expenses

15

425

1,586

6,001

Total segment expenses

119,941

163,928

388,085

521,412

Gross segment profit

96,377

100,553

303,206

311,607

General and administrative expenses

48,737

38,733

125,608

115,152

Interest expense

28,896

32,170

88,767

101,343

Impairment and closure charges

420

193

1,264

26,947

Amortization of intangible assets

3,072

3,075

9,222

9,225

Loss (gain) on disposition of assets

(73,650

)

1,176

(89,642

)

(21,287

)

Loss on extinguishment of debt

2,306

4,917

7,885

Debt modification costs

(21

)

4,103

Income before income taxes

86,596

25,227

163,070

68,239

Provision for income taxes

(26,023

)

(8,702

)

(54,215

)

(21,667

)

Net income

$

60,573

$

16,525

$

108,855

$

46,572

Net income available to common stockholders:

Net income

$

60,573

$

16,525

$

108,855

$

46,572

Less: Accretion of Series B Convertible Preferred Stock

(688

)

(647

)

(2,033

)

(1,915

)

Less: Net income allocated to unvested participating restricted stock

(1,187

)

(359

)

(2,477

)

(1,212

)

Net income available to common stockholders

$

58,698

$

15,519

$

104,345

$

43,445

Net income available to common stockholders per share:

Basic

$

3.26

$

0.86

$

5.84

$

2.43

Diluted

$

3.14

$

0.85

$

5.66

$

2.38

Weighted average shares outstanding:

Basic

18,006

17,968

17,859

17,912

Diluted

18,924

18,243

18,801

18,268

DineEquity, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

September 30,

December 31,

2012

2011

Assets

(Unaudited)

Current assets:

Cash and cash equivalents

$

71,838

$

60,691

Receivables, net

75,532

115,667

Prepaid income taxes

312

13,922

Prepaid gift cards

39,879

45,412

Deferred income taxes

23,659

20,579

Assets held for sale

16,372

9,363

Other current assets

15,311

11,313

Total current assets

242,903

276,947

Long-term receivables

214,772

226,526

Property and equipment, net

345,603

474,154

Goodwill

697,470

697,470

Other intangible assets, net

809,217

822,361

Other assets, net

111,792

116,836

Total assets

$

2,421,757

$

2,614,294

Liabilities and Stockholders' Equity

Current liabilities:

Current maturities of long-term debt

$

7,420

$

7,420

Accounts payable

31,959

29,013

Accrued employee compensation and benefits

19,701

26,191

Gift card liability

84,115

146,955

Accrued interest payable

31,452

12,537

Current maturities of capital lease and financing obligations

12,848

13,480

Other accrued expenses

25,398

22,048

Total current liabilities

212,893

257,644

Long-term debt, less current maturities

1,232,707

1,411,448

Financing obligations, less current maturities

93,774

162,658

Capital lease obligations, less current maturities

127,198

134,407

Deferred income taxes

366,529

383,810

Other liabilities

105,551

109,107

Total liabilities

2,138,652

2,459,074

Commitments and contingencies

Stockholders' equity:

Series B Convertible Preferred Stock, at accreted value, shares:10,000,000 authorized; 35,000 issued; September 30, 2012 and December 31, 2011 - 34,900 outstanding

46,541

44,508

Common stock, $0.01 par value, shares: 40,000,000 authorized; September 30, 2012 - 24,694,241 issued, 18,418,903 outstanding; December 31, 2011 - 24,658,985 issued,18,060,206 outstanding

247

247

Additional paid-in-capital

214,440

205,663

Retained earnings

303,691

196,869

Accumulated other comprehensive loss

(150

)

(294

)

Treasury stock, at cost; shares: