Notes to Consolidated Financial Statements
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements of Dine Brands Global, Inc. (the “Company” or “Dine Brands Global”) have been prepared in accordance with United States 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 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. The operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2021.
The consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
2. Basis of Presentation
The Company’s fiscal quarters end on the Sunday closest to the last day of each calendar quarter. For convenience, the fiscal quarters of each year are referred to as ending on March 31, June 30, September 30 and December 31. The first fiscal quarter of 2021 began on January 4, 2021 and ended on April 4, 2021; the second fiscal quarter of 2021 ended on July 4, 2021. The first fiscal quarter of 2020 began on December 30, 2019 and ended on March 29, 2020; the second fiscal quarter of 2020 ended on June 28, 2020.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates may include the calculation and assessment of the following: impairment of goodwill, other intangible assets and tangible assets; income taxes; allowance for credit losses on accounts and notes receivables; lease accounting estimates; contingencies; and stock-based compensation. On an ongoing basis, the Company evaluates its estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
Risks and Uncertainties
The Company was subject to risks and uncertainties as a result of the continuing outbreak of a novel strain of coronavirus, designated “COVID-19.” The extent of the continued impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as measures taken in response to and the effect of the pandemic have varied and continue to vary by state and municipalities within states. Assessments of the success of measures taken and the timing of any further restrictions, or lifting of such restrictions, continues to evolve. The Company first began to experience impacts from COVID-19 in March 2020, as federal, state, local and international governments began to react to the public health crisis by encouraging “social distancing” and requiring, in varying degrees, restaurant dine-in limitations and other restrictions that largely limited the restaurants of the Company's franchisees and its company-operated restaurants to take-out and delivery sales. Subsequently, government-imposed dine-in restrictions have been relaxed in many of the locations in which the Company operates as incidents of infection decline within the respective governmental jurisdictions. As of June 30, 2021, 98% of domestic Applebee's and IHOP restaurants were operating at 100% capacity and 99% of domestic Applebee's and IHOP restaurants were open.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Basis of Presentation (Continued)
The Company took several actions to mitigate the effects of the COVID-19 pandemic on its operations and its franchisees, as follows: (i) drew down $220 million from its revolving credit facility in March 2020 and repaid the borrowing in March 2021; (ii) suspended repurchases of common stock and the declaration of dividends on common stock after the first quarter of 2020.; (iii) deferred franchisee payment of royalty, advertising and other fees, and lease obligations for up to two months on a case-by-case basis, with 98% of Applebee's and 87% of IHOP deferrals collected as of June 30, 2021; (iv) deferred franchisee remodel and development obligations for up to 15 months; and (v) negotiated deferrals and abatements for properties on which the Company was lessee.
The severity of the continued impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, how long the pandemic will last, whether/when recurrences of the virus and variants of the virus may arise, the availability and acceptance of vaccines, what restrictions on in-restaurant dining may be imposed or re-imposed, the timing and extent of customer re-engagement with the Company's brands and, in general, what the short- and long-term impact on consumer discretionary spending the COVID-19 pandemic might have on the Company and the restaurant industry as a whole, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could adversely be impacted by the length of time dine-in restrictions remain in place and the success of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by itself and its franchisees. As such, the extent to which the COVID-19 pandemic may continue to materially impact the Company's financial condition, liquidity, or results of operations is highly uncertain.
3. Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted
Accounting Standards Adopted in the Current Fiscal Year
In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance intended to simplify the accounting for income taxes, change the accounting for certain income tax transactions, and make other minor changes. The Company adopted the new guidance at the beginning of the first fiscal quarter of 2021. Adoption did not have any material effect on the consolidated financial statements.
Additional new accounting guidance became effective for the Company as of the beginning of fiscal 2021 that the Company reviewed and concluded was either not applicable to its operations or had no material effect on its consolidated financial statements in the current or future fiscal years.
Newly Issued Accounting Standards Not Yet Adopted
In March 2020, with an update in January 2021, the FASB issued guidance which provides optional expedients and exceptions for applying current U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The guidance can be adopted immediately and is applicable to contracts entered into on or before December 31, 2022. The Company is currently evaluating its contracts that reference LIBOR and the potential effects of adopting this new guidance.
In July 2021, the FASB issued guidance which affect lessors with lease contracts that (i) have variable lease payments that do not depend on a reference index or a rate and (ii) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. The amendments are effective for fiscal years beginning after December 15, 2021. The Company is are currently evaluating lease contracts and the potential effects of adopting this new guidance.
The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements when adoption is required in the future.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Revenue Disclosures
Franchise revenue and revenue from company-operated restaurants are recognized in accordance with current guidance for revenue recognition as codified in Accounting Standards Topic 606 (“ASC 606”). Under ASC 606, revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration the Company expects to receive for those services or goods.
Franchising Activities
The Company owns, franchises and operates the Applebee's Neighborhood Grill & Bar® (“Applebee's”) concept in the casual dining category of the restaurant industry and the Company owns and franchises the International House of Pancakes® (“IHOP”) concept in the family dining category of the restaurant industry. The franchise arrangement for both brands is documented in the form of a franchise agreement and, in most cases, a development agreement. The franchise arrangement between the Company as the franchisor and the franchisee as the customer requires the Company to perform various activities to support the brands that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the respective brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement for both brands primarily consists of (a) initial franchise/development fees; (b) continuing franchise fees (royalties); and (c) advertising fees. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required. All domestic IHOP franchise agreements require franchisees to purchase proprietary pancake and waffle dry mix from the Company.
The Company recognizes the primary components of the transaction price as follows:
•Franchise and development fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the restaurant opening date. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;
•The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's reported sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or once billed, accounts receivable, and are included in “receivables, net” in the Consolidated Balance Sheets.
•Revenue from the sale of proprietary pancake and waffle dry mix is recognized in the period in which distributors ship the franchisee's order; recognition of revenue results in an accounts receivable included in “receivables, net” in the Consolidated Balance Sheets.
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgments as it is based on either the term of the franchise agreement, the month of reported sales by the franchisee or the date of product shipment, none of which require estimation. The Company does not incur a significant amount of contract acquisition costs in conducting franchising activities. The Company's franchising arrangements do not contain a significant financing component.
Company Restaurant Revenue
Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant sales are reported net of sales taxes collected from guests that are remitted to the appropriate taxing authorities.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Revenue Disclosures (Continued)
The following table disaggregates franchise revenue by major type for the three and six months ended June 30, 2021 and 2020:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2021
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2020
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2021
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2020
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(In thousands)
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Franchise Revenue:
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Royalties
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$
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78,124
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$
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31,011
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|
|
$
|
142,401
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|
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$
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98,611
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|
Advertising fees
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|
72,324
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|
|
29,095
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|
|
133,209
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|
|
90,818
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Pancake and waffle dry mix sales and other
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13,525
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4,037
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24,415
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|
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16,885
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Franchise and development fees
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2,981
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3,733
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7,905
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|
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6,599
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Total franchise revenue
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$
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166,954
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$
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67,876
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$
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307,930
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$
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212,913
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Accounts and other receivables from franchisees as of June 30, 2021 and December 31, 2020 were $69.4 million (net of allowance of $6.0 million) and $76.3 million (net of allowance of $11.4 million), respectively, and were included in receivables, net in the Consolidated Balance Sheets.
Changes in the Company's contract liability for deferred franchise and development fees during the six months ended June 30, 2021 are as follows:
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Deferred Franchise Revenue (short- and long-term)
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(In thousands)
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Balance at December 31, 2020
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$
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59,919
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Recognized as revenue during the six months ended June 30, 2021
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(7,433)
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Fees deferred during the six months ended June 30, 2021
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2,755
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Balance at June 30, 2021
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$
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55,241
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The balance of deferred revenue as of June 30, 2021 is expected to be recognized as follows:
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(In thousands)
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Remainder of 2021
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$
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3,743
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2022
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7,278
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2023
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6,644
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2024
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6,051
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2025
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5,274
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Thereafter
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26,251
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Total
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$
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55,241
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5. Current Expected Credit Losses (“CECL”)
The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself. The Company records specific reserves against account balances of franchisees deemed at-risk when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed at-risk, an allowance is recorded based on expected loss rates derived pursuant to the Company's CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
The Company considers its portfolio segments to be the following:
Accounts Receivable (Franchise-Related)
Most of the Company’s short-term receivables due from franchisees are derived from royalty, advertising and other franchise-related fees.
Gift Card Receivables
Gift card receivables consist primarily of amounts due from third-party vendors. Receivables related to gift card sales are subject to seasonality and usually peak around year-end as a result of the December holiday season.
Notes Receivable
Notes receivable balances primarily relate to the conversion of certain Applebee's franchisee accounts receivable to notes receivable, cash loans to franchisees for working capital purposes, a note receivable in connection with the sale of IHOP company restaurants and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. A significant portion of these notes have specific reserves recorded against them amounting to $9.2 million as of June 30, 2021.
Equipment Leases Receivable
Equipment leases receivable relate to IHOP franchise development activity prior to 2003 when IHOP typically leased or purchased the restaurant site, built and equipped the restaurant, then franchised the restaurant to a franchisee. Equipment lease contracts are collateralized by the equipment in the restaurant. The estimated fair value of the equipment collateralizing these lease contracts are not deemed to be significant given the very seasoned and mature nature of this portfolio. The weighted average remaining life of the Company’s equipment leases is 5.1 years as of June 30, 2021.
Direct Financing Leases Receivable
Direct financing lease receivables also relate to IHOP franchise development activity prior to 2003. IHOP provided the financing for leasing or subleasing the site. Direct financing leases at June 30, 2021, comprised 81 leases with a weighted average remaining life of 4.4 years, and relate to locations that IHOP is leasing from third parties and subleasing to franchisees.
Distributor Receivables
Receivables due from distributors are related to the sale of IHOP’s proprietary pancake and waffle dry mix to franchisees through the Company’s network of suppliers and distributors and are included as part of Other receivables.
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June 30, 2021
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December 31, 2020
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(In millions)
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Accounts receivable
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$
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72.8
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$
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85.7
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Gift card receivables
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6.9
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22.5
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Notes receivable
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20.1
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|
|
18.6
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Financing receivables:
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Equipment leases receivable
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37.5
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43.9
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Direct financing leases receivable
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18.9
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22.7
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Franchise fee notes receivable
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0.1
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0.1
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Other
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6.4
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6.0
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162.7
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|
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199.5
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Less: allowance for credit losses
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(15.6)
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(23.1)
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|
|
147.1
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176.4
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Less: current portion
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(99.3)
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|
|
(121.9)
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Long-term receivables
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$
|
47.8
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$
|
54.5
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Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
Changes in the allowance for credit losses during the six months ended June 30, 2021 were as follows:
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Accounts Receivable
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Notes receivable, short-term
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Notes receivable, long-term
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Lease Receivables
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Equipment Notes
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Other (1)
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Total
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(In millions)
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Balance, December 31, 2020
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$
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11.2
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$
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3.6
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$
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5.3
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$
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0.4
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$
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2.3
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$
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0.3
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$
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23.1
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Bad debt (credit) expense for the six months ended June 30, 2021
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(2.2)
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0.4
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(0.1)
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0.1
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(0.4)
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(0.1)
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(2.3)
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Advertising provision adjustment
|
(2.9)
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0.0
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—
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—
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—
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—
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(2.9)
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Write-offs
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(0.2)
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—
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—
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(0.5)
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(1.7)
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—
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(2.4)
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Other
|
—
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—
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—
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0.1
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0.0
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|
—
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|
|
0.1
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Balance, June 30, 2021
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$
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5.9
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$
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4.0
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$
|
5.2
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|
$
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0.1
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|
$
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0.2
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$
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0.2
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$
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15.6
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(1) Primarily distributor receivables, gift card receivables and credit card receivables
The Company's primary credit quality indicator for all portfolio segments is delinquency. The delinquency status of receivables (other than accounts receivable, gift card receivables and distributor receivables) at June 30, 2021 was as follows:
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Notes receivable, short-term
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Notes receivable, long-term
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Lease Receivables
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Equipment Notes
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Other (1)
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Total
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(In millions)
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Current
|
$
|
5.3
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$
|
12.0
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|
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$
|
18.9
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|
|
$
|
37.5
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|
|
$
|
1.8
|
|
|
$
|
75.5
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30-59 days
|
0.2
|
|
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
0.2
|
|
60-89 days
|
0.1
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|
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
0.1
|
|
90-119 days
|
0.1
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|
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
0.1
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|
120+ days
|
2.5
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|
|
—
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|
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—
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|
|
—
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|
|
—
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|
|
2.5
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Total
|
$
|
8.2
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|
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$
|
12.0
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|
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$
|
18.9
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|
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$
|
37.5
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|
|
$
|
1.8
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|
|
$
|
78.4
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(1) Primarily credit card receivables
The year of origination of the Company's financing receivables is as follows:
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|
|
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|
|
|
|
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|
|
|
|
|
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Notes receivable, short and long-term
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Lease Receivables
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Equipment Notes
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Total
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(In millions)
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2021
|
$
|
2.3
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|
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$
|
1.0
|
|
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$
|
—
|
|
|
$
|
3.3
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2020
|
0.8
|
|
|
1.5
|
|
|
—
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|
|
2.3
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2019
|
2.5
|
|
|
0.8
|
|
|
—
|
|
|
3.3
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2018
|
8.0
|
|
|
—
|
|
|
—
|
|
|
8.0
|
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2017
|
6.4
|
|
|
—
|
|
|
—
|
|
|
6.4
|
|
Prior
|
0.1
|
|
|
15.6
|
|
|
37.5
|
|
|
53.2
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Total
|
$
|
20.1
|
|
|
$
|
18.9
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$
|
37.5
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$
|
76.5
|
|
The Company does not place its financing receivables in non-accrual status.
6. Lease Disclosures
The Company engages in leasing activity as both a lessee and a lessor. The Company currently leases from third parties the real property on which approximately 540 IHOP franchisee-operated restaurants and one Applebee's franchisee-operated restaurant are located; the Company (as lessor) subleases the property to the franchisees that operate those restaurants. The Company also leases property it owns to the franchisees that operate approximately 55 IHOP restaurants and one Applebee's restaurant. The Company leases from third parties the real property on which 69 Applebee's company-operated restaurants are located. The Company also leases office space for its principal corporate office in Glendale, California and restaurant support centers in Kansas City, Missouri and Raleigh, North Carolina. The Company does not have a significant amount of non-real estate leases.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Lease Disclosures (Continued)
The Company's existing leases/subleases related to IHOP restaurants generally provide for an initial term of 20 to 25 years, with most having one or more five-year renewal options. Leases related to Applebee's restaurants generally have an initial term of 10 to 20 years, with renewal terms of five to 20 years. Option periods were not included in determining liabilities and right-of-use assets related to operating leases. Approximately 275 of the Company's leases met the sales levels that required variable rent payments to the Company (as lessor), based on a percentage of restaurant sales during the six months ended June 30, 2021. Approximately 40 of the leases met the sales levels that required variable rent payments by the Company (as lessee), based on a percentage of restaurant sales during the six months ended June 30, 2021.
The Company's lease cost for the three and six months ended June 30, 2021 and 2020 was as follows:
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|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(In millions)
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
1.1
|
|
|
$
|
1.3
|
|
|
$
|
2.3
|
|
|
$
|
2.5
|
|
Interest on lease liabilities
|
1.4
|
|
|
1.6
|
|
|
2.8
|
|
|
3.4
|
|
Operating lease cost
|
24.7
|
|
|
26.6
|
|
|
49.8
|
|
|
53.1
|
|
Variable lease cost
|
0.5
|
|
|
(0.1)
|
|
|
0.8
|
|
|
0.3
|
|
Short-term lease cost
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
Sublease income
|
(24.9)
|
|
|
(21.5)
|
|
|
(49.1)
|
|
|
(48.1)
|
|
Lease cost
|
$
|
2.8
|
|
|
$
|
7.9
|
|
|
$
|
6.6
|
|
|
$
|
11.2
|
|
Future minimum lease payments under noncancelable leases as lessee as of June 30, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
Leases
|
|
Operating
Leases
|
|
(In millions)
|
2021 (remaining six months)
|
$
|
7.7
|
|
|
$
|
46.0
|
|
2022
|
14.4
|
|
|
87.9
|
|
2023
|
11.6
|
|
|
72.4
|
|
2024
|
9.7
|
|
|
67.2
|
|
2025
|
8.6
|
|
|
58.6
|
|
Thereafter
|
51.0
|
|
|
150.4
|
|
Total minimum lease payments
|
103.0
|
|
|
482.5
|
|
Less: interest/imputed interest
|
(28.7)
|
|
|
(86.7)
|
|
Total obligations
|
74.3
|
|
|
395.8
|
|
Less: current portion
|
(10.2)
|
|
|
(70.5)
|
|
Long-term lease obligations
|
$
|
64.1
|
|
|
$
|
325.3
|
|
The weighted average remaining lease term as of June 30, 2021 was 9.4 years for finance leases and 7.0 years for operating leases. The weighted average discount rate as of June 30, 2021 was 10.2% for finance leases and 5.6% for operating leases.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Lease Disclosures (Continued)
During the three and six months ended June 30, 2021 and 2020, the Company made the following cash payments for leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(In millions)
|
Principal payments on finance lease obligations
|
$
|
2.6
|
|
|
$
|
3.0
|
|
|
$
|
5.2
|
|
|
$
|
6.0
|
|
Interest payments on finance lease obligations
|
$
|
1.4
|
|
|
$
|
1.6
|
|
|
$
|
2.8
|
|
|
$
|
3.4
|
|
Payments on operating leases
|
$
|
22.8
|
|
|
$
|
23.0
|
|
|
$
|
45.8
|
|
|
$
|
46.5
|
|
Variable lease payments
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
The Company's income from operating leases for the three and six months ended June 30, 2021 and 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(In millions)
|
Minimum lease payments
|
$
|
23.9
|
|
|
$
|
22.5
|
|
|
$
|
47.7
|
|
|
$
|
47.9
|
|
Variable lease income
|
2.8
|
|
|
0.4
|
|
|
4.4
|
|
|
2.8
|
|
Total operating lease income
|
$
|
26.7
|
|
|
$
|
22.9
|
|
|
$
|
52.1
|
|
|
$
|
50.7
|
|
Minimum payments to be received as lessor under noncancelable operating leases as of June 30, 2021 were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2021 (remaining six months)
|
$
|
50.2
|
|
2022
|
100.0
|
|
2023
|
96.4
|
|
2024
|
87.7
|
|
2025
|
76.2
|
|
Thereafter
|
178.9
|
|
Total minimum rents receivable
|
$
|
589.4
|
|
The Company's income from direct financing leases for the three and six months ended June 30, 2021 and 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(In millions)
|
Interest income
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
$
|
1.1
|
|
|
$
|
1.8
|
|
Variable lease income
|
0.2
|
|
|
0.0
|
|
|
0.3
|
|
|
0.2
|
|
Total operating lease income
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
|
$
|
2.0
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Lease Disclosures (Continued)
Minimum payments to be received as lessor under noncancelable direct financing leases as of June 30, 2021 were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
2021 (remaining six months)
|
$
|
4.8
|
|
2022
|
7.6
|
|
2023
|
3.7
|
|
2024
|
1.6
|
|
2025
|
0.8
|
|
Thereafter
|
4.0
|
|
Total minimum rents receivable
|
22.5
|
|
Less: unearned income
|
(3.6)
|
|
Total net investment in direct financing leases
|
18.9
|
|
Less: current portion
|
(7.5)
|
|
Long-term investment in direct financing leases
|
$
|
11.4
|
|
7. Long-Term Debt
At June 30, 2021 and December 31, 2020, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
(In millions)
|
Series 2019-1 4.194% Fixed Rate Senior Secured Notes, Class A-2-I
|
$
|
694.8
|
|
|
$
|
698.3
|
|
Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II
|
595.5
|
|
|
598.5
|
|
Series 2019-1 Variable Funding Senior Notes Class A-1, variable interest rate of 2.42% at December 31, 2020
|
—
|
|
|
220.0
|
|
Debt issuance costs
|
(8.5)
|
|
|
(11.8)
|
|
Long-term debt, net of debt issuance costs
|
1,281.8
|
|
|
1,505.0
|
|
Current portion of long-term debt
|
(3.3)
|
|
|
(13.0)
|
|
Long-term debt
|
$
|
1,278.5
|
|
|
$
|
1,492.0
|
|
On June 5, 2019, Applebee’s Funding LLC and IHOP Funding LLC (the “Co-Issuers”), each a special purpose, wholly-owned indirect subsidiary of the Company, issued two tranches of fixed rate senior secured notes, the Series 2019-1 4.194% Fixed Rate Senior Secured Notes, Class A-2-I (“Class A-2-I Notes”) in an initial aggregate principal amount of $700 million and the Series 2019-1 4.723% Fixed Rate Senior Secured Notes, Class A-2-II (“Class A-2-II Notes”) in an initial aggregate
principal amount of $600 million (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “2019 Class A-2 Notes”). The 2019 Class A-2 Notes were issued pursuant to an offering exempt from registration under the Securities Act of 1933, as amended.
The Co-Issuers also entered into a revolving financing facility, the 2019-1 Variable Funding Senior Notes, Class A-1 (the “Credit Facility”), that allows for drawings up to $225 million of variable funding notes and the issuance of letters of credit. The Credit Facility and the 2019 Class A-2 Notes are referred to collectively herein as the “New Notes.” The New Notes were issued in a securitization transaction pursuant to which substantially all the domestic revenue-generating assets and domestic intellectual property held by the Co-Issuers and certain other special-purpose, wholly-owned indirect subsidiaries of the Company (the “Guarantors”) were pledged as collateral to secure the New Notes.
The New Notes were issued under a Base Indenture, dated as of September 30, 2014, and amended and restated as of June 5, 2019 (the “Base Indenture”), and the related Series 2019-1 Supplement to the Base Indenture, dated June 5, 2019 (the “Series 2019-1 Supplement”), among the Co-Issuers and Citibank, N.A., as the trustee (in such capacity, the “Trustee”) and securities intermediary. The Base Indenture and the Series 2019-1 Supplement (collectively, the “Indenture”) will allow the Co-Issuers to issue additional series of notes in the future subject to certain conditions set forth therein.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
2019 Class A-2 Notes
The legal final maturity of the 2019 Class A-2 Notes is June 2049, but rapid amortization will apply if the Class A-2-I Notes are not repaid by June 2024 (the “Class A-2-I Anticipated Repayment Date”) and for the Class A-2-II Notes if not repaid by June 2026 (the “Class A-2-II Anticipated Repayment Date”). If the Co-Issuers have not repaid or refinanced the Class A-2-I Notes by the Class A-2-I Anticipated Repayment Date or the Class A-2-II Notes by the Class A-2-II Anticipated Repayment Date, then additional interest will accrue on the Class A-2-I Notes and the Class A-2-II Notes, as applicable, at the greater of: (A) 5.0% and (B) the amount, if any, by which the sum of the following exceeds the applicable Series 2019-1 Class A-2 Note interest rate: (x) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on the applicable anticipated repayment date of the United States Treasury Security having a term closest to 10 years plus (y) 5.0%, plus (z) 2.15% for the Series 2019-1 Class A-2-I Notes and 2.64% for the Series 2019-1 Class A-2-II Notes.
While the 2019 Class A-2 Notes are outstanding, payment of principal and interest is required to be made on the 2019 Class A-2 Notes on a quarterly basis. The quarterly principal payment of $3.25 million on the 2019 Class A-2 Notes may be suspended when the leverage ratio for the Company and its subsidiaries is less than or equal to 5.25x. Exceeding the leverage ratio of 5.25x does not violate any covenant related to the New Notes. In general, the leverage ratio is the Company's indebtedness (as defined in the Indenture) divided by adjusted EBITDA (as defined in the Indenture) for the four preceding quarterly periods. The complete definitions of all calculation elements of the leverage ratio are contained in the Indenture.
As of June 30, 2021, the Company's leverage ratio was 4.94x. As a result, quarterly principal payments on the 2019 Class A-2 Notes of $3.25 million will no longer to be required after a payment is made on September 7, 2021.
The Company may voluntarily repay the 2019 Class A-2 Notes at any time; however, if the 2019 Class A-2 Notes are repaid prior to certain dates, the Company would be required to pay make-whole premiums. As of June 30, 2021, the make-whole premium associated with voluntary prepayment of the Class A-2-I Notes was approximately $22 million; this amount declines progressively each quarter to zero in June 2022. As of June 30, 2021, the make-whole premium associated with voluntary prepayment of the Class A-2-II Notes was approximately $57 million; this amount declines progressively each quarter to zero in June 2024. The Company would also be subject to a make-whole premium in the event of a mandatory prepayment required following a Rapid Amortization Event or certain asset dispositions. The mandatory make-whole premium requirements are considered derivatives embedded in the New Notes that must be bifurcated for separate valuation. The Company estimated the fair value of these derivatives to be immaterial as of June 30, 2021, based on the probability-weighted discounted cash flows associated with either event.
2019 Class A-1 Notes
The Co-Issuers entered into the Credit Facility that allows for drawings up to $225 million of variable funding notes and the issuance of letters of credit. The applicable interest rate under the Credit Facility depends on the type of borrowing by the Co-Issuers. The applicable interest rate for advances is generally calculated at a per annum rate equal to the commercial paper funding rate or one-, two-, three- or six-month Eurodollar Funding Rate, in either case, plus 2.15%. The applicable interest rate for swingline advances and unreimbursed draws on outstanding letters of credit is a per annum base rate equal to the sum of (a) 1.15% plus (b) the greatest of (i) the Prime Rate in effect from time to time, (ii) the Federal Funds Rate in effect from time to time plus 0.50% and (iii) the one-month Eurodollar Funding Rate plus 1.00%. There is no upfront fee for the Credit Facility. There is a fee of 50 basis points on any unused portion of the revolving financing facility. Undrawn face amounts of outstanding letters of credit that are not cash collateralized accrue a fee of 2.15% per annum.
In March 2020, the Company borrowed $220.0 million against the Credit Facility. The maximum amount of borrowings from the Credit Facility outstanding during the six months ended June 30, 2021 was $220.0 million. The $220.0 million was repaid on March 5, 2021 and there have been no new borrowings since that date. As of June 30, 2021, there were no outstanding borrowings under the Credit Facility. The interest rate for borrowings under the Credit Facility is the three-month LIBOR rate plus 2.15% for 60% of the advances and the commercial paper funding rate of our conduit investor plus 2.15% for 40% of the advances. The weighted average interest rate on Credit Facility borrowings for the period outstanding during the six months ended June 30, 2021 was 2.4%.
At June 30, 2021, $3.3 million was pledged against the Credit Facility for outstanding letters of credit, leaving $221.7 million available for borrowing. The letters of credit are used primarily to satisfy insurance-related collateral requirements.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
Covenants and Restrictions
The New Notes are subject to a series of covenants and restrictions customary for transactions of this type, including: (i) that the Co-Issuers maintain specified reserve accounts to be used to make required payments in respect of the New Notes, (ii) provisions relating to optional and mandatory prepayments, and the related payment of specified amounts, including specified call redemption premiums in the case of Class A-2 Notes under certain circumstances; (iii) certain indemnification payments in the event, among other things, the transfers of the assets pledged as collateral for the New Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The New Notes are subject to customary rapid amortization events provided for in the Indenture, including events tied to failure of the Securitization Entities (as defined in the Indenture) to maintain the stated debt service coverage ratio (“DSCR”), the sum of domestic retail sales for all restaurants being below certain levels on certain measurement dates, certain manager termination events, certain events of default and the failure to repay or refinance the Class A-2 Notes on the anticipated repayment dates. The New Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the New Notes, failure of the Securitization Entities to maintain the stated DSCR, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties and certain judgments.
In general, the DSCR ratio is Net Cash Flow (as defined in the Indenture) for the four quarters preceding the calculation date divided by the total debt service payments (as defined in the Indenture) of the preceding four quarters. The complete definitions of the DSCR and all calculation elements are contained in the Indenture. Failure to maintain a prescribed DSCR can trigger a Cash Flow Sweeping Event, A Rapid Amortization Event, a Manager Termination Event or a Default Event as described below. In a Cash Flow Sweeping Event, the Trustee is required to retain 50% of excess Cash Flow (as defined in the Indenture) in a restricted account. In a Rapid Amortization Event, all excess Cash Flow is retained and used to retire principal amounts of debt. In a Manager Termination Event, the Company may be replaced as manager of the assets securitized under the Indenture. In a Default Event, the outstanding principal amount and any accrued but unpaid interest can be called to become immediately due and payable. Key DSCRs are as follows:
•DSCR less than 1.75x - Cash Flow Sweeping Event
•DSCR less than 1.20x - Rapid Amortization Event
•Interest-only DSCR less than 1.20x - Manager Termination Event
•Interest-only DSCR less than 1.10x - Default Event
The Company's DSCR for the reporting period ended June 30, 2021 was approximately 4.6x.
Debt Issuance Costs
Amortization of costs incurred in connection with the issuance of the 2019 Class A-2 Notes of $0.6 million and $0.5 million were included in interest expense for the three months ended June 30, 2021 and 2020, respectively. Amortization of costs incurred in connection with the issuance of the 2019 Class A-2 Notes of $1.1 million and $1.0 million were included in interest expense for the six months ended June 30, 2021 and 2020, respectively. Amortization costs incurred in connection with the Company's Credit Facility and prior credit facility of $0.1 million and $0.1 million were included in interest expense for the three months ended June 30, 2021 and 2020, respectively. Amortization costs incurred in connection with the Company's Credit Facility and prior credit facility of $0.3 million and $0.3 million were included in interest expense for the six months ended June 30, 2021 and 2020, respectively.
At June 30, 2021, total unamortized debt issuance costs of $8.5 million are reported as a direct reduction of the 2019 Class A-2 Notes in the Consolidated Balance Sheets. At June 30, 2021, total unamortized debt issuance costs of $1.8 million related to the Credit Facility and prior credit facility are classified as other long-term assets because there are no borrowings outstanding against the Credit Facility.
Maturities of Long-term Debt
•The anticipated repayment date of the Class A-2-I Notes is June 2024.
•The anticipated repayment date of the Class A-2-II Notes is in June 2026.
•Quarterly principal payments on the Class A-2-I and Class A-2-II Notes totaling $3.25 million ($13.0 million per annum) are required if the Company's leverage ratio is greater than 5.25x.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. Stockholders' Deficit
Dividends
Dividends declared and paid per share for the three and six months ended June 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Dividends declared per common share
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.76
|
|
Dividends paid per common share
|
$
|
—
|
|
|
$
|
0.76
|
|
|
$
|
—
|
|
|
$
|
1.45
|
|
Stock Repurchase Program
In February 2019, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $200 million of the Company’s common stock (the “2019 Repurchase Program”) on an opportunistic basis from time to time in the open market or in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The 2019 Repurchase Program, as approved by the Board of Directors, does not require the repurchase of a specific number of shares and can be terminated at any time.
The Company did not repurchase any shares during three and six months ended June 30, 2021. The Company did not repurchase any shares during the three months ended June 30, 2020 and repurchased 459,899 shares during the six months ended June 30, 2020. As of June 30, 2021, cumulative repurchases of stock total 1,697,597 shares at a cost of $129.8 million, with a dollar value of $70.2 million remaining for repurchase under the 2019 Repurchase Program.
Treasury Stock
Repurchases of the Company's common stock are included in treasury stock at the cost of shares repurchased plus any transaction costs. Treasury stock may be re-issued when stock options are exercised, when restricted stock awards are granted and when restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is determined using the first-in, first-out (“FIFO”) method. During the six months ended June 30, 2021, the Company re-issued 596,645 shares of treasury stock at a total FIFO cost of $24.1 million.
9. Income Taxes
The Company's effective tax rate was 12.3% (a tax provision of $7.7 million on pretax book income of $62.7 million) for the six months ended June 30, 2021, as compared to 4.5% for the six months ended June 30, 2020 (a tax benefit of $5.3 million on pretax book loss of $117.7 million). The effective tax rate for the six months ended June 30, 2021 was lower than the statutory federal tax rate of 21% primarily due to the recognition of excess tax benefits on stock-based compensation in the first quarter of 2021. In addition, the effective tax rate for the six months ended June 30, 2021 was different than the prior comparable period due to the impairment of goodwill in the second quarter of 2020, which was not deductible for income tax purposes and therefore had no associated tax benefit.
The total gross unrecognized tax benefit as of June 30, 2021 and December 31, 2020 was $1.9 million and $2.2 million, respectively, excluding interest, penalties and related tax benefits. The Company estimates the unrecognized tax benefit as of June 30, 2021 may decrease over the upcoming 12 months by an amount up to $0.2 million related to settlements with taxing authorities and expiring statutes of limitations. For the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to make a reasonable estimate as to when cash settlement with a taxing authority will occur.
As of June 30, 2021, accrued interest was $0.6 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. As of December 31, 2020, accrued interest was $0.9 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of its income tax provision recognized in its Consolidated Statements of Comprehensive Income.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Income Taxes (Continued)
The Company files federal income tax returns and the Company or one of its subsidiaries file income tax returns in various state and international jurisdictions. With few exceptions, the Company is no longer subject to federal tax examinations by tax authorities for years before 2017 and state or non-United States tax examinations by tax authorities for years before 2011. The Company believes that adequate reserves have been provided related to all matters contained in the tax periods open to examination.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP Act”) was enacted in response to the COVID-19 pandemic. The Company is continuing to evaluate the impact of the ARP Act, but at present, does not expect the ARP Act would result in a material impact to our income tax benefit or provision.
10. Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense included in general and administrative expenses in the Consolidated Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Total stock-based compensation expense:
|
(In millions)
|
|
|
|
|
|
|
|
|
Equity classified awards expense
|
$
|
2.5
|
|
|
$
|
2.6
|
|
|
$
|
5.6
|
|
|
$
|
6.7
|
|
Liability classified awards expense (credit)
|
0.5
|
|
|
0.1
|
|
|
2.0
|
|
|
(0.5)
|
|
Total pre-tax stock-based compensation expense
|
3.0
|
|
|
2.7
|
|
|
7.6
|
|
|
6.2
|
|
Book income tax benefit
|
(0.8)
|
|
|
(0.7)
|
|
|
(1.9)
|
|
|
(1.6)
|
|
Total stock-based compensation expense, net of tax
|
$
|
2.2
|
|
|
$
|
2.0
|
|
|
$
|
5.7
|
|
|
$
|
4.6
|
|
As of June 30, 2021, total unrecognized compensation expense of $20.9 million related to restricted stock and restricted stock units and $3.9 million related to stock options are expected to be recognized over a weighted average period of 1.5 years for restricted stock and restricted stock units and 1.8 years for stock options.
Fair Value Assumptions
The Company granted 95,891 stock options during the six months ended June 30, 2021 for which the fair value was estimated using a Black-Scholes option pricing model. The following summarizes the weighted average assumptions used in the Black-Scholes model:
|
|
|
|
|
|
Risk-free interest rate
|
0.5
|
%
|
Historical volatility
|
67.7
|
%
|
Dividend yield
|
—
|
%
|
Expected years until exercise
|
4.5
|
Fair value of options granted
|
$40.25
|
Equity Classified Awards - Stock Options
Stock option balances at June 30, 2021, and activity for the six months ended June 30, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Term
(in Years)
|
|
Aggregate
Intrinsic
Value (in Millions)
|
Outstanding at December 31, 2020
|
|
1,014,670
|
|
|
$
|
64.16
|
|
|
|
|
|
Granted
|
|
95,891
|
|
|
75.28
|
|
|
|
|
|
Exercised
|
|
(474,686)
|
|
|
47.96
|
|
|
|
|
|
Expired
|
|
(24,540)
|
|
|
98.26
|
|
|
|
|
|
Forfeited
|
|
(56,582)
|
|
|
88.34
|
|
|
|
|
|
Outstanding at June 30, 2021
|
|
554,753
|
|
|
75.97
|
|
|
6.4
|
|
$
|
8.3
|
|
Vested at June 30, 2021 and Expected to Vest
|
|
533,000
|
|
|
75.81
|
|
|
6.3
|
|
$
|
8.1
|
|
Exercisable at June 30, 2021
|
|
372,922
|
|
|
$
|
72.86
|
|
|
5.1
|
|
$
|
6.9
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Stock-Based Compensation (Continued)
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price of the Company’s common stock on the last trading day of the second quarter of 2021 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 June 30, 2021. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock and the number of in-the-money options.
Equity Classified Awards - Restricted Stock and Restricted Stock Units
Outstanding balances as of June 30, 2021, and activity related to restricted stock and restricted stock units for the six months ended June 30, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Stock-Settled Restricted
Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at December 31, 2020
|
|
254,331
|
|
|
$
|
76.50
|
|
|
355,570
|
|
|
$
|
28.01
|
|
Granted
|
|
127,041
|
|
|
83.73
|
|
|
68,578
|
|
|
62.92
|
|
Released
|
|
(46,223)
|
|
|
67.14
|
|
|
(314,713)
|
|
|
22.84
|
|
Forfeited
|
|
(40,105)
|
|
|
83.34
|
|
|
—
|
|
|
—
|
|
Outstanding at June 30, 2021
|
|
295,044
|
|
|
$
|
80.15
|
|
|
109,435
|
|
|
$
|
64.76
|
|
Liability Classified Awards - Cash-settled Restricted Stock Units
The Company has granted cash-settled restricted stock units to certain employees. These instruments are recorded as liabilities at fair value as of the respective period end.
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled Restricted
Stock Units
|
Outstanding at December 31, 2020
|
|
52,956
|
|
|
|
|
Released
|
|
(38,916)
|
|
Forfeited
|
|
(740)
|
|
Outstanding at June 30, 2021
|
|
13,300
|
|
For the three months ended June 30, 2021 and 2020, an expense of $0.1 million and $0.4 million, respectively, was included as stock-based compensation expense related to cash-settled restricted stock units. For the six months ended June 30, 2021 and 2020, an expense of $1.5 million and a credit of $0.9 million, respectively, was included as stock-based compensation expense related to cash-settled restricted stock units. At June 30, 2021 and December 31, 2020, liabilities of $0.8 million and $2.5 million, respectively, related to cash-settled restricted stock units were included as part of accrued employee compensation and benefits in the Consolidated Balance Sheets.
Liability Classified Awards - Long-Term Incentive Awards
The Company has granted cash long-term incentive awards (“LTIP awards”) to certain employees. Annual LTIP awards vest over a three-year period and are determined using multipliers from 0% to 200% of the target award based on the total stockholder return of Dine Brands Global common stock compared to the total stockholder returns of a peer group of companies. The awards are considered stock-based compensation and are classified as liabilities measured at fair value as of the respective period end. For the three months ended June 30, 2021 and 2020, an expense of $0.3 million and a credit of $0.3 million, respectively, were included in total stock-based compensation expense related to LTIP awards. For the six months ended June 30, 2021 and 2020, $0.5 million and $0.4 million, respectively, were included in total stock-based compensation expense related to LTIP awards. At June 30, 2021 and December 31, 2020, liabilities of $1.2 million and $2.1 million, respectively, related to LTIP awards were included as part of accrued employee compensation and benefits in the Consolidated Balance Sheets.
11. Segments
The Company identifies its reporting segments based on the organizational units used by management to monitor performance and make operating decisions. The Company currently has five operating segments: Applebee's franchise operations, Applebee's company-operated restaurant operations, IHOP franchise operations, rental operations and financing
Dine Brand Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. Segments (Continued)
operations. The Company has four reportable segments: franchise operations, (an aggregation of Applebee's and IHOP franchise operations), company-operated restaurant operations, rental operations and financing operations. The Company
considers these to be its reportable segments, regardless of whether any segment exceeds 10% of consolidated revenues, income before income tax provision or total assets.
As of June 30, 2021, the franchise operations segment consisted of (i) 1,627 restaurants operated by Applebee’s franchisees in the United States, two U.S. territories and 11 countries outside the United States and (ii) 1,744 restaurants operated by IHOP franchisees and area licensees in the United States, two U.S. territories and seven countries outside the United States. Franchise operations revenue consists primarily of franchise royalty revenues, franchise advertising revenue, sales of proprietary products to franchisees (primarily pancake and waffle dry mixes for the IHOP restaurants), and franchise fees. Franchise operations expenses include advertising expenses, the cost of IHOP proprietary products, bad debt expense, franchisor contributions to marketing funds, pre-opening training expenses and other franchise-related costs.
Company restaurant sales are retail sales at 69 Applebee's company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, 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 from finance leases on which the Company is the lessee.
Financing revenues primarily consist of interest income from the financing of IHOP equipment leases and franchise fees and interest income on Applebee's notes receivable from franchisees. Financing expenses are the cost of taxes related to IHOP equipment leases.
Information on segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(In millions)
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
166.9
|
|
|
$
|
67.8
|
|
|
$
|
307.9
|
|
|
$
|
212.9
|
|
Rental operations
|
|
27.4
|
|
|
23.7
|
|
|
53.5
|
|
|
52.7
|
|
Company restaurants
|
|
38.2
|
|
|
16.8
|
|
|
74.2
|
|
|
48.1
|
|
Financing operations
|
|
1.1
|
|
|
1.4
|
|
|
2.2
|
|
|
2.9
|
|
Total
|
|
$
|
233.6
|
|
|
$
|
109.7
|
|
|
$
|
437.8
|
|
|
$
|
316.6
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operations
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
$
|
2.6
|
|
|
$
|
3.1
|
|
Company restaurants
|
|
0.8
|
|
|
0.5
|
|
|
1.7
|
|
|
1.0
|
|
Corporate
|
|
15.7
|
|
|
17.1
|
|
|
32.2
|
|
|
32.3
|
|
Total
|
|
$
|
17.8
|
|
|
$
|
19.1
|
|
|
$
|
36.5
|
|
|
$
|
36.4
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
2.5
|
|
|
$
|
2.6
|
|
|
$
|
5.0
|
|
|
$
|
5.1
|
|
Rental operations
|
|
2.8
|
|
|
3.1
|
|
|
5.6
|
|
|
6.3
|
|
Company restaurants
|
|
1.8
|
|
|
1.7
|
|
|
3.5
|
|
|
3.2
|
|
Corporate
|
|
2.9
|
|
|
3.4
|
|
|
5.9
|
|
|
6.7
|
|
Total
|
|
$
|
10.0
|
|
|
$
|
10.7
|
|
|
$
|
20.0
|
|
|
$
|
21.3
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss), by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise operations
|
|
$
|
87.7
|
|
|
$
|
30.8
|
|
|
$
|
163.7
|
|
|
$
|
106.4
|
|
Rental operations
|
|
6.8
|
|
|
2.4
|
|
|
12.0
|
|
|
8.9
|
|
Company restaurants
|
|
3.4
|
|
|
(4.4)
|
|
|
6.5
|
|
|
(3.4)
|
|
Financing operations
|
|
1.0
|
|
|
1.2
|
|
|
2.0
|
|
|
2.6
|
|
Total gross profit
|
|
98.9
|
|
|
30.0
|
|
|
184.2
|
|
|
114.5
|
|
Corporate and unallocated expenses, net
|
|
(60.2)
|
|
|
(176.9)
|
|
|
(121.5)
|
|
|
(232.3)
|
|
Income (loss) before income taxes
|
|
$
|
38.7
|
|
|
$
|
(146.8)
|
|
|
$
|
62.7
|
|
|
$
|
(117.7)
|
|
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Net Income (Loss) per Share
The computation of the Company's basic and diluted net income (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(In thousands, except per share data)
|
Numerator for basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
29,362
|
|
|
$
|
(134,779)
|
|
|
$
|
54,965
|
|
|
$
|
(112,451)
|
|
Less: Net income allocated to unvested participating restricted stock
|
(657)
|
|
|
—
|
|
|
(1,431)
|
|
|
(420)
|
|
Net income (loss) available to common stockholders - basic
|
28,705
|
|
|
(134,779)
|
|
|
53,534
|
|
|
(112,871)
|
|
Effect of unvested participating restricted stock in two-class calculation
|
3
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders - diluted
|
$
|
28,708
|
|
|
$
|
(134,779)
|
|
|
$
|
53,544
|
|
|
$
|
(112,871)
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock - basic
|
16,886
|
|
|
16,177
|
|
|
16,673
|
|
|
16,215
|
|
Dilutive effect of stock options
|
91
|
|
|
—
|
|
|
129
|
|
|
—
|
|
Weighted average outstanding shares of common stock - diluted
|
16,977
|
|
|
16,177
|
|
|
16,802
|
|
|
16,215
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.70
|
|
|
$
|
(8.33)
|
|
|
$
|
3.21
|
|
|
$
|
(6.96)
|
|
Diluted
|
$
|
1.69
|
|
|
$
|
(8.33)
|
|
|
$
|
3.19
|
|
|
$
|
(6.96)
|
|
For the six months ended June 30, 2020, diluted loss per common share was computed using the basic weighted average number of shares outstanding during the period as the 101,000 shares from common stock equivalents would have been antidilutive. There were no common stock equivalents for the three months ended June 30, 2020.
13. Impairment and Closure Charges
Closure and long-lived tangible asset impairment charges for the three and six months ended June 30, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment and Closure Charges
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(In millions)
|
Closure charges
|
|
$
|
1.0
|
|
|
$
|
0.7
|
|
|
$
|
2.9
|
|
|
$
|
0.7
|
|
Long-lived tangible asset impairment
|
|
1.6
|
|
|
17.2
|
|
|
1.7
|
|
|
17.2
|
|
Goodwill impairment
|
|
—
|
|
|
92.2
|
|
|
—
|
|
|
92.2
|
|
Tradename impairment
|
|
—
|
|
|
11.0
|
|
|
—
|
|
|
11.0
|
|
Impairment of reacquired franchise rights
|
|
—
|
|
|
3.3
|
|
|
—
|
|
|
3.3
|
|
Total impairment and closure charges
|
|
$
|
2.6
|
|
|
$
|
124.4
|
|
|
$
|
4.6
|
|
|
$
|
124.4
|
|
Closure Charges
The closure charges of $1.0 million for the three months ended June 30, 2021 related to the establishment of or revision
to closure reserves for approximately 30 IHOP restaurants. The closure charges of $2.9 million for the six months ended June 30, 2021 related to the establishment of or revision to closure reserves for approximately 50 IHOP restaurants.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Closure and Impairment Charges (Continued)
Long-lived Tangible Asset Impairment
The long-lived asset impairment of $1.6 million for the three months ended June 30, 2021 related to three IHOP franchisee-operated restaurants for which the carrying amount exceeded the undiscounted cash flows. The long-lived asset impairment of $1.7 million for the six months ended June 30, 2021 related to four IHOP franchisee-operated restaurants. The impairment recorded represented the difference between the carrying value and the estimated fair value. The impairments related to operating lease right-of-use assets that had been recorded in 2019 upon adoption of new lease accounting guidance codified in Accounting Standards Codification Topic 842.
Goodwill and Intangible Assets
For the three and six months ended June 30, 2021, the Company determined that there were no indicators for impairment to goodwill and intangible assets.
Impairment in 2020
Most of the Company's goodwill and intangible assets arose from the November 29, 2007 acquisition of Applebee's. The Company evaluates its goodwill and the indefinite-lived Applebee's tradename for impairment annually in the fourth quarter of each year or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. Definite-lived intangible assets and long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows.
In the second quarter of 2020, the Company noted that its common stock had recovered less of its early March 2020 (pre-pandemic) market value than the overall U.S. stock market had recovered. The Company also was able to assess several additional months of data as to the impact of the COVID-19 pandemic on its operations and, in turn, assess the impact that might have on the risk premium incorporated into its discount rate. Based on these developments, the Company determined that an interim quantitative test of goodwill and indefinite-lived intangible assets for impairment should be performed as of May 24, 2020. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The fair value technique used in this instance is classified as Level 3, where unobservable inputs are used when little or no market data is available.
In performing the quantitative test for impairment of goodwill, the Company used the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of goodwill and intangible assets. Significant assumptions made by management in estimating fair value under the discounted cash flow model include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working capital, along with an appropriate discount rate based on the Company's estimated cost of equity capital and after-tax cost of debt. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.
In performing the impairment review of the tradename, the Company used the relief of royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate and a discount rate to be applied to the forecast revenue stream.
As a result of performing the quantitative test of impairment, the Company recognized an impairment of $92.2 million to the goodwill of the Applebee's franchise unit and an impairment of $11.0 million to Applebee's tradename during the three months ended June 30, 2020. The majority of the impairment was due to an increase in the assessed risk premium incorporated into the discount rate assumption.
In addition, the Company reviewed its reacquired franchising rights and determined that the carrying amount exceeded the estimated fair value by $3.3 million and has recorded an impairment to that intangible asset.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. Fair Value Measurements
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company is not a party to any material derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required.
The Company believes the fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short duration.
The fair values of the Company's 2019 Class A-2 Notes at June 30, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
December 31, 2020
|
|
|
(In millions)
|
Face Value of Class A-2 Notes
|
|
$
|
1,290.3
|
|
|
$
|
1,296.8
|
|
|
Fair Value of Class A-2 Notes
|
|
$
|
1,354.9
|
|
|
$
|
1,259.5
|
|
|
The fair values were determined based on Level 2 inputs, including information gathered from brokers who trade in the Company’s 2019 Class A-2 Notes, as well as information on notes that are similar to those of the Company.
15. Commitments and Contingencies
Litigation, Claims and Disputes
The Company is subject to various lawsuits, administrative proceedings, audits and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The Company is required under U.S. GAAP to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of the Company's litigation are expensed as such fees and expenses are incurred. Management regularly assesses the Company's insurance coverage, analyzes litigation information with the Company's attorneys and evaluates the Company's loss experience in connection with pending legal proceedings. While the Company does not presently believe that any of the legal proceedings to which it is currently a party will ultimately have a material adverse impact on the Company, there can be no assurance that the Company will prevail in all the proceedings the Company is party to, or that the Company will not incur material losses from them.
Lease Guarantees
In connection with the sale of Applebee’s restaurants to franchisees, the Company has, in certain cases, guaranteed or has potential continuing liability for lease payments totaling $234.8 million as of June 30, 2021. This amount represents the maximum potential liability for future payments under these leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 2021 through 2048. Excluding unexercised option periods, the Company's potential liability for future payments under these leases is $40.1 million. In the event of default, the indemnity and default clauses in the sale or assignment agreements govern the Company's ability to pursue and recover damages incurred.
16. Cash, Cash Equivalents and Restricted Cash
Cash and Cash Equivalents
The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. These cash equivalents are stated at cost which approximates market value. Cash held related to IHOP advertising funds and the Company's gift card programs is not considered to be restricted cash as there are no restrictions on the use of these funds.
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
16. Cash, Cash Equivalents and Restricted Cash (Continued)
The components of cash and cash equivalents were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
(In millions)
|
Money market funds
|
$
|
30.0
|
|
|
$
|
175.0
|
|
IHOP advertising funds and gift card programs
|
76.2
|
|
|
71.6
|
|
Other depository accounts
|
153.3
|
|
|
136.8
|
|
Total cash and cash equivalents
|
$
|
259.5
|
|
|
$
|
383.4
|
|
The decrease in money market funds between December 31, 2020 and June 30, 2021 was due to the repayment of $220.0 million previously drawn on the Company's Credit Facility.
Current Restricted Cash
Current restricted cash primarily consisted of funds required to be held in trust in connection with the Company's securitized debt and funds from Applebee's franchisees pursuant to franchise agreements, usage of which was restricted to advertising activities. The components of current restricted cash were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
(In millions)
|
Securitized debt reserves
|
$
|
33.7
|
|
|
$
|
27.0
|
|
Applebee's advertising funds
|
38.3
|
|
|
12.8
|
|
Other
|
0.1
|
|
|
0.1
|
|
Total current restricted cash
|
$
|
72.1
|
|
|
$
|
39.9
|
|
Non-current Restricted Cash
Non-current restricted cash was $16.4 million and $32.8 million at June 30, 2021 and December 31, 2020, respectively, and represents interest reserves required to be set aside for the duration of the Company's securitized debt. The minimum reserve is approximately one quarter's interest payment on the Company's securitized debt, currently approximately $16 million. The Company voluntarily increased the amount held in the reserve account to twice the minimum amount during the year ended December 31, 2020 and, in turn, reduced the reserve to the minimum amount during the six months ended June 30, 2021.