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Delivering
what
we
promised.
2012 annual report
We look forward to what’s next.
So will you.
Five years ago, we set a series of goals
after acquiring Applebee’s. Today, we’ve
accomplished them all — and we’re a
stronger, more aligned, better performing
company as a result. We’ve improved
operations, built strong relationships
with franchisees, and demonstrated
that together, our DineEquity® team
can achieve great success
Two
Over
#1 brands in their respective categories
$1 billion
99%franchised
in debt reduction
We said it. We did it.
What’s next?
“ This year, we completed
our transition to a 99%
franchised company.”
Julia Stewart
To Our DineEquity Family of Shareholders,
When we acquired Applebee’s in November 2007, we had a lot of work
ahead of us. Today, I am proud to announce that we’ve accomplished
everything we set out to do.
With the completion of the final three Applebee’s® refranchising transactions
in late 2012, DineEquity has successfully transitioned to a 99% franchised
system. Over the course of the last five years, we’ve also completed several
major objectives for the business, beginning with substantially lowering
general and administrative (G&A) expenses; reducing our total debt by
over $1 billion since the acquisition, and re-pricing our senior secured credit
facility. We reengineered the Applebee’s menu for profitability. We’ve also
completed a sale-leaseback agreement for 181 Company-owned properties
and improved performance at the Company-owned restaurants. We formed
Centralized Supply Chain Services, LLC (CSCS), an independent purchasing
cooperative that enables franchisees to mitigate commodity and distribution
costs. Lastly, we’ve implemented an internal Shared Services model to
deliver services more effectively and efficiently to our IHOP® and Applebee’s
franchisees. All of these measures combined have helped both Applebee’s
and IHOP maintain the number one positions in their respective categories.1
Last year, I also stepped back into the day-to-day leadership role at IHOP,
in order to provide strategic direction and re-ignite the success of this iconic
brand. The team and I have been working on a strategy to regain our share
in the breakfast category. In 2012, we honed a strategy that centers upon
revitalizing our menu, delivering a better value proposition to our guests,
achieving operations excellence, and maximizing advertising and media.
We’re continuing to roll out these efforts nationwide and look forward to
sharing more in 2013.
1 Nation’s Restaurant News, “Special Report: Top 100,” June 25, 2012 (Applebee’s rank based on U.S. system-wide sales in the casual
dining category; IHOP rank based on U.S. system-wide sales in the family dining category).
1
“ As DineEquity moves forward with a more
franchise-centric structure, collaborative
input from key franchise partners is more
and more important. This unique opportunity
to leverage experience from the field
increases the value the parent franchisor
can return to the entire system.”
Roy Raeburn, President, Apple-Metro
Leveraging resources to build value
Having met our refranchising goals, we announced
a capital allocation strategy in February 2013 that will
create additional value for our shareholders. We
re-priced our senior secured credit facility, lowering
the effective interest rate from 4.25% to 3.75% in
keeping with our objective to lower interest expense
on borrowings. At the same time, we modified debt
covenants to reduce limitations on DineEquity’s capital
allocation options, providing the Company with added
flexibility. As of December 31, 2012, the outstanding
principal balance of the Company’s senior secured
credit facility was reduced from $844 million as of
December 31, 2010 to $472 million.
of resources and organizational structure to effectively
support our two brands; deliver industry-leading
support to franchisees, and realize economies of scale
whenever possible.
The independent purchasing cooperative, CSCS,
which DineEquity participates in, has established itself
as a point of competitive differentiation by enabling
procurement of commodity items at lower costs and
reduced distribution expenses, which are then passed
on in the form of savings to our franchisees and
ultimately to our guests. In 2012 alone, CSCS calculated
that it has generated a Net Positive Financial Impact of
$21.2 million for Applebee’s franchisees and $15.4 million
for IHOP franchisees.1
Achieving new levels of synergy and efficiency
In 2012, we continued to move forward with the
implementation of more efficient internal processes.
We are working to ensure that we have the right type
We’ve also continued to evolve our DineEquity Shared
Services model, in order to leverage expertise across
the organization. Today, Shared Services includes the
Free
cash flow2
(in millions)
Total
debt
(in billions)
Consolidated general &
administrative expense3
(in millions)
$153
$2.36
$182.2
$135
$108
$57
$48
$2.14
$2.03
$158.5
$159.6
$155.8
$163.2
$1.73
$1.40
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
1 Net positive financial impact is comprised of net savings and cost avoidances. Net savings represent cost reductions year-over-year. Cost avoidances represent cost
increases that were avoided because of an action taken by CSCS.
2 The decline in free cash flow in fiscal 2012 was primarily due to the increase in cash taxes paid on refranchising proceeds and, as expected, lower segment profit due
to refranchising.
3 General and administrative ("G&A") expenses increased $7.4 million, primarily due to a $9.1 million charge for settling certain litigation that commenced prior to our 2007
acquisition of Applebee's.
2
Julia Stewart
Chairman and Chief Executive Officer
“ I have a long history with the IHOP brand, and have
great respect for the tradition and values of the
company. Working directly with many departments,
I have found the team to be responsive, intelligent
and passionate about our shared success.”
Dan Campbell, Chair, IHOP Franchise Leadership Council
Human Resources, Finance, Communications and
Legal departments. As part of this restructuring, we’ve
shifted personnel from both brands to Shared Services
in order to maximize efficiency, and we’re always
looking to do more.
One of the most exciting developments in the past
year has been the formation of DineEquity’s four
Centers of Excellence. These Centers are designed
to provide DineEquity and franchisees with more
synergy in terms of best practices, processes and
technical innovation, while also shortening the
development cycle on new restaurant offerings.
Like Shared Services, Centers of Excellence bring
together talent from across the organization in key
areas. Located both in Glendale, CA and Kansas City,
KS, each Center of Excellence has a specific focus. The
Operations Services team works to ensure that every
DineEquity franchisee receives the unmatched service,
support, and tools required to succeed. The Development
team creates and manages a robust agenda to expand
each brand’s footprint, both by opening traditional
restaurants and also by pursuing innovative formats
and channels. Consumer Insights provides relevant
market intelligence to facilitate planning at both brands.
Lastly, the Training and Development team provides
best-in-class learning and development support to
Applebee’s and IHOP franchisees, while supporting
enterprise leadership and competency development
for all DineEquity team members.
Enhancing collaboration with franchisees
I’ve long said that, “The best place for the restaurants
to be is in the hands of our franchisees.” To this end, we
have prioritized our ability to forge collaborative, mutually
rewarding relationships with franchisees. This year, we
put an organizational infrastructure in place that we
believe will foster unprecedented alignment and buy-in
with franchisees now and in the future.
For several years, IHOP and Applebee’s franchisees
have operated their own representative advisory
groups, with leaders elected by fellow franchisees.
They include the Franchise Leadership Council (FLC)
for IHOP and Franchise Business Council (FBC) for
3
CSCS net poSitive
finanCial impaCt
In 2012, Centralized Supply
Chain Services (CSCS)
helped franchisees avoid
significant additional costs.
$21.2 million
Applebee’s Co-op
$15.4 million
IHOP Co-op
Applebee’s. These groups provide a forum for
franchisees to share best demonstrated practices, offer
counsel and review strategies, working side by side with
the leadership of the IHOP and Applebee’s brands.
Today, DineEquity has expanded the ways in which we
collaborate with the FLC and FBC by establishing several
franchisee sub-committees. Applebee’s sub-committees
focus on franchise marketing, information technology,
operations, and back-of-the-house innovation, among
others. IHOP sub-committees focus on priorities like
marketing, menu innovation and more. As we develop
new ideas — from menu items to technology platforms
— the sub-committees serve as a forum where we can
share, test and fine-tune elements like business plans
and marketing programs. This deeply collaborative
process garners invaluable direct feedback, and fosters
mutual respect and trust between DineEquity team
members and franchisees.
“Doing right. Winning together.”
My pride in the quality of our team can best be summed
up by the sentiment: “Who we are is how we win.” Today,
this has never been more true. Our people are our
competitive advantage, and every day, they leverage
passion, resourcefulness and innovation to drive our
Company forward. Community outreach is a strong
ethic at DineEquity, which is why we offer employees
one day of paid time off each year to volunteer for the
causes of their choosing. Whether we are building value
for shareholders or making a difference for franchisees,
guests or the communities we serve, I believe that our
people are truly dedicated to going the extra mile.
4
Last year, we began to define the cultural attributes
that set us apart through our “Doing right. Winning
together.” initiative. This year, we’ve taken important
steps to further inculcate our core values throughout
the Company by rolling out a set of organizational
actions and behaviors. We began by informing and
educating our Senior Leadership Team on strategies for
modeling behaviors. At the same time, we’ve built the
values into each of our Human Resource processes —
from executive assessment and behavioral interviewing
to talent review, development planning and performance
reviews. We’ve worked diligently and consistently on
this, and it shows. Today, DineEquity is a more aligned,
collaborative environment, with a greater reserve of
shared resources and clearer expectations.
So much has happened in the last five years. I’m extremely
proud of everything that we’ve accomplished and very
excited about what comes next. I would like to express
my sincere thanks to my executive team, our Board of
Directors, team members, our franchisees, the purchasing
cooperative, vendor partners, and to you, our shareholders,
for your steadfast support.
Julia A. Stewart
Chairman and Chief Executive Officer
DineEquity, Inc.
What does 99%
franchised mean?
Our strategy
for revitalizing
brands works.
How do we drive restaurant performance
at IHOP and Applebee’s? By maintaining a
relentless focus on the fundamental elements
of our brand management approach. Our
ingredients include: operations excellence,
menu innovation, enhanced marketing,
strategic advertising and media, restaurant
remodels, franchise development…and so
much more.
5
Delivering
what our guests
really want.
Championing
breakfast at IHOP.
In 2012, we focused
on ways to raise
the bar at this iconic
brand in order to build
an insurmountable
lead in the breakfast
category.
8
9
Over the last 54 years,
IHOP has achieved iconic
status as a beloved
breakfast brand around
the world.
Today, we’re tapping into that affinity to keep IHOP
energized for the future. We’re in the process of
developing prototypes for a new system-wide remodel.
We’re also expanding internationally, by building upon
our success in Mexico, pursuing opportunities in Central
America and the Philippines and continuing to extend
our footprint into Southeast Asia and Canada. In the
Middle East, we achieved a milestone with the opening
of the first IHOP in Dubai. The opening was the result of
a development agreement between IHOP and the Alshaya
Group, which includes plans to open 40 new IHOP
restaurants across the region in the next several years.
Thus far, the Dubai IHOP is one of the most successful
IHOP openings in the brand’s history — proving that the
appeal of an American/IHOP-style breakfast can be
appreciated anywhere in the world.
Revitalizing the IHOP menu
We’re also focusing on ways to fine-tune every aspect
of the brand, in order to build guest interest and deliver
maximum value. It all starts with the menu. In 2012, we
initiated a menu redesign with an eye toward reducing
complexity, while improving ease of navigation. We’re
reengineering our core menu to provide unique offerings
that align with our mission to be guests’ first choice for
breakfast. To this end, we’ve been developing a pipeline
of exciting new offerings, while eliminating weaker
performers. We are also evaluating factors like price,
plating, portions and innovation, to deliver a more
appealing value proposition to guests. So what’s on the
menu? We’ve created a partnership with Quaker® Oats
to broaden the “Simple and Fit” category with a variety
of proprietary, branded IHOP offerings, and we have
rolled out a delectable new array of “Griddle Melts”
breakfast sandwiches in early 2013. And that’s just a
taste of things to come in the year ahead!
10
Achieving operations excellence
Another critical ingredient in IHOP’s success is the guest
experience. Today, we’re collaborating with franchisees
on strategies to simplify current operational processes
in order to improve both the service experience and the
bottom line. In support of this, we’re evaluating and
implementing new menu offerings, as well as technology
and service delivery platforms that can lower complexity
in the back-of-the-house, streamline ordering and table
service for guests, and maximize profitability. To promote
consistency among franchisees, we’re supporting these
operational excellence measures by providing more
comprehensive training and follow-up for restaurant staff.
Maximizing the impact of advertising and media
We’re also devising
compelling new advertising
messaging and media
strategies that will entice
guests to visit their local
IHOP restaurants.
In 2012, we developed a new brand promise, along with
a tagline that leverages the heritage of the IHOP brand:
“Everything you love about breakfast.” We also began
rolling out a new advertising strategy, starting with a
testimonial campaign that will introduce the pipeline of
new offerings debuting in 2013. As we do so, we’re
expanding our reach and frequency of interaction with
guests, with a media plan designed to penetrate today’s
competitive landscape in a meaningful way. We made
significant progress in the digital advertising space in
2012 with the launch of the new IHOP.com website,
which leverages interactive elements and social media
to stimulate and capture guest interest. Going forward,
we’ll be expanding on the success and momentum
we’ve built in 2012 with robust activity across digital
and social media in 2013 and beyond.
Raising spirits on
National Pancake Day
Every year, National Pancake Day brings us
together as a company to create a brighter
future for children and families across the
nation. On IHOP’s seventh annual National
Pancake Day in 2012, we achieved a new
fundraising record, raising more than $3
million in donations for Children’s Miracle
Network hospitals and other local charities.
To date, IHOP has raised more than $10
million in donations since the first National
Pancake Day in 2006.
For children and families in need, these
donations translate into comfort, happiness
and hope. On National Pancake Day, dreams
also come true on a more personal scale.
After wrapping up the latest National Pancake
Day on February 5, 2013, newly crowned Miss
America, Mallory Hagan, shared this story:
“There was a young girl [at Children’s Hospital
Los Angeles] who was not having the best
day. It was really great to sit down and talk
with her, [and] to see that by the time that I
left, she was in better spirits. That’s really
what this is about for me. To be part of the
Children’s Miracle Network Hospitals where
we have an opportunity to go and provide
better care for these kids, just by raising
money and by walking around with a shining
hat on has been an experience that is
unforgettable.”
Caring for the communities we serve is one
of our most treasured commitments as an
organization — whether it’s DineEquity team
members donating time, or the generosity of
our franchisees and guests.
11
12
leading the way
at applebee’s.
in 2012, applebee’s
retained the number
one position in casual
dining for the fifth
consecutive year.1
Here’s how we intend
to keep it.
1 Nation’s Restaurant News, “Special Report: Top 100,” June 25, 2012 (Applebee’s rank based on U.S. system-wide sales in the casual dining category).
13
What’s new in the neighborhood?
At Applebee’s, we’re always looking for
ways to bring creativity and innovation to
our brand and the casual dining category.
Over the years, we’ve distinguished the brand with
several industry firsts that quickly became classics —
including “2 for $20”, “Unbelievably Great Tasting and
Under 550 Calories,™” “Spirited Cuisine,” and more.
We’re first in other ways, too. On December 10, 2012,
Applebee’s franchisee Apple Metro opened the first
Leadership in Energy and Environmental Design
(LEED)-certified Gold restaurant in New York City,
located on 117th Street in Harlem. This Applebee’s
boasts at least 45 environmentally friendly features —
including a rooftop greenhouse — and it’s one of
only 11 LEED-certified Gold restaurant projects to
date in the entire nation.
A big part of staying ahead of the curve lies in anticipating
guest expectations, and keeping Applebee’s energized
and fresh across every touch point. This is why we’re
continually introducing new menu offerings, exciting
promotional campaigns and more. Today, over half of
the Applebee’s domestic system has completed our
ongoing remodel program, with more restaurants
debuting the new look in 2013. We also evaluate
technological innovation and training on an ongoing
basis to ensure that we’re consistently exceeding our
goals for operational excellence.
Inviting guests to return, day after day
In 2012, we launched “See You Tomorrow,®” a brand
promise that encapsulates our strategy and inspires
guests to return to Applebee’s every day. We’ll accomplish
this by bringing together our experience and passion
for great food, to truly become the neighborhood
restaurant where guests can connect with the people
important to them over the food and beverages they
love. We are bringing “See You Tomorrow” to life in
a variety of ways, starting with our marketing
communications strategy. In 2012, we began rolling
out a new campaign that showcases the perspective
of Applebee’s chefs.
14
Expressing our thanks
on Veteran’s Day
At Applebee’s we’re committed to giving back
to neighborhoods across America. That’s why
we make time every year to celebrate the
heroes in our nation’s military on Veteran’s
Day. Since 2009, Applebee’s has served more
than 3 million free thank-you meals to veterans
and active duty military. Throughout the year,
we encourage people to express their thanks
at www.ThankYouMovement.com, a site that
features over 2.6 million heartfelt messages
of gratitude to veterans and active duty
troops. In May 2012, as part of the Thank You
Movement, Applebee’s team members outdid
themselves, kicking off Military Appreciation
Month with the delivery of 101,000 Thank You
cards at the headquarters of Disabled
American Veterans in Cold Spring, KY.
Are we making a difference? It seems so, as
veterans share their appreciation with us in
their own words:
“I am recently retired from the Army after 31
years. I visited our Sierra Vista Applebee’s for
your Veterans’ appreciation day today…You
made today extra special.” – Sierra Vista, AZ
“To whoever thought up this promotion…both
my brother and I say a very heartfelt, ‘Thank
You!’ for remembering us veterans. It was so
wonderful to see so many WWII, Korea, and
Vietnam veterans all out together. The feeling
of brotherhood was palpable! You did a
wonderful thing, Applebee’s.” – Baxter, MN
15
We’re also addressing key aspects of Applebee’s value
equation with an eye toward enticing guests to return
on a daily basis. It starts with serving up irresistible
Applebee’s flavor — at a great price that’s worth every
penny. We’re working on ways to keep the ambience
fresh and exciting, while also inviting guests back
day after day, and inspiring them to share their
experiences with friends, and ultimately become
brand ambassadors.
In addition, we’re implementing a series of strategic
priorities to support “See You Tomorrow”. We are
working to improve the quality perception of our food
and beverages through menu innovation, new product
launches, core menu improvements and by identifying
ways to reduce cost and complexity at the back-of-
the-house. We’re looking at ways to adapt our food,
menu, service model and pricing to meet guests’
needs during every daypart, whether it’s lunch, dinner
or late night. As we do so, we’re also evolving our digital
advertising strategy, in order to engage on a one-to-
one level with guests, so that we can better understand
and market to their behaviors and preferences.
Bringing creativity to the table
Another way we exceed guest expectations is by
continually providing innovative, appealing menu
choices. In the last five years, we’ve updated 90% of
the Applebee’s menu, delivering exciting new offerings
along with menu refreshes at key times of the year. We
accomplish this by leveraging consumer insights into
ideas through a robust culinary development and testing
process that brings out the best of our chefs’ creative
talent. Today, this process has yielded favorites like,
“Unbelievably Great Tasting and Under 550 Calories,”
“Fresh Flavors of the Season”, and our newest offering
“The Jazzed Up Flavors of Bourbon Street”. In early
2013, we rolled out “Brew Pub Pretzels” at Applebee’s,
and there’s more on the way.
management team (from left)
John B. Jakubek
Senior Vice President,
Human Resources
Thomas W. Emrey
Chief Financial Officer
Board of Directors
Bryan R. Adel
Senior Vice President, Legal,
Michael J. Archer
President, Applebee’s
General Counsel and Secretary
Business Unit
Julia A. Stewart
Chairman and Chief Executive Officer
Tod J. MacKenzie
Senior Vice President,
Interim President, IHOP Business Unit
Communications and Public Affairs
Julia A. Stewart
Chairman and Chief Executive
Officer, DineEquity, Inc.
Michael S. Gordon
Former Vice Chairman,
First Q Capital LLC
Stephen P. Joyce
President and Chief Executive
Officer, Choice Hotels
International, Inc.
Larry A. Kay
Chief Executive Officer and
Managing Member,
BSG Technologies, LLC
Caroline W. Nahas
Managing Director, Southern
California, Korn/Ferry International
Richard J. Dahl
Lead Director
Chairman, President and
Chief Executive Officer,
The James Campbell Company LLC
Howard M. Berk
Partner, MSD Capital, L.P.
Daniel J. Brestle
Independent Consultant;
Former Vice Chairman and
President, Estee Lauder
Companies Inc. North America
16
Douglas M. Pasquale
Former Chairman, President and
Chief Executive Officer,
Nationwide Health Properties, Inc.
Gilbert T. Ray
Independent Consultant; Retired
Partner, O’Melveny & Myers LLP
Patrick W. Rose
Private Investor; Former Chairman
of the Board, President and
Chief Executive Officer,
Van Camp Seafood, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-15283
DineEquity, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
450 North Brand Boulevard, Glendale, California
(Address of principal executive offices)
95-3038279
(I.R.S. Employer
Identification No.)
91203-2306
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant's telephone number, including area code: (818) 240-6055
Title of each class
Name of each exchange on which registered
Common Stock, $.01 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was Required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a
smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012:
$680.9 million.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class
Outstanding as of February 22, 2013
Common Stock, $.01 par value
19,177,147
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on Tuesday, May 14, 2013 (the "2013 Proxy Statement") are
incorporated by reference into Part III.
DINEEQUITY, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2012
Table of Contents
PART I.
Item 1—Business ..............................................................................................................................................................
Item 1A—Risk Factors .....................................................................................................................................................
Item 1B—Unresolved Staff Comments ............................................................................................................................
Item 2—Properties ............................................................................................................................................................
Item 3—Legal Proceedings...............................................................................................................................................
Item 4—Mine Safety Disclosures .....................................................................................................................................
PART II.
Item 5—Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.............................................................................................................................................................
Item 6—Selected Financial Data ......................................................................................................................................
Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations .............................
Item 7A—Quantitative and Qualitative Disclosures about Market Risk..........................................................................
Item 8—Financial Statements and Supplementary Data ..................................................................................................
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................
Item 9A—Controls and Procedures ..................................................................................................................................
Item 9B—Other Information ............................................................................................................................................
PART III.
Item 10—Directors, Executive Officers and Corporate Governance ...............................................................................
Item 11—Executive Compensation ..................................................................................................................................
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........
Item 13—Certain Relationships and Related Transactions, and Director Independence .................................................
Item 14—Principal Accounting Fees and Services...........................................................................................................
PART IV.
Item 15—Exhibits and Financial Statement Schedules ....................................................................................................
Signatures..........................................................................................................................................................................
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2
Item 1. Business
General
PART I
The Company was incorporated under the laws of the State of Delaware in 1976 with the name IHOP Corp. Effective June 2,
2008, the name of the Company was changed to DineEquity, Inc. (the "Company," "we," "our" or "us"). Our common stock is
listed on the New York Stock Exchange ("NYSE") and trades under the ticker symbol "DIN." Our principal executive offices are
located at 450 North Brand Boulevard, Glendale, California 91203-2306 and our telephone number is (818) 240-6055. Our Internet
address is www.dineequity.com.
We have a 52/53 week fiscal year ending on the Sunday nearest to December 31 of each year. For convenience, we refer to
all fiscal years as ending on December 31 and all interim fiscal quarters as ending on March 31, June 30 and September 30 of the
respective fiscal year. There were 52 weeks in our 2012, 2011 and 2010 fiscal years, which ended on December 30, 2012, January
1, 2012 and January 2, 2011, respectively.
Background
The first International House of Pancakes® ("IHOP®") restaurant opened in 1958 in Toluca Lake, California. Since that time,
the Company or its predecessors have engaged in the development, franchising and operation of IHOP restaurants. In November
2007, we completed the acquisition of Applebee's International, Inc., which became our wholly-owned subsidiary. Through various
subsidiaries we own, franchise and operate two restaurant concepts: Applebee's Neighborhood Grill & Bar®, ("Applebee's"), in
the bar and grill segment of the casual dining category of the restaurant industry, and IHOP, in the family dining category of the
restaurant industry. References herein to Applebee's and IHOP restaurants are to these two restaurant concepts, whether operated
by franchisees, area licensees or the Company. Retail sales at restaurants that are operated by franchisees and area licensees are
not attributable to the Company. Unless the context reflects otherwise, franchisees and area licensees are referred to collectively
as franchisees and restaurants operated by them are referred to collectively as franchise restaurants. With more than 3,600 restaurants
combined in 17 countries and over 400 franchisees, DineEquity is one of the largest full-service restaurant companies in the world.
We achieved a significant milestone in 2012. With the refranchising and sale of related assets of 154 Applebee's company-
operated restaurants during 2012, we realized our vision of becoming a 99% franchised company put in motion when we completed
the acquisition of Applebee's five years ago. We believe this highly franchised business model requires less capital investment
and general and administrative overhead, generates higher gross profit margins and reduces the volatility of free cash flow
performance, as compared to a model based on operating a significant number of company-owned restaurants.
This report should be read in conjunction with the cautionary statements on page 30 under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.—Forward Looking Statements."
Financial Information about Industry Segments
We identify our segments based on the organizational units used by management to monitor performance and make operating
decisions. Our segments, unchanged from prior years, are as follows: franchise operations, company restaurant operations, rental
operations and financing operations. IHOP operates within all four segments; Applebee's operates primarily in the franchise and
company operations segments.
Franchise Operations Segment
As of December 31, 2012, the franchise operations segment consisted of 2,011 restaurants operated by Applebee's franchisees
in the United States, one United States territory and 15 foreign countries and 1,569 restaurants operated by IHOP franchisees and
area licensees in the United States, two United States territories and five foreign countries. Franchise operations revenue consists
of franchise royalty revenues, sales of proprietary products (primarily IHOP pancake and waffle dry-mixes) and the portion of the
franchise fees allocated to IHOP and Applebee's intellectual property. Additionally, franchise fees designated for IHOP's national
advertising fund and local marketing and advertising cooperatives are recognized as revenue and expense of franchise operations;
due to differing contractual arrangements, Applebee's national advertising fund transactions constitute agency activity and therefore
are not recognized as franchise revenue and expense.
Franchise operations expenses include IHOP advertising expense, the cost of proprietary products, pre-opening training
expenses and other franchise-related costs.
3
Company Operations Segment
As of December 31, 2012, the company restaurant operations segment consisted of 23 Applebee's company-operated
restaurants, 10 IHOP company-operated restaurants and two IHOP restaurants reacquired from franchisees and operated by IHOP
on a temporary basis until refranchised. All company-operated restaurants are in the United States and are primarily used to test
new remodel programs, operating procedures, products, technology, cooking platforms and service models.
Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating
expenses at company-operated restaurants and include food, beverage, labor, utilities, rent and other restaurant operating costs.
Rental Operations Segment
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental
operations expenses are costs of operating leases and interest expense on capital leases on franchisee-operated restaurants. The
rental operations revenue and expenses are primarily generated by IHOP. Applebee's has an insignificant amount of rental activity
that only relates to properties that are retained after refranchising company-operated restaurants until such time as the properties
can be disposed of by sale.
Financing Operations Segment
Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases,
as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants taken
back from franchisees not allocated to IHOP intellectual property. Financing expenses are primarily the cost of restaurant equipment.
Financial information for our four operating segments for the last three fiscal years is set forth in Note 20, Segment Reporting,
of the Notes to the Consolidated Financial Statements included in this report. Revenue derived from all foreign countries, in the
aggregate, comprises less than 2% of total consolidated revenue.
Restaurant Concepts
Applebee's
We develop, franchise and operate restaurants in the bar and grill segment of the casual dining category of the restaurant
industry under the name "Applebee's Neighborhood Grill & Bar." With 2,034 system-wide restaurants as of December 31, 2012,
Applebee's is the largest casual dining concept in the world, in terms of number of restaurants and market share(1). As of December 31,
2012, 68 franchise groups operated 2,011 of these restaurants and 23 restaurants were company-operated. The restaurants were
located in 49 states, one United States territory and 15 countries outside of the United States.
Each Applebee's restaurant is designed as an attractive, friendly, neighborhood establishment featuring high quality,
moderately-priced food, alcoholic and non-alcoholic beverage items, table service and a comfortable atmosphere. Applebee's
restaurants appeal to a wide range of customers including young adults, senior citizens and families with children.
Menu
Applebee's restaurants offer a diverse menu offering fresh, flavorful and fun-to-eat food at a great value. The menu features
a broad selection of signature dishes and traditional entrées, as well as appetizers, salads, sandwiches, specialty drinks and desserts.
All Applebee's restaurants offer beer, wine, liquor and premium specialty drinks. Applebee's updates its menu offerings regularly
to better serve our customers and give them new reasons to return to our restaurants. Since 2007, more than 90% of Applebee's
menu now consists of either new offerings or improved offerings with high quality ingredients.
Our signature “2 for $20” menu, first introduced in 2009, and the “2 for $24” trade-up option continue to resonate with our
guests, and have been imitated by many of our competitors. Our "Sizzling Entrees" menu, introduced in 2010, has also generated
strong guest appeal. The innovative “Unbelievably Great Tasting & Under 550 CaloriesTM” menu provides our guests with great
tasting, generous portions that support their health and nutritional goals. Each of these platforms is refreshed regularly throughout
the year with new menu choices to give guests reasons to come to Applebee's every day.
In 2009, Applebee's entered into a non-exclusive endorsement agreement with Weight Watchers International, Inc. ("Weight
Watchers") to offer Weight Watchers® branded menu items to our guests. Under the agreement, Applebee's and participating
franchisees pay Weight Watchers a royalty equal to 2.5% of the proceeds from the sale of Weight Watchers-endorsed items on the
Applebee's menu. The agreement has been extended through at least November 2014.
__________________________________________________________________________
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 25, 2012 (market share based on U.S. system-wide sales in the casual dining category).
4
Franchise Operations
We continuously monitor franchise restaurant operations, principally through our Franchise Area Directors and our Directors
of Franchise Operations. Company and third-party representatives make both scheduled and unannounced inspections of restaurants
to ensure that only approved products are in use and that our prescribed operations practices and procedures are being followed.
We have the right to terminate a franchise agreement if a franchisee does not operate and maintain a restaurant in accordance with
our requirements. We also monitor the financial health of our franchisees through business and financial reviews.
We maintain a domestic Franchise Business Council which provides input about operations, marketing, product development
and other aspects of restaurants for the purpose of improving the franchise system. As of December 31, 2012, the Franchise
Business Council consisted of eight franchisee representatives and three members of our senior management team. One franchisee
representative, the founder of Applebee's, is a member for life. The other franchisee representatives are elected by franchisees to
staggered two-year terms. The Franchise Business Council is also responsible for the appointment of members to advisory
committees related to marketing, restaurant operations, information technology, product development and human resources.
Franchising
Generally, franchise arrangements for Applebee's restaurants consist of a development agreement and separate franchise
agreements for each restaurant. Development agreements grant to the franchise developer the exclusive right to develop Applebee's
restaurants in a designated geographical area over a specified period of time. The term of a domestic development agreement is
generally 20 years. The development agreements typically provide for an initial development schedule of one to five years as
agreed upon by the Company and the franchisee. At or shortly prior to the completion of the initial development schedule or any
subsequent supplemental development schedule, the Company and the franchisee generally execute supplemental development
schedules providing for the development of additional Applebee's restaurants in the franchise developer's exclusive territory.
Prior to the opening of each new Applebee's restaurant, the franchisee and the Company enter into a separate franchise
agreement for that restaurant. Our current standard domestic Applebee's franchise agreement provides for an initial term of 20 years
and permits four renewals, in five-year increments, for up to an additional 20 years, upon payment of an additional franchise fee.
Our current standard domestic Applebee's franchise arrangement calls for an initial franchisee fee of $35,000 and a royalty fee
equal to 4% of the restaurant's monthly net sales. We have agreements with a majority of our franchisees for Applebee's restaurants
opened before January 1, 2000 which provide for royalty rates of 4% and extend the initial term of the franchise agreements until
2020. The terms, royalties and advertising fees under a limited number of franchise agreements and other franchise fees under
older development agreements vary from the currently offered arrangements.
As of December 31, 2012, we had 68 franchise groups, including 28 international franchise groups. We have generally selected
franchisees that are experienced multi-unit restaurant operators. Many franchisees have operated or concurrently operate other
restaurant concepts. We have assigned development rights to the vast majority of domestic areas in all states except Hawaii and
the company-operated market in the Kansas City area.
Domestic Franchising
As of December 31, 2012, there were 1,862 domestic Applebee's franchise restaurants. During 2012, 20 domestic franchise
restaurants opened, six domestic franchise restaurants closed. 154 company-operated restaurants were franchised, of which 56
went to existing franchise groups and 98 to new franchise groups. The number of restaurants held by an individual franchisee
ranges from one to 438 restaurants. The table below sets forth information regarding the number of Applebee's restaurants owned
by domestic franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the listed ownership
ranges.
Number of Restaurants Held by Franchisee
One to ten ............................................................................
Eleven to twenty-five ..........................................................
Twenty-six to fifty...............................................................
Fifty-one to one hundred .....................................................
Greater than one hundred ....................................................
Total(a)............................................................................................
_______________________________________________
(a) Percentages may not add due to rounding.
Franchisees
Restaurants
Number
Percent
of Total
Number
Percent
of Total
9
11
8
9
3
40
22.5%
27.5%
20.0%
22.5%
7.5%
56
198
328
608
672
3.0%
10.6%
17.6%
32.7%
36.1%
100.0%
1,862
100.0%
5
International Franchising
We continue to pursue franchising of the Applebee's concept internationally. To this end we seek qualified franchisees that
possess the resources needed to open multiple restaurants in each territory and are familiar with the specific local business
environment in which they propose to develop and operate Applebee's restaurants. We currently are focusing on international
franchising primarily in Canada, Mexico, Central and South America, Southeast Asia and the Mediterranean/Middle East region.
We work closely with our international franchisees to develop and implement the Applebee's system outside the United States,
recognizing commercial, cultural and dietary diversity. Differences in tastes and cultural norms and standards mean we need to
be flexible and pragmatic regarding many elements of the Applebee's system, including menu, restaurant design, restaurant
operations, training, marketing, purchasing and financing.
As of December 31, 2012, there were 149 international Applebee's franchise restaurants. During 2012, 14 international
franchise restaurants opened and 13 international franchise restaurants closed. The number of restaurants held by an individual
franchisee ranges from one to 22 restaurants. The table below sets forth information regarding the number of Applebee's restaurants
owned by international franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the
listed ownership ranges.
Number of Restaurants Held by Franchisee
One ......................................................................................
Two to five...........................................................................
Six to ten..............................................................................
Eleven to twenty ..................................................................
Greater than twenty .............................................................
Total(a)............................................................................................
_______________________________________________
(a) Percentages may not add due to rounding.
Franchisees
Restaurants
Number
Percent
of Total
Number
Percent
of Total
5
14
5
3
1
28
17.9%
50.0%
17.9%
10.7%
3.6%
100.0%
5
41
40
41
22
3.4%
27.5%
26.8%
27.5%
14.8%
149
100.0%
The success of further international expansion will depend on, among other things, local acceptance of the Applebee's concept
and menu offerings and our ability to attract qualified franchisees and operating personnel. Our franchisees must comply with the
regulatory requirements of the local jurisdictions.
Company-Operated Restaurants
In 2012, we completed the refranchising and sale of related restaurant assets of 154 Applebee's company-operated restaurants,
comprised as follows:17 restaurants located in a six-state market area geographically centered around Memphis, Tennessee, 33
restaurants located primarily in Missouri and Indiana, 65 restaurants located in Michigan and 39 restaurants located primarily in
Virginia. In total, of the 510 Applebee's company-operated restaurants open when the acquisition was completed, we have
refranchised 479 restaurants since the refranchising strategy was initiated in 2008 and closed eight.
As of December 31, 2012, the remaining 23 Applebee's company-operated restaurants were located in the Kansas City market
area. We intend to operate these restaurants primarily to test new remodel programs, operating procedures, products, technology,
cooking platforms and service models.
Restaurant Development
We make the design specifications for a typical restaurant available to franchisees, and we retain the right to prohibit or modify
the use of any set of plans. Each franchisee is responsible for selecting the site for each restaurant within its territory. We may
assist franchisees in selecting appropriate sites, and any selection made by a franchisee is subject to our approval. We also conduct
a physical inspection, review any proposed lease or purchase agreement and make available to franchisees demographic and other
studies.
There are currently 89 development agreements with 35 franchise groups in place covering the entire United States (except
Hawaii and our company-operated market) and 11 development agreements with 11 franchise groups calling for restaurant
development in foreign countries. In conjunction with the refranchising of company-operated restaurants, we entered into
development agreements with the new franchisees setting forth requirements for additional development in each market.
6
During 2013, we expect franchisees to open a total of between 40 to 50 new Applebee's franchise restaurants, the majority of
which are expected to be opened domestically. We do not plan to open any company-operated restaurants. The following table
represents commitments for 2013 and 2014 by franchisees under development agreements to develop Applebee's restaurants. We
disclose development commitments for only a two-year period as the Applebee's development agreements generally provide for
a series of two-year development commitments after the initial development period.
Domestic development agreements ............................................................................................
International development agreements .......................................................................................
Total............................................................................................................................................
Contractual Opening of
Restaurants by Year
2013
35
11
46
2014
51
5
56
The actual number of openings may differ from both our expectations and development commitments due to various factors,
including economic conditions, franchisee access to capital, and the impact of currency fluctuations on our international franchisees.
The timing of new restaurant openings also may be affected by various factors including weather-related and other construction
delays and difficulties in obtaining regulatory approvals.
Marketing and Advertising
Applebee's has historically concentrated its marketing and advertising efforts primarily on food-specific promotions, as well
as on Weight Watchers and other Applebee's branded messaging. Our marketing and advertising includes national, regional and
local expenditures, utilizing primarily television, radio, direct mail and print media, as well as alternative channels such as the
Internet, social media, digital, product placements and the use of third-party retailers to market our gift cards.
During 2012, we launched Applebee's new campaign, “See You Tomorrow®,” which communicates that we are doing whatever
it takes to make sure our guests return. The campaign includes TV, radio, online, and outdoor ads to encourage repeat visits by
highlighting recent changes to the Applebee's brand, such as the revitalization of the restaurants.
For the year ended December 31, 2012, approximately 4% of Applebee's company restaurant sales were allocated for marketing
activities. This amount includes contributions to the national advertising fund, which develops and funds the national promotions
and the development of television and radio commercials and print advertising materials. We focus the remainder of our company-
operated restaurant marketing expenditures on local marketing in the Kansas City area.
We currently require domestic franchisees of Applebee's restaurants to contribute 2.75% of their gross sales to the national
advertising fund and to spend at least 1% of their gross sales on local marketing and promotional activities. Under the current
Applebee's franchise agreements, we have the ability to increase the amount of the required combined contribution to the national
advertising fund and the amount required to be spent on local marketing and promotional activities to a maximum of 5% of gross
sales.
Supply Chain
Maintaining high food quality, system-wide consistency and availability is the central focus of our supply chain program,
which includes the franchisee-owned purchasing cooperative established in 2009. We establish quality specifications for products
used in the restaurants, and we maintain a list of approved suppliers and distributors from which we and our franchisees must
select. We periodically review the quality of the products served in our domestic restaurants in an effort to ensure compliance with
these standards. Due to cultural and regulatory differences, we may have different requirements for restaurants opened outside of
the United States.
IHOP
We develop, franchise and operate restaurants in the family dining category of the restaurant industry under the names IHOP
and International House of Pancakes. IHOP is the largest family dining brand in the world in terms of system-wide sales(2) . As of
December 31, 2012 there were a total of 1,581 IHOP restaurants of which 1,404 were subject to franchise agreements, 165 were
subject to area license agreements, 10 were company-operated restaurants and two restaurants were reacquired from franchisees
and operated by IHOP on a temporary basis. Franchisees and area licensees are independent third parties who are licensed by us
to operate their restaurants using our trademarks, operating systems and methods and offer a broad range of entrées, appetizers,
desserts and non-alcoholic beverages specified by IHOP, including our award-winning pancakes.
____________________________________________________________________________
(2)Source: Nation's Restaurant News, "Special Report: Top 100," June 25, 2012 (based on U.S. system-wide sales in the family dining category).
7
We own and operate ten IHOP restaurants in the Cincinnati market area primarily to test new remodel programs, operating
procedures, products, technology, cooking platforms and service models. In addition, from time to time we may also operate, on
a temporary basis until refranchised, IHOP restaurants that we reacquire for a variety of reasons from IHOP franchisees. There
were two such restaurants included as company-operated restaurants as of December 31, 2012. IHOP restaurants are located in
all 50 states of the United States, the District of Columbia, Puerto Rico and the United States Virgin Islands and internationally
in Canada, the Dominican Republic, Guatemala, Mexico and the United Arab Emirates.
IHOP restaurants feature full table service and high quality, moderately priced food and beverage offerings in an attractive
and comfortable atmosphere. Although the restaurants are best known for their award-winning pancakes, omelets and other
breakfast specialties, IHOP restaurants offer a variety of lunch, dinner and snack items as well. IHOP restaurants are open throughout
the day and evening hours. Approximately half of our IHOP restaurants operate 24 hours a day, seven days a week and approximately
200 additional restaurants operate 24 hours a day for some portion of the week.
Menu
The IHOP menu offers a large selection of high-quality, moderately priced products designed to appeal to a broad base of
customers. These include a wide variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak, sandwiches, salads
and lunch and dinner specialties. IHOP restaurants offer special Under 600 Calories items for children. Most restaurants offer
special items for seniors at reduced prices. In recognition of local tastes, IHOP restaurants typically offer a few regional specialties
that complement the IHOP core menu. Our Food and Beverage Innovation Department works together with franchisees and our
Marketing Department to develop new menu and promotion ideas. These new items are thoroughly evaluated in our test kitchen
and in limited regional tests with consumers, including operational tests, before being introduced throughout the system through
core menu updates. The purpose of adding new items and improving existing items is to broaden the appeal of our food to our
guests and continually give them new reasons to return to our restaurants. These efforts are based on consumer research, feedback
and benchmarking, which help to identify opportunities to improve existing items as well as for developing new items.
The IHOP menu is being redesigned and simplified to capture the essence of our iconic brand. We plan to provide our guests
with the best combination of value that aligns with our mission of being their first choice for breakfast and their destination for
items "only IHOP can make." When the new menu is introduced in 2013, it will feature fewer items overall, and will include core
items, such as our signature pancakes, in addition to platforms comprised of unique offerings that will be updated on a regular
basis, similar to the strategy we successfully applied at Applebee's.
Franchising
Franchised restaurants include both company-financed and franchisee-financed development. Under the strategy adopted in
January 2003 (the "Current Business Model"), substantially all new IHOP restaurants are developed by franchise developers with
the intention of operating them as franchised restaurants. Under our business model as it was in effect prior to 2003 (the "Previous
Business Model"), we developed a substantial majority of all IHOP restaurants with the intention of leasing them to franchisees.
More than half of our current franchise restaurants were developed under the Previous Business Model.
Current Business Model
Under our Current Business Model, a potential franchisee first negotiates and enters into either a single-restaurant development
agreement or a multi-restaurant development agreement with us and, upon completion of a prescribed approval procedure, is
primarily responsible for the development and financing of one or more new IHOP franchised restaurants. In general, we do not
provide any financing with respect to the franchise fee or otherwise under the Current Business Model. The franchise developer
uses its own capital and financial resources along with third-party financial sources arranged for by the franchise developer to
purchase or lease a restaurant site, build and equip the business and fund its working capital needs. The principal terms of the
franchise agreements entered into under the Previous Business Model and the Current Business Model, including the franchise
royalties and the franchise advertising fees, are substantially the same except with respect to the terms relating to the franchise
fee. Of the 1,404 IHOP restaurants subject to franchise agreements as of December 31, 2012, a total of 495 operate under the
Current Business Model.
8
The revenues we receive from a typical franchise development arrangement under the Current Business Model include (a) (i)
a location fee equal to $15,000 upon execution of a single-restaurant development agreement or (ii) a development fee equal to
$20,000 for each IHOP restaurant that the franchisee contracts to develop upon execution of a multi-restaurant development
agreement; (b) a franchise fee equal to (i) $50,000 (against which the $15,000 location fee will be credited) for a restaurant
developed under a single-restaurant development agreement or (ii) $40,000 (against which the $20,000 development fee will be
credited) for each restaurant developed under a multi-restaurant development agreement, in each case paid upon execution of the
franchise agreement; (c) franchise royalties equal to 4.5% of weekly gross sales; (d) revenue from the sale of pancake and waffle
dry-mixes; and (e) franchise advertising fees. The franchise agreements generally provide for advertising fees comprised of (i) a
local advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which was typically used to
cover the cost of local media purchases and other local advertising expenses incurred by a local advertising cooperative, and (ii) a
national advertising fee equal to 1.0% of weekly gross sales under the franchise agreement. Area licensees are generally required
to pay lesser amounts toward advertising. Beginning in 2005, every year, the Company and the IHOP franchisees agreed to
reallocate portions of the local advertising fees to purchase national broadcast, syndication and cable television time in order to
reach our target audience more frequently and more cost effectively (see "Marketing and Advertising").
Previous Business Model
IHOP franchised restaurants established prior to 2003 under our Previous Business Model were generally developed by us,
and we were involved in all aspects of the development and financing of the restaurants. Under the Previous Business Model, we
typically identified and leased or purchased the restaurant sites for new company-developed IHOP restaurants, built and equipped
the restaurants and then franchised them to franchisees. In addition, IHOP typically financed as much as 80% of the franchise fee
for periods ranging from five to eight years and leased the restaurant and equipment to the franchisee over a 25-year period.
The revenues received from a restaurant franchised under the Previous Business Model include: (a) the franchise fee, a portion
of which (typically 20%) was paid upon execution of the franchise agreement; (b) interest income from the financing arrangements
for the unpaid portion of the franchise fee under the franchise notes and from the equipment notes; (c) franchise royalties typically
equal to 4.5% of weekly gross sales; (d) lease or sublease rents for the restaurant property and building; (e) rent under an equipment
lease; (f) revenues from the sale of pancake and waffle dry-mixes; and (g) franchise advertising fees as described above.
In a few instances, we have agreed to accept reduced royalties and/or lease payments from franchisees or have provided other
accommodations to franchisees for specified periods of time in order to assist them in either establishing or reinvigorating their
businesses.
From time to time, we will reacquire restaurants developed under the Previous Business Model from a franchisee that is
struggling to fulfill its financial obligations or is otherwise in default of its agreements with us. In most cases we have been able
to refranchise these restaurants to new franchisees fairly quickly. Where that is not the case, we typically operate the reacquired
restaurant pending refranchising. These reacquired restaurants may require investments in remodeling and rehabilitation before
they can be refranchised. As a consequence, our reacquired restaurants frequently incur operating losses for some period of time.
Where appropriate, we may negotiate modified payment terms or agree to other accommodations with franchisees to assist them
to rehabilitate these restaurants. More than half of our franchise restaurants operate under the Previous Business Model.
Area License Agreements and International Franchise Agreements
We have entered into three long-term area license agreements covering the state of Florida and certain counties in the state
of Georgia and the province of British Columbia, Canada. As of December 31, 2012, the area licensee for the state of Florida and
certain counties in Georgia operated or sub-franchised a total of 152 IHOP restaurants. The area licensee for the province of British
Columbia, Canada operated or sub-franchised a total of 13 IHOP restaurants. The area license for British Columbia expires in
2026. The area license agreements provide for royalties ranging from 0.5% to 2.0% of gross sales and advertising fees equal to
0.25% of gross sales. The area license agreements provide the licensees with the right to develop new IHOP restaurants in their
respective territories. We also derive revenues from the sale of proprietary products to these area licensees and in certain instances
their sub-franchisees. Revenues from our area licensees are included in franchise operations revenues for segment reporting
purposes.
Franchise Operations
IHOP's Operations Department is charged with ensuring that high operational standards are met at all times by our franchisees.
Operating standards have been developed in consultation with franchisees and are detailed in the "IHOP Manual of Standard
Operating Procedures." Company and third-party representatives make both scheduled and unannounced inspections of restaurants
to ensure that only approved products are in use and that our prescribed operations practices and procedures are being followed.
Due to cultural and regulatory differences, we may have different requirements for restaurants opened outside of the United States.
9
We highly value good franchisor/franchisee relations and strive to maintain positive working relationships with our franchisees.
We sponsor the IHOP Franchise Leadership Council, an elected and appointed body of IHOP franchisees formed to advise and
assist IHOP management with respect to a broad range of matters relating to the operation of IHOP restaurants. The group meets
with IHOP management at least three times a year to discuss operational issues, marketing matters, development and construction
issues, information technology and many other topics.
Company-Operated Restaurants
Company-operated IHOP restaurants are primarily comprised of our IHOP-owned restaurants in the Cincinnati, Ohio market.
In addition, from time to time, franchise restaurants may be returned by franchisees to us and these restaurants may be operated
by us for an indefinite period until they can be refranchised. We utilize the company-operated restaurants in the Cincinnati market
primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.
Restaurant Development
The Current Business Model relies on franchisees to obtain their own financing to develop IHOP restaurants. We review and
approve the franchisees' proposed sites but do not contribute capital or become the franchisees' landlord. Under the Current Business
Model, substantially all new IHOP restaurants are financed and developed by franchisees or area licensees. In 2012, our franchisees
and area licensees financed and developed 48 new restaurants. We do not currently intend to build additional company-operated
IHOP restaurants in the Cincinnati market.
New IHOP restaurants are only developed after a detailed site selection process is completed. All restaurant development is
approved by the Franchise Review Committee comprised of senior management. We expect our franchisees to add restaurants to
the IHOP system in major markets where we already have a core guest base. We believe that concentrating growth in existing
markets allows us to achieve economies of scale in our supervisory and advertising functions. We also look to have our franchisees
strategically add restaurants in new markets in which we currently have no presence or our presence is limited.
Future Restaurant Development
In 2012, IHOP entered into 23 new franchise development agreements for the development of 55 IHOP restaurants. As of
December 31, 2012, we had signed commitments and options from franchisees to build 245 IHOP restaurants over the next 17 years,
comprised of 5 restaurants under single-restaurant or non-traditional development agreements, 120 restaurants under multi-
restaurant development agreements and 63 restaurants under international development agreements. The signed agreements include
options to build an additional 57 restaurants over the next 10 years.
During 2013, we expect our franchisees to open a total of 50 to 60 new IHOP restaurants, primarily in the domestic market.
The following table represents our IHOP restaurant development commitments, including options, as of December 31, 2012:
Number of
Signed
Agreements
at 12/31/12
Contractual Openings of Restaurants by Year
2013
2014
2015
2016
2017 and
thereafter
Single-restaurant development agreements ....
Multi-restaurant development agreements .....
Multi-restaurant development options............
International territory agreements...................
International territory options .........................
Total................................................................
5
43
5
5
3
61
5
38
—
12
2
57
—
28
—
11
1
40
—
23
3
15
2
43
—
6
8
20
1
35
—
25
34
5
6
70
Total
5
120
45
63
12
245
The actual number of openings in any period may differ from both our expectations and the number of signed commitments.
Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be
developed due to various factors including weather-related delays, other construction delays, difficulties in obtaining timely
regulatory approvals, franchisee noncompliance with development agreements and various economic factors.
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Composition of Franchise System
As of December 31, 2012, there were 1,525 domestic IHOP franchise and area license restaurants. During 2012, our franchisees
and area licensees opened 40 domestic franchise restaurants and 17 domestic franchise and area license restaurants were closed.
The number of restaurants held by an individual franchisee ranges from one to 152 restaurants. The table below sets forth information
regarding the number of IHOP restaurants owned by domestic franchisees as of December 31, 2012 as well as the total number
of restaurants falling into each of the listed ownership ranges.
Number of Restaurants Held by Franchisee
One ......................................................................................
Two to five...........................................................................
Six to ten..............................................................................
Eleven to fifteen ..................................................................
Sixteen and over ..................................................................
Total(a)............................................................................................
________________________________
(a) Percentages may not add due to rounding.
Franchisees
Restaurants
Number
Percent of
Total
Number
Percent of
Total
158
119
30
14
17
338
46.7%
35.2%
8.9%
4.1%
5.0%
100.0%
158
332
237
183
615
1,525
10.4%
21.8%
15.5%
12.0%
40.3%
100.0%
As of December 31, 2012, there were 44 international IHOP franchise and area license restaurants. During 2012, our franchisees
opened eight international franchise restaurants and no restaurants were closed. The number of restaurants held by an individual
franchisee ranges from one to 13 restaurants. The table below sets forth information regarding the number of IHOP restaurants
owned by international franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the
listed ownership ranges.
Number of Restaurants Held by Franchisee
One ......................................................................................
Two to ten............................................................................
Greater than ten ...................................................................
Total(a)............................................................................................
________________________________
(a) Percentages may not add due to rounding.
Marketing and Advertising
Franchisees
Restaurants
Number
Percent of
Total
Number
Percent of
Total
3
9
1
13
23.1%
69.2%
7.7%
100.0%
3
28
13
44
6.8%
63.6%
29.5%
100.0%
IHOP franchisees and company-operated restaurants contribute a percentage of their sales to local advertising cooperatives
and a national advertising fund. The franchise agreements provide for local and national advertising fees. The local advertising
cooperatives have historically used advertising fees for various local marketing programs. The national marketing fund is primarily
used for buying media and national advertising and also for the production of advertising. The national marketing fund is also
used to defray certain expenses associated with our marketing and advertising functions.
Since 2005, we and our franchisees have allocated a portion of the local advertising fees to national media in order to take
advantage of purchasing efficiencies associated with national broadcast, syndication and cable media. For the past four years, the
franchisees agreed to reallocate a greater portion of their local advertising fees to national media, which resulted in more television
advertising on national broadcast, syndication and cable media. We also have expanded the scope of our gift card program and
increased our third-party retailer base to market our gift cards.
Our goal is to attract new guests to our restaurants and to encourage our existing guests to come more often through focused
and compelling communications. To make sure we are breaking through today's competitive media landscape and maximizing
our advertising spending through an improved buying process, we are focusing our media planning on strengthening media weights
in key decision time periods, developing a stronger on-air presence and diversifying our media mix to reach our guests more
effectively.
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Purchasing Cooperative
In February 2009, Centralized Supply Chain Services, LLC ("CSCS" or the "Co-op"), an independent cooperative entity, was
formed to operate as a purchasing cooperative for the operators of Applebee's and IHOP domestic restaurants who have chosen
to join the Co-op. We have appointed CSCS as the sole authorized purchasing organization and purchasing agent for goods,
equipment and distribution services for Applebee's and IHOP restaurants in the United States. We (as a restaurant operator) are a
member of CSCS and have committed to purchase substantially all goods, equipment and distribution services for company-
operated restaurants through the CSCS supply chain program. CSCS combines the purchasing volume for goods, equipment and
distribution services within and across the Applebee's and IHOP concepts. Its mission is to achieve for its members the benefit of
continuously available goods, equipment and distribution services in adequate quantities at the lowest possible sustainable prices.
The operations of CSCS are funded by a separately stated administrative fee added to one or more products purchased by operators.
As of December 31, 2012, 100% of Applebee's franchise restaurants and 99% of IHOP franchise restaurants were members of
CSCS.
We believe the larger scale provided by combining the supply chain requirements of both brands provides continuing cost
savings and efficiencies while helping to ensure compliance with Company quality and safety standards. In some instances, IHOP
and Applebee's may be required to guarantee their purchase of any remaining inventory of certain food and other items purchased
by CSCS for the purpose of supplying limited time promotions on behalf of the IHOP Applebee's and IHOP systems as a whole.
Industry Overview and Competition
The Applebee's and IHOP restaurant chains are among the numerous restaurant chains and independent restaurants competing
in the $650 billion restaurant industry in the United States. The restaurant industry is generally categorized into segments by price
point ranges, the types of food and beverages offered and the types of service available to consumers. These segments include,
among others, fast food or quick service restaurants ("QSR"), family dining, casual dining and fine dining. Each of these segments
can be broken down further into the type of food served by the restaurant. For example, the QSR category includes sandwich
chains, hamburger chains and other chains.
Applebee's competes in the casual dining segment and the bar and grill sub-segment against national and multi-state operators
such as Chili's, T.G.I. Friday's and Ruby Tuesday, among others. In addition, there are many independent restaurants across the
country in the casual dining segment. Casual dining restaurants offer full table service and typically have bars or serve liquor,
wine and beer. Applebee's is the largest casual dining brand in the world, in terms of number of restaurants and market share.
IHOP competes in the family dining segment and the breakfast sub-segment against national and multi-state operators such
as Denny's, Cracker Barrel Old Country Store and Bob Evans Restaurants. IHOP also faces a growing level of competition from
fast food chains that serve breakfast. In addition, there are many independent restaurants and diners across the country in the family
dining segment. Family dining restaurants offer full table service, typically do not have bars or serve liquor, and usually offer
breakfast in addition to lunch and dinner items. IHOP is the largest family dining brand in the world in terms of system-wide sales.
The restaurant business is highly competitive and is affected by, among other things, economic conditions, price levels, on-
going changes in eating habits and food preferences, population trends and traffic patterns. The principal bases of competition in
the industry are the type, quality and price of the food products served. Additionally, restaurant location, quality and speed of
service, advertising, name identification and attractiveness of facilities are important.
The market for high quality restaurant sites is also highly competitive. We and our franchisees often compete with other
restaurant chains and retail businesses for suitable sites for the development of new restaurants.
We also compete against other franchising organizations both within and outside the restaurant industry for new franchise
developers.
Trademarks and Service Marks
We and our affiliates have registered certain trademarks and service marks with the United States Patent and Trademark Office
and various international jurisdictions, including “DineEquity®” and “Great Franchisees. Great Brands.®” We own trademarks
and service marks used in the Applebee's system, including “Applebee's®” and "Applebee's Neighborhood Grill & Bar®,” and
variations of each, as well as “Brewtus®,” “Carside To Go®,” “There's No Place Like The Neighborhood®,” “Pick 'N Pair®,” “Main
Street 'Rita®,” “Fiesta Lime Chicken®,” “Fire Grilled Favorites®,” “Triple Chocolate Meltdown®,” “Summer Squeeze®,” “Mucho
Margarita®”, and “See You Tomorrow®.” In addition, through our affiliate, we own trademarks and service marks used in the IHOP
system, including “IHOP®” and “International House of Pancakes®,” and variations of each, as well as “Never Empty Coffee
Pot®,” “Rooty Tooty Fresh 'N Fruity®,” “Rooty Jr.®,” “Harvest Grain 'N Nut®,” “Come Hungry. Leave Happy.®,” “IHOP at Home®,”
“IHOP Cafe®,” and “IHOP Express®,” “Cinn-A-Stack®,” “Create-A-Face®,” “Funny Face®,” “Pancake Revolution®,” “IHOP
Splashers®,” and “IHOP 'N Go®.”
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We consider our trademarks and service marks important to the identification of our company and our restaurants and believe
they are of material importance to the conduct of our business. We generally intend to renew trademarks and service marks which
come up for renewal. We own or have rights to all trademarks we believe are material to our restaurant operations. In addition,
we have registered various domain names on the Internet that incorporate certain of our trademarks and service marks, and believe
these domain name registrations are an integral part of our identity. From time to time, we may take appropriate legal action to
defend and protect the use of our intellectual property.
Seasonal Operations
We do not consider our operations to be seasonal to any material degree.
Government Regulation
We are subject to Federal Trade Commission ("FTC") regulation and a number of state laws which regulate the offer and sale
of franchises. We also are subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee
relationship. The FTC's Trade Regulation Rule on Franchising, as amended (the "FTC Rule"), requires us to furnish to prospective
franchisees a Franchise Disclosure Document containing information prescribed by the FTC Rule.
State laws that regulate the offer and sale of franchises and the franchisor-franchisee relationship presently exist in a number
of states. State laws that regulate the offer and sale of franchises require registration of the franchise offering with the state
authorities. Those states that regulate the franchise relationship generally require that the franchisor deal with its franchisees in
good faith, prohibit interference with the right of free association among franchisees, limit the imposition of unreasonable standards
of performance on a franchisee and regulate discrimination against franchisees with respect to charges, royalty fees or other fees.
Although such laws may restrict a franchisor in the termination and/or non-renewal of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the termination and/or non-renewal, advance notice to the franchisee of the termination
or non-renewal, an opportunity to cure a default and a repurchase of inventory or other compensation upon termination, these
provisions have not historically had a significant effect on our franchise operations.
Each restaurant is subject to licensing and regulation by a number of governmental authorities, which may include liquor
license authorities (primarily in the case of Applebee's restaurants), health, sanitation, safety, fire, building and other agencies in
the state or municipality in which the restaurant is located. Difficulties in obtaining, or failure to obtain, the required licenses or
approvals could delay or prevent the development of a new restaurant in a particular area or cause the temporary closure of existing
restaurants. We are also subject to new laws and regulations, which vary from jurisdiction to jurisdiction, relating to nutritional
content and menu labeling. Compliance with these laws and regulations may lead to increased costs and operational complexity
and may increase our exposure to governmental investigations or litigation.
We are subject to federal and state environmental regulations, but these have not had a material effect on our operations. More
stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could
delay or prevent the development of new restaurants in particular areas.
Various federal and state labor laws govern both our own and our franchisees' relationships with our respective employees.
These include such matters as minimum wage requirements, overtime and other working conditions. Significant additional
government-imposed increases in minimum wages, paid leaves of absence, mandated health benefits or increased tax reporting
and tax payment requirements with respect to employees who receive gratuities could be detrimental to the economic viability of
our restaurants.
In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education
Affordability Reconciliation Act of 2010. The legislation is far-reaching and is intended to expand access to health insurance
coverage over time by adjusting the eligibility thresholds for most state Medicaid programs and providing certain other individuals
and small businesses with tax credits to subsidize a portion of the cost of health insurance coverage. The legislation includes a
requirement that most individuals obtain health insurance coverage beginning in 2014 and also a requirement that certain large
employers offer coverage to their employees or pay a financial penalty. We are evaluating the impact the new law will have on
our business. Although we cannot predict with certainty the financial and operational impacts the new law will have on us, we
expect that our expenses will increase over the long term as a result of this legislation, and any such increases could adversely
affect our business, cash flows, financial condition and results of operations.
In recent years, there has been an increased legislative, regulatory and consumer focus at the federal, state and municipal
levels on the food industry including nutrition and advertising practices. Restaurants operating in the quick-service and fast-casual
segments have been a particular focus. The State of California, New York City and a growing number of other jurisdictions around
the United States have adopted regulations requiring that chain restaurants include calorie information on their menus or make
other nutritional information available. The recently-enacted United States health care reform law included nation-wide menu
labeling and nutrition disclosure requirements as well. Initiatives in the area of nutrition disclosure or advertising, such as
13
requirements to provide information about the nutritional content of our food, may result in increased costs of compliance with
the requirements and may also change customer buying habits in a way that adversely impacts our sales.
Environmental Matters
We are not aware of any federal, state or local environmental laws or regulations that are likely to materially impact our
revenues, cash flow or competitive position, or result in any material capital expenditure. However, we cannot predict the effect
of possible future environmental legislation or regulations.
Employees
At December 31, 2012, we had approximately 2,450 employees, of whom approximately 500 were full-time, non-restaurant,
corporate personnel. Our employees are not presently represented by any collective bargaining agreements and we have never
experienced a work stoppage. We believe our relations with employees are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports
and other filings with the United States Securities and Exchange Commission (the "SEC") are available free of charge through
our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The
information contained on our website is not incorporated into this annual report. Further, the SEC maintains an Internet site that
contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. In addition, the
public may read and copy the materials we file with the SEC at the SEC's Public Reference Room at 100 F. Street, NE, Washington,
D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC.
Item 1A. Risk Factors.
General
This Item 1A includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on
forward-looking statements included in Item 7.
The occurrence of any of the events discussed in the following risk factors may materially adversely affect our business,
financial condition and results of operations, which may materially adversely affect the value of our shares of common stock.
Our business is affected by general economic conditions that are largely out of our control. Our business is dependent
to a significant extent on national, regional and local economic conditions, and, to a lesser extent, on global economic conditions,
particularly those conditions affecting the demographics of the guests that frequently patronize Applebee's or IHOP restaurants.
If our customers' disposable income available for discretionary spending is reduced (because of circumstances such as job losses,
credit constraints, higher housing costs, increased tax rates, energy costs, interest rates or other costs) or if the perceived wealth
of customers decreases (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased
tax rates or other economic disruptions), our business could experience lower sales and customer traffic as potential customers
choose lower-cost alternatives (such as quick-service restaurants or fast casual dining) or choose alternatives to dining out. Any
resulting decreases in customer traffic or average value per transaction will negatively impact the financial performance of
Applebee's or IHOP company-operated restaurants, as reduced gross sales result in downward pressure on margins and profitability.
These factors could also:
•
•
reduce gross sales at franchise restaurants, resulting in lower royalty payments from franchisees, and
reduce the profitability of franchise restaurants, potentially impacting the ability of franchisees (i) to make royalty
payments when they are due and (ii) to develop new restaurants as called for in their respective development agreements.
Our indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our debt.
As of December 31, 2012, we had $1.2 billion of outstanding Senior Notes and Term Loans. In addition, we had approximately
$0.2 billion in financing and capital lease obligations as of December 31, 2012. Our level of indebtedness which could have
important consequences to our financial health. For example, it could:
• make it more difficult for us to satisfy our obligations with respect to our debt;
•
•
increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;
require us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that are not as highly leveraged;
•
•
14
•
•
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to
borrow additional funds; and
result in an event of default if we fail to satisfy our obligations under our debt or fail to comply with the financial and
other restrictive covenants contained in our debt documents, which event of default could result in all of our debt becoming
immediately due and payable and could permit certain of our lenders to foreclose on our assets securing such debt.
In addition, we may incur substantial additional indebtedness in the future. If new debt is added to our current debt levels,
the related risks that we now face could intensify.
To service our indebtedness, we will require a significant amount of cash, which depends on many factors beyond our
control. There is no assurance that our business will generate sufficient cash flow from operations, or that future borrowings
will be available to us under our senior secured credit facility in amounts sufficient to enable us to fund our liquidity needs,
including with respect to our other indebtedness. As we are required to satisfy amortization requirements under our senior secured
credit facility or as other debt matures, we may also need to raise funds to refinance all or a portion of our debt when it becomes
due. Further, there is no assurance that we will be able to refinance any of our debt on attractive terms, commercially reasonable
terms or at all. Our future operating performance and our ability to service, extend or refinance our debt will be subject to future
economic conditions and to financial, business and other factors.
Declines in our financial performance could result in additional impairment charges in future periods. United States
generally accepted accounting principles ("U.S. GAAP") require annual (or more frequently if events or changes in circumstances
warrant) impairment tests of goodwill, intangible assets and other long-lived assets. Generally speaking, if the carrying value of
the asset is in excess of the estimated fair value of the asset, the carrying value will be adjusted to fair value through an impairment
charge. Fair values of goodwill and intangible assets are primarily estimated using discounted cash flows based on five-year
forecasts of financial results that incorporate assumptions as to same-restaurant sales trends, future development plans and brand-
enhancing initiatives, among other things. Fair values of long-lived tangible assets are primarily estimated using discounted cash
flows over the estimated useful lives of the assets. Significant underachievement of forecasted results could reduce the estimated
fair value of these assets below the carrying value, requiring non-cash impairment charges to reduce the carrying value of the
asset. As of December 31, 2012, our total stockholders' equity was $308.8 million. A significant impairment write-down of goodwill,
intangible assets or long-lived assets in the future could result in a deficit balance in stockholders' equity. While such a deficit
balance would not create an incident of default in any of our contractual agreements, the negative perception of such a deficit
could have an adverse effect on our stock price and could impair our ability to obtain new financing, or refinance existing
indebtedness on commercially reasonable terms or at all.
Many factors, including those over which we have no control, affect the trading volatility and price of our stock. Many
factors, in addition to our operating results, may have an impact on the trading volatility and price of our common stock. These
factors include general economic and market conditions, publicity regarding us, our competitors, or the restaurant industry generally,
changes in financial estimates by securities analysts, changes in financial or tax reporting and accounting principles or practices,
trading activity in our common stock, and the impact of our capital allocation initiatives, including any future stock repurchase
programs or dividend declarations. A number of these factors are outside of our control, and any failure to meet market expectations
whether for sales growth rates, earnings per share or other metrics could cause our share price to decline.
Our actual operating and financial results in any given period may differ from guidance we provide to the public, including
our most recent public guidance. From time to time, in press releases, SEC filings, public conference calls and other contexts,
we have provided guidance to the public regarding current business conditions and our expectations for our future financial results.
We expect that we will provide guidance periodically in the future. Our guidance is based upon a number of assumptions,
expectations and estimates that are inherently subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In providing our guidance, we also make various assumptions with respect
to our future business decisions, some of which will change. Our actual financial results, therefore, may vary from our guidance
due to our inability to meet the assumptions upon which our guidance is based and the impact on our business of the various risks
and uncertainties described in these risk factors and in our public filings with the SEC. Variances between our actual results and
our guidance may be material. To the extent that our actual financial results do not meet or exceed our guidance, the trading prices
of our securities may be materially adversely affected.
The restaurant industry is highly competitive, and that competition could lower our revenues, margins and market
share. The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographics
and the type, number and location of competing restaurants. The restaurant industry is highly competitive with respect to price,
service, location, personnel and the type and quality of food. Each Applebee's and IHOP restaurant competes directly and indirectly
with a large number of national and regional restaurant chains, as well as independent businesses. The trend toward convergence
in grocery, deli, and restaurant services, as well as the continued expansion of restaurants into the breakfast daypart, may increase
the number and variety of Applebee's and IHOP restaurants' competitors. In addition to the prevailing baseline level of competition,
major market players in non-competing industries may choose to enter the food services market which could decrease the market
15
share of Applebee's and IHOP in each of their respective categories. Such increased competition could have a material adverse
effect on the financial condition and results of operations of Applebee's or IHOP restaurants in affected markets. Applebee's and
IHOP restaurants also compete with other restaurant chains for qualified management and staff, and we compete with other
restaurant chains for available locations for new restaurants. Applebee's and IHOP restaurants also face competition from the
introduction of new products and menu items by other restaurant chains, as well as substantial price discounting, and are likely
to face such competition in the future. The future success of new products, initiatives and overall strategies is highly difficult to
predict and will be influenced by competitive product offerings, pricing and promotions offered by competitors. Our ability to
differentiate the Applebee's and IHOP brands from their competitors, which is in part limited by the advertising monies available
to us and by consumer perception, cannot be assured. These factors could reduce the gross sales or profitability at Applebee's or
IHOP restaurants, which would reduce the revenues generated by company-owned restaurants and the franchise payments received
from franchisees.
Our business strategy may not achieve the anticipated results. We expect to continue to apply a business strategy that
includes, among other things, (i) operation of a 99% franchised restaurant system; (ii) the maintenance of a purchasing cooperative
that procures products and services for our Applebee's and IHOP restaurants; (iii) the possible introduction of new restaurant
concepts; and (iv) the continued implementation of a shared service model across the brands for various functions, including legal,
human resources, communications, finance and centers of excellence in development and operations support. However, the
Applebee's business is different in many respects from the IHOP business. In particular, the Applebee's restaurants are part of the
casual dining segment of the restaurant industry whereas the IHOP restaurants are part of the family dining segment, and the
Applebee's business is larger, distributed differently across the United States and appeals to a somewhat different segment of the
consumer market. Therefore, there can be no assurance that the business strategy we apply to the Applebee's business will be
suitable or will achieve similar results to the application of such business strategy to the IHOP system. The actual benefit from
the refranchising of the Applebee's company-operated restaurants is uncertain and may be less than anticipated. Finally, our
operational improvement initiatives or purchasing initiatives may not be successful or achieve the desired results. In particular,
there can be no assurance that the existing franchisees or prospective new franchisees will respond favorably to such initiatives.
Our performance is subject to risks associated with the restaurant industry. The sales and profitability of our restaurants
and, in turn, payments from our franchisees may be negatively impacted by a number of factors, some of which are outside of our
control. The most significant are:
•
•
•
•
•
•
•
•
declines in comparable-restaurant sales growth rates due to: (i) failing to meet customers' expectations for food
quality and taste or to innovate new menu items to retain the existing customer base and attract new customers;
(ii) competitive intrusions in our markets; (iii) opening new restaurants that cannibalize the sales of existing
restaurants; (iv) failure of national or local marketing to be effective; (v) weakening national, regional and local
economic conditions; and (vi) natural disasters or adverse weather conditions.
negative trends in operating expenses such as: (i) increases in food costs including rising commodity costs;
(ii) increases in labor costs including increases mandated by minimum wage and other employment laws, immigration
reform, the potential impact of union organizing efforts, increases due to tight labor market conditions and the Patient
Protection and Affordable Care Act; and (iii) increases in other operating costs including advertising, utilities, lease-
related expenses and credit card processing fees;
the inability to open new restaurants that achieve and sustain acceptable sales volumes;
the inability to increase menu pricing to offset increased operating expenses;
failure to effectively manage further penetration into mature markets;
negative trends in the availability of credit and in expenses such as interest rates and the cost of construction materials
that will affect our ability or our franchisees' ability to maintain and refurbish existing restaurants;
the inability to manage our company-owned restaurants due to unanticipated changes in executive management, and
availability of qualified restaurant management, staff and other personnel; and
the inability to operate effectively in new and/or highly competitive geographic regions or local markets in which
we or our franchisees have limited operating experience.
A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current
restaurants may adversely affect our sales and results of operations. The success of our restaurants depends in large part on
their locations. As demographic and economic patterns change, current locations may not continue to be attractive or profitable.
Potential declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those
neighborhoods could result in reduced sales in those locations. In addition, desirable locations for new restaurant openings or for
the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a
new restaurant or relocation. Additionally, restaurant revitalization initiatives may not be completed as and when projected.
16
A failure to address cost pressures, including rising costs for labor, food commodities and utilities used by our and our
franchisees' restaurants, and a failure of the Co-op to effectively deliver cost management activities and achieve economies of
scale in purchasing, may compress our franchisees' operating margins and adversely affect our and our franchisees' business
results. Our and our franchisees' business results depend highly on the ability to anticipate and react to changes in the availability
and pricing of food commodities, utilities, and other related costs over which we may have little control. Operating margins for
our and our franchisees' restaurants are subject to increases in labor costs mandated by health care laws, employment laws,
immigration reform, union organizing efforts and labor market conditions. In addition, our and our franchisees' operating margins
are subject to changes in the pricing and availability of beef, pork, eggs, cheese, coffee and produce. We attempt to leverage our
size to achieve economies of scale in purchasing through the Co-op, but there can be no assurances that we can always do so
effectively. We are subject to the general risks of inflation. Restaurant operating margins are also affected by fluctuations in the
price of utilities such as electricity and natural gas, whether as a result of inflation or otherwise, on which the restaurants depend
for their energy supply. Our inability to anticipate and respond effectively to any of these cost pressures could have an adverse
effect on our business results.
We may experience shortages or interruptions in the supply or delivery of food and other products from third parties or
in the availability of utilities. Our franchised and company-operated restaurants are dependent on frequent deliveries of fresh
produce, food, beverage and other products. This subjects us to the risk of shortages or interruptions in food and beverage supplies
which may result from a variety of causes including, but not limited to, shortages due to adverse weather, labor unrest, political
unrest, terrorism, outbreaks of food-borne illness, disruption of operation of production facilities or other unforeseen circumstances.
Such shortages could adversely affect our revenue and profits. The inability to secure adequate and reliable supplies or distribution
of food and beverage products could limit our ability to make changes to our core menus or offer promotional "limited time only"
menu items, which may limit our ability to implement our business strategies. Our restaurants bear risks associated with the
timeliness of deliveries by suppliers and distributors as well as the solvency, reputation, labor relationships, freight rates, prices
of raw materials and health and safety standards of each supplier and distributor. Other significant risks associated with our suppliers
and distributors include improper handling of food and beverage products and/or the adulteration or contamination of such food
and beverage products. Disruptions in our relationships with suppliers and distributors may reduce the profits generated by
company-operated restaurants or the payments we receive from franchisees. In addition, interruptions to the availability of gas,
electric, water or other utilities may adversely affect our operations.
A failure to develop and implement innovative marketing and guest relationship initiatives, ineffective or improper use of
social media or other marketing initiatives, and increased advertising and marketing costs, could adversely affect our business
results. If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses
increase, or if our advertising and promotions become less effective than those of our competitors, we could experience a material
adverse effect on our business results. A failure to sufficiently innovate, develop guest relationship initiatives, or maintain adequate
and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.
As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests.
These efforts may not be successful, resulting in expenses incurred without the benefit of higher revenues or increased employee
engagement. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of
proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, or out-of-
date information. The inappropriate use of social media vehicles by our franchisees, guests or employees could increase our costs,
lead to litigation or result in negative publicity that could damage our reputation. These efforts may not be successful, and pose
a variety of other risks, as discussed above under the heading: “We rely heavily on information technology in our operations, and
insufficient guest or employee facing technology, or any material failure, inadequacy, interruption or breach of security of any of
our technology, could harm our ability to effectively operate our business.”
Changing health or dietary preferences may cause consumers to avoid Applebee's and IHOP's products in favor of
alternative foods. The food service industry as a whole rests on consumer preferences and demographic trends at the local,
regional, national and international levels, and the impact on consumer eating habits of new information regarding diet, nutrition
and health. Our franchise development and system-wide sales depend on the sustained demand for our products, which may be
affected by factors we do not control. Changes in nutritional guidelines issued by the United States Department of Agriculture,
issuance of similar guidelines or statistical information by federal, state or local municipalities, or academic studies, among other
things, may impact consumer choice and cause consumers to select foods other than those that are offered by Applebee's or IHOP
restaurants. We may not be able to adequately adapt Applebee's or IHOP restaurants' menu offerings to keep pace with developments
in consumer preferences, which may result in reductions to the revenues generated by our company-operated restaurants and the
franchise payments we receive from franchisees.
We face a variety of risks associated with doing business with franchisees and vendors in foreign markets. Our expansion
into international markets could create risks to our brands and reputation. We believe that we have selected high-caliber international
franchisees with significant experience in restaurant operations. However, the ultimate success and quality of any franchise
17
restaurant rests with the franchisee. If the franchisee does not successfully operate its restaurants in a manner consistent with our
standards, or customers have negative experiences due to issues with food quality or operational execution, our brand values could
suffer, which could have an adverse effect on our business.
There also is no assurance that international operations will be profitable or that international growth will continue. Our
international operations are subject to all of the same risks associated with our domestic operations, as well as a number of additional
risks. These include, among other things, international economic and political conditions, foreign currency fluctuations, and
differing cultures and consumer preferences.
We also are subject to governmental regulations throughout the world that impact the way we do business with our international
franchisees and vendors. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations
and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Failure to comply with any
such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of
operations and financial condition.
Factors outside our control may harm our brands' reputations. The success of our restaurant business is largely dependent
upon brand recognition and the strength of our franchise systems. The continued success of our company-operated restaurants
and our franchisees will be directly dependent upon the maintenance of a favorable public view of the Applebee's and IHOP brands.
Negative publicity (e.g., crime, scandal, litigation, on-site accidents and injuries or other harm to customers) at a single Applebee's
or IHOP location can have a substantial negative impact on the operations of all restaurants within the Applebee's or IHOP system.
Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any
type, but particularly regarding food quality, food-borne illness, food tampering, obesity, injury or other health concerns with
respect to certain foods, whether or not accurate or valid. The risk of food-borne illness or food tampering cannot be completely
eliminated. Any outbreak of food-borne illness or other food-related incidents attributed to Applebee's or IHOP restaurants or
within the food service industry or any widespread negative publicity regarding the Applebee's or IHOP brands or the restaurant
industry in general could harm our reputation. Although the Company maintains liability insurance, and each franchisee is required
to maintain liability insurance pursuant to its franchise agreements, a liability claim could injure the reputation of all Applebee's
or IHOP restaurants, whether or not it is ultimately successful.
We may be subject to legal proceedings that could be time consuming, result in costly litigation, require significant amounts
of management time and result in the diversion of significant operational resources. We are involved in lawsuits, claims and
proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. Any claims against us, whether
meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result
in the diversion of significant operational resources. There have been a growing number of lawsuits in recent years. There has
also been a rise in employment-related lawsuits. From time to time, we have been subject to these types of lawsuits. The cost of
defending claims against us or the ultimate resolution of such claims may harm our business and operating results. In addition,
the increasingly regulated business environment may result in a greater number of enforcement actions and private litigation. This
could subject us to increased exposure to stockholder lawsuits.
We and our franchisees are subject to a variety of litigation. We and our franchisees are subject to complaints or litigation
from guests alleging illness, injury or other food quality, food safety, health or operational concerns. We and our franchisees are
also subject to "dram shop" laws in some states pursuant to which we and our franchisees may be subject to liability in connection
with personal injuries or property damages incurred in connection with wrongfully serving alcoholic beverages to an intoxicated
person. We may also initiate legal proceedings against franchisees for breach of the terms of their franchise agreements, including
underreporting of sales , failure to operate restaurants according to standard operating procedures and payment defaults. Such
claims may reduce the profits generated by company-operated restaurants and the ability of franchisees to make payments to us.
These claims may also reduce the ability of franchisees to enter into new franchise agreements with us. Although our franchise
agreements require our franchisees to defend and indemnify us, we may be named as a defendant and sustain liability in legal
proceedings against franchisees under the doctrines of vicarious liability, agency, negligence or otherwise.
Third-party claims with respect to intellectual property assets, if decided against us, may result in competing uses or require
adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues. We regard our
service marks and trademarks related to our restaurant businesses as having significant value and being important to our marketing
efforts. To protect our restaurants and services from infringement, we rely on contracts, copyrights, patents, trademarks, service
marks and other common law rights, such as trade secret and unfair competition laws. We have registered certain trademarks and
service marks in the United States and foreign jurisdictions; however, effective intellectual property protection may not be available
in every country in which we have or intend to open or franchise a restaurant. Although we believe we have taken appropriate
measures to protect our intellectual property, there can be no assurance that these protections will be adequate.
18
In addition, there can be no assurance that third parties will not assert infringement or misappropriation claims against us, or
assert claims that our rights in our trademarks, service marks and other intellectual property assets are invalid or unenforceable.
Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our
rights in any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual property
which, in turn, could lead to a decline in restaurant revenues and sales of other branded products and services (if any). If the
intellectual property became subject to third-party infringement, misappropriation or other claims, and such claims were decided
against us, we may be forced to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated
to acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated
with the defense of any infringement, misappropriation, or other third-party claims.
Ownership of real property exposes us to potential environmental liabilities. The ownership of real property exposes us
to potential environmental liabilities from United States federal, state and local governmental authorities and private lawsuits by
individuals or businesses. The potential environmental liabilities in connection with the ownership of real estate are highly uncertain.
We currently do not have actual knowledge of any environmental liabilities that would have a material adverse effect on the
Company. From time to time, we have experienced some non-material environmental liabilities resulting from environmental
issues at our properties. While we are unaware of any material environmental liabilities, it is possible that material environmental
liabilities relating to our properties may arise in the future.
Matters involving employees at certain company-operated restaurants expose us to potential liability. We are subject to
United States federal, state and local employment laws that expose us to potential liability if we are determined to have violated
such employment laws. Failure to comply with federal and state labor laws pertaining to minimum wage, overtime pay, meal and
rest breaks, unemployment tax rates, workers' compensation rates, citizenship or residency requirements, child labor requirements,
sales taxes and other employment-related matters may have a material adverse effect on our business or operations. In addition,
employee claims based on, among other things, discrimination, harassment or wrongful termination may divert financial and
management resources and adversely affect operations. The losses that may be incurred as a result of any violation of such
employment laws are difficult to quantify.
Our failure or the failure of our franchisees to comply with federal, state and local governmental regulations may subject
us to losses and harm our brands. We are subject to the Fair Labor Standards Act (which governs such matters as minimum
wages, overtime and other working conditions), along with the Americans with Disabilities Act, the Immigration Reform and
Control Act of 1986, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated by
federal, state and local governmental authorities that govern these and other employment matters, including tip credits, working
conditions, safety standards and immigration status. We expect increases in payroll expenses as a result of federal and state mandated
increases in the minimum wage, and although such increases are not expected to be material, we cannot assure you that there will
not be material increases in the future. Enactment and enforcement of various federal, state and local laws, rules and regulations
on immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants in a particular
area or across the United States. Other labor shortages or increased team member turnover could also increase labor costs. In
addition, our vendors may be affected by higher minimum wage standards or availability of labor, which may increase the price
of goods and services they supply to us. We continue to review the health care reform law enacted by Congress in March of 2010
and regulations issued related to the law to evaluate the potential impact of this new law on our business, and to accommodate
various parts of the law as they take effect. There are no assurances that a combination of cost management and price increases
can accommodate all of the costs associated with compliance.
We are subject to extensive federal, state and local governmental regulations, including those relating to the food safety and
inspection and the preparation and sale of food and alcoholic beverages. Disruptions within any government agencies could impact
the U.S. food industry which may have an adverse affect on our business. We are also subject to laws and regulations relating to
building and zoning requirements. Each of our and our franchisees' restaurants is also subject to licensing and regulation by
alcoholic beverage control, health, sanitation, safety and fire agencies in the state, county and/or municipality where the restaurant
is located. We generally have not encountered any material difficulties or failures in obtaining and maintaining the required licenses
and approvals that could impact the continuing operations of an existing restaurant, or delay or prevent the opening of a new
restaurant. Although we do not, at this time, anticipate any occurring in the future, we cannot assure you that we or our franchisees
will not experience material difficulties or failures that could impact the continuing operations of an existing restaurant, or delay
the opening of restaurants in the future.
In addition, we are subject to laws and regulations, which vary from jurisdiction to jurisdiction, relating to nutritional content
and menu labeling. Compliance with these laws and regulations may lead to increased costs and operational complexity and may
increase our exposure to governmental investigations or litigation. In connection with the continued operation or remodeling of
certain restaurants, we or our franchisees may be required to expend funds to meet federal, state and local and foreign regulations.
The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of such laws could have
an adverse effect on our results of operations.
19
Finally, we are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state
franchise laws contain provisions that supersede the terms of franchise agreements, including provisions concerning the termination
or non-renewal of a franchise. Some state franchise laws require that certain materials be registered before franchises can be offered
or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and the
franchisees. Changes in, and the cost of compliance with, government regulations could have a material effect on operations.
Restaurant development plans under development agreements may not be implemented effectively. We rely on franchisees
to develop Applebee's and IHOP restaurants. Restaurant development involves substantial risks, including the following:
•
•
•
•
•
•
•
•
the availability of suitable locations and terms for potential development sites;
the ability of franchisees to fulfill their commitments to build new restaurants in the numbers and the time frames specified
in their development agreements;
the availability of financing, at acceptable rates and terms, to both franchisees and third-party landlords, for restaurant
development;
delays in obtaining construction permits and in completion of construction;
developed properties not achieving desired revenue or cash flow levels once opened;
competition for suitable development sites;
changes in governmental rules, regulations, and interpretations (including interpretations of the requirements of the
Americans with Disabilities Act); and
general economic and business conditions.
We cannot assure that the development and construction of facilities will be completed, or that any such development will be
completed in a timely manner. We cannot assure that present or future development plans will perform in accordance with our
expectations.
The opening and success of Applebee's and IHOP restaurants depend on various factors, including the demand for Applebee's
and IHOP restaurants and the selection of appropriate franchisee candidates, the availability of suitable sites, the negotiation of
acceptable lease or purchase terms for new locations, costs of construction, permit issuance and regulatory compliance, the ability
to meet construction schedules, the availability of financing and other capabilities of franchisees. There is no assurance that
franchisees planning the opening of restaurants will have the business abilities or sufficient access to financial resources necessary
to open the restaurants required by their agreements. It cannot be assured that franchisees will successfully participate in our
strategic initiatives or operate their restaurants in a manner consistent with our concepts and standards.
Approximately 99% of our restaurants are owned and operated by our franchisees and, as a result, we are highly dependent
upon our franchisees. We have significantly increased the percentage of restaurants owned and operated by our franchisees. As
a result, we expect to receive less revenue from company restaurant sales and any increase in general and administrative expenses
may have a greater impact on our financial condition and business results. While our franchise agreements are designed to maintain
brand consistency, this increase in the franchised-operated restaurants reduces our direct day-to-day control over these restaurants
and may expose us to risks not otherwise encountered if we maintained ownership and control of the restaurants. These risks
include franchisee defaults in their obligations to us arising from financial or other difficulties encountered by them, such as
payments to us or maintenance and improvement obligations; limitations on enforcement of franchise obligations due to bankruptcy
or insolvency proceedings; unwillingness of franchisees to support our marketing programs and strategic initiatives; inability to
participate in business strategy changes due to financial constraints; inability to meet rent obligations on leases on which we retain
contingent liability; failure to operate restaurants in accordance with required standards; failure to report sales information
accurately; efforts by one or more large franchisees or an organized franchise association to cause poor franchise relations; and
failure to comply with food quality and preparation requirements subjecting us to potential losses even when we are not legally
liable for a franchisee's actions or failure to act. Although we believe that our current relationships with our franchisees are
generally good, there can be no assurance that we will maintain strong franchise relationships. Our dependence on franchisees
could adversely affect us, our reputation and our brands, and could adversely affect our business, financial condition and results
of operations.
Concentration of Applebee's franchised restaurants in a limited number of franchisees subjects us to greater credit risk. As
of December 31, 2012, Applebee's franchisees operated 1,862 Applebee's restaurants in the United States, comprising 99% of the
total Applebee's restaurants in the United States. Of those restaurants, the twelve largest Applebee's franchisees owned 1,280
restaurants, representing 69% of all franchised Applebee's restaurants in the United States. The concentration of franchised
restaurants in a limited number of franchisees subjects us to a potentially higher level of credit risk in respect of such franchisees
because their financial obligations to us are greater as compared to those franchisees with fewer restaurants. The risk associated
with these franchisees is also greater where franchisees are the sole or dominant franchisee for a particular region of the United
States, as is the case for most domestic Applebee's franchised territories. In particular, if any of these franchisees experiences
financial or other difficulties, the franchisee may default on its obligations under multiple franchise agreements including payments
to us and the maintenance and improvement of its restaurants. If any of these franchisees are subject to bankruptcy or insolvency
20
proceedings, a bankruptcy court may prevent the termination of the related franchise agreements and development agreements.
Any franchisee that is experiencing financial difficulties may also be unable to participate in implementing changes to our business
strategy. Any franchisee that owns and operates a significant number of Applebee's restaurants and fails to comply with its other
obligations under the franchise agreement, such as those relating to the quality and preparation of food and maintenance of
restaurants, could cause significant harm to the Applebee's brand and subject us to claims by consumers even if we are not legally
liable for the franchisee's actions or failure to act. Development rights for Applebee's restaurants are also concentrated among a
limited number of existing franchisees. If any of these existing franchisees experience financial difficulties, future development
of Applebee's restaurants may be materially adversely affected.
We are subject to credit risk from our IHOP franchisees operating under our Previous Business Model, and a default by
these franchisees may negatively affect our cash flows. Of the 1,404 IHOP restaurants subject to franchise agreements as of
December 31, 2012, over half operate under the Previous Business Model. The Company was involved in all aspects of the
development and financing of the IHOP restaurants established prior to 2003. Under the Previous Business Model, the Company
typically identified and leased or purchased the restaurant sites, built and equipped the restaurants and then franchised them to
franchisees. In addition, IHOP typically financed as much as 80% of the franchise fee for periods ranging from five to eight years
and leased the restaurant and equipment to the franchisee over a 25-year period. Therefore, in addition to franchise fees and
royalties, the revenues received from an IHOP franchisee operating under the Previous Business Model include, among other
things, lease or sublease rents for the restaurant property building, rent under an equipment lease and interest income from the
financing arrangements for the unpaid portion of the franchise fee under the franchise notes. If any of these IHOP franchisees
were to default on their payment obligations to us, we may be unable to collect the amounts owed under the building property
lease/sublease agreement and our notes and equipment contract receivables, as well as outstanding franchise royalties. The
additional amounts owed to us by each of these IHOP franchisees subject us to greater credit risk and defaults by IHOP franchisees
operating under our Previous Business Model may negatively affect our cash flows.
Termination or non-renewal of franchise agreements may disrupt restaurant performance. Each franchise agreement is
subject to termination by us in the event of default by the franchisee after applicable cure periods. Upon the expiration of the initial
term of a franchise agreement, the franchisee generally has an option to renew the franchise agreement for an additional term.
There is no assurance that franchisees will meet the criteria for renewal or will desire or be able to renew their franchise agreements.
If not renewed, a franchise agreement and the related payments will terminate. We may be unable to find a new franchisee to
replace such lost revenues. Furthermore, while we will be entitled to terminate franchise agreements following a default that is
not cured within the applicable grace period, if any, such termination may disrupt the performance of the restaurants affected.
Franchisees may breach the terms of their franchise agreements in a manner that adversely affects our
brands. Franchisees are required to conform to specified product quality standards and other requirements pursuant to their
franchise agreements in order to protect our brands and to optimize restaurant performance. However, franchisees may receive
through the supply chain or produce sub-standard food or beverage products, which may adversely impact the reputation of our
brands. Franchisees may also breach the standards set forth in their respective franchise agreements.
Franchisees are subject to potential losses that are not covered by insurance that may negatively impact their ability to
make payments to us and perform other obligations under franchise agreements. Franchisees may have insufficient insurance
coverage to cover all of the potential risks associated with the ownership and operation of their restaurants. A franchisee may have
insufficient funds to cover unanticipated increases in insurance premiums or losses that are not covered by insurance. Certain
extraordinary hazards may not be covered and insurance may not be available (or may be available only at prohibitively expensive
rates) with respect to many other risks. Moreover, there is no assurance that any loss incurred will not exceed the limits on the
policies obtained, or that payments on such policies will be received on a timely basis, or even if obtained on a timely basis, that
such payments will prevent losses to such franchisee or enable timely franchise payments. Accordingly, in cases in which a
franchisee experiences increased insurance premiums or must pay claims out-of-pocket, the franchisee may not have the funds
necessary to make franchise payments.
Franchisees generally are not "limited purpose entities," making them subject to business, credit, financial and other
risks. Franchisees may be natural persons or legal entities. Franchisees are often not "limited-purpose entities," making them
subject to business, credit, financial and other risks which may be unrelated to the operations of Applebee's or IHOP restaurants.
These unrelated risks could materially and adversely affect a franchisee and its ability to make its franchise payments in full or
on a timely basis. Any such decrease in franchise payments may have a material adverse effect on us. See the Risk Factor titled
"An insolvency or bankruptcy proceeding involving a franchisee could prevent the collection of payments or the exercise of rights
under the related franchise agreement," below.
An insolvency or bankruptcy proceeding involving a franchisee could prevent the collection of payments or the exercise
of rights under the related franchise agreement. An insolvency proceeding involving a franchisee could prevent us from
collecting payments or exercising any of our other rights under the related franchise agreement. In particular, the protection of the
statutory automatic stay that arises under Section 362 of the United States Bankruptcy Code upon the commencement of a
21
bankruptcy proceeding by or against a franchisee would prohibit us from terminating a franchise agreement previously entered
into with a franchisee. Furthermore, a franchisee that is subject to bankruptcy proceedings may reject the franchise agreement in
which case we would be limited to a general unsecured claim against the franchisee's bankruptcy estate on account of breach-of-
contract damages arising from the rejection. Payments previously made to us by a franchisee that is subject to a bankruptcy
proceeding also may be recoverable on behalf of the franchisee as a preferential transfer under the United States Bankruptcy Code.
The number and quality of franchisees is subject to change over time, which may negatively affect our business. Our
Applebee's business is highly concentrated in a limited number of franchisees. We cannot guarantee the retention of any, including
the top performing, franchisees in the future, or that we will maintain the ability to attract, retain, and motivate sufficient numbers
of franchisees of the same caliber. The quality of existing franchisee operations may be diminished by factors beyond our control,
including franchisees' failure or inability to hire or retain qualified managers and other personnel. Training of managers and other
personnel may be inadequate. These and other such negative factors could reduce the franchisee's restaurant revenues, impact
payments under the franchise agreements and could have a material adverse effect on us. In the case of Applebee's, these negative
factors would be magnified by the limited number of existing franchisees.
The inability of franchisees to fund capital expenditures may adversely impact future growth. Our business strategy
includes the periodic updating of Applebee's and IHOP restaurant locations through new remodel programs and other operational
changes. The success of that business strategy will depend to a significant extent on the ability of the franchisees to fund the
necessary capital expenditures to aid the repositioning and re-energizing of the brand. Labor and material costs expended will
vary by geographical location and are subject to general price increases. To the extent the franchisees are not able to fund the
necessary capital expenditures, our business strategy may take longer to implement and may not be as successful as we expect.
If franchisees and other licensees do not observe the required quality and trademark usage standards, our brands may
suffer reputational damage, which could in turn adversely affect our business. We license our intellectual property to our
franchisees, product suppliers, manufacturers, distributors, advertisers and other third parties. The franchise agreements and other
license agreements require that each franchisee or other licensee use the intellectual property in accordance with established or
approved quality control guidelines. However, there can be no assurance that the franchisees or other licensees will use the
intellectual property assets in accordance with such guidelines. Franchisee and licensee noncompliance with the terms and
conditions of the governing franchise agreement or other license agreement may reduce the overall goodwill associated with our
brands. Franchisees and other licensees may refer to our intellectual property improperly in communications, resulting in the
weakening of the distinctiveness of our intellectual property. There can be no assurance that the franchisees or other licensees will
not take actions that could have a material adverse effect on the Applebee's or IHOP intellectual property.
In addition, even if the licensee product suppliers, manufacturers, distributors, or advertisers observe and maintain the quality
and integrity of the intellectual property assets in accordance with the relevant license agreement, any product manufactured by
such suppliers may be subject to regulatory sanctions and other actions by third parties which can, in turn, negatively impact the
perceived quality of our restaurants and the overall goodwill of our brands, regardless of the nature and type of product involved.
Any such actions could reduce restaurant revenues and corresponding franchise payments to us.
We are heavily dependent on information technology and any material failure of that technology could impair our ability
to efficiently operate our business. We rely heavily on information systems across our operations, including, for example, point-
of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various
other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity
of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to
replacement systems, fraudulent manipulation of sales reporting from our restaurants resulting in loss of sales and royalty payments,
or a breach in security of these systems could be harmful and cause delays in customer service and reduce efficiency in our
operations. Significant capital investments might be required to remediate any problems.
As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests.
These efforts may not be successful, and pose a variety of other risks, as discussed above under the heading: “A failure to develop
and implement innovative marketing and guest relationship initiatives, ineffective or improper use of social media or other
marketing initiatives, and increased advertising and marketing costs, could adversely affect our results of operations.”
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing
a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our employee
and business relationships, all of which could subject us to loss and harm our brands. A cyber incident is considered to be any
adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber
incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt
operations, corrupt data, or steal confidential information about our customers, franchisees, vendors and employees. As our reliance
on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary
risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationship
22
with our tenants, and private data exposure. In addition to maintaining insurance coverage to address cyber incidents, we also
have implemented processes, procedures and controls to help mitigate these risks. These measures, as well as our increased
awareness of a risk of a cyber incident, do not guarantee that our reputation and financial results will not be negatively impacted
by such an incident.
Our use of personally identifiable information is regulated by foreign, federal and state laws, as well as by certain third-party
agreements. If our security and information systems are compromised or if our employees or franchisees fail to comply with these
laws and regulations, and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect
our reputation and could result in costly litigation, judgments, or penalties resulting from violation of federal and state laws and
payment card industry regulations. As privacy and information security laws and regulations change, we may incur additional
costs to ensure that we remain in compliance with those laws and regulations.
Our inability or failure to execute on a comprehensive business continuity plan following a major natural disaster such
as an earthquake, tornado or man-made disaster, including terrorism, at our corporate facilities could materially adversely
impact our business. Our corporate systems and processes and corporate support for our restaurant operations are handled primarily
at our two restaurant support centers. We have disaster recovery procedures and business continuity plans in place to address most
events of a crisis nature, including earthquakes, tornadoes and other natural disasters, and back up and off-site locations for recovery
of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans,
we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and
compliance, failures to adequately support field operations and other breakdowns in normal communication and operating
procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative
and other legal claims.
Our business depends on our ability to attract and retain talented employees. Our business is based on successfully attracting
and retaining talented employees. The market for highly skilled employees and leaders in our industry is extremely competitive.
If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver
successful products and services may be adversely affected. Effective succession planning is also important to our long-term
success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our
strategic planning and execution.
Retail brand development initiatives could negatively impact our IHOP brand. Our business expansion into retail product
licensing could create new risks to our IHOP brand and reputation. During 2011, IHOP launched a line of premium frozen breakfast
entrées and pancake syrups in retail outlets. We believe that this new retail product offering is a growth opportunity that allows
our brand to reach additional customers more often. If customers have negative perceptions or experiences with retail products,
our brand value could suffer which could have an adverse effect on our business.
Failure of our internal controls over financial reporting and future changes in accounting standards may cause adverse
unexpected operating results, affect our reported results of operations or otherwise harm our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control
over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external
purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement
of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could
limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting
failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in
the market price of our common stock.
A change in accounting standards can have a significant effect on our reported results and may affect our reporting of
transactions before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred
and may occur in the future. Changes to existing accounting rules or the questioning of current accounting practices may adversely
affect our reported financial results. Additionally, our assumptions, estimates and judgments related to complex accounting matters
could significantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements,
implementation guidelines and interpretations are highly complex and involve many subjective assumptions, estimates and
judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by
us could significantly change our reported or expected financial performance.
Item 1B. Unresolved Staff Comments.
None.
23
Item 2. Properties.
The table below shows the location and ownership type of Applebee's and IHOP restaurants as of December 31, 2012:
Franchise
Applebee's
Company
Total
Franchise
IHOP
Company
Area License
Total
United States
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total Domestic
30
2
33
11
114
26
7
12
—
111
69
—
12
65
66
27
24
37
18
11
26
29
86
58
20
47
8
20
14
14
57
18
112
58
11
95
22
21
78
8
40
6
41
100
16
3
73
40
17
44
5
1,862
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10
—
—
—
—
—
—
—
—
13
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
30
2
33
11
114
26
7
12
—
111
69
—
12
65
66
27
34
37
18
11
26
29
86
58
20
60
8
20
14
14
57
18
112
58
11
95
22
21
78
8
40
6
41
100
16
3
73
40
17
44
5
1,885
24
19
4
39
15
228
29
7
7
3
—
75
6
9
54
23
9
20
6
28
1
35
20
20
12
11
27
5
5
24
4
39
17
55
49
2
21
27
7
18
3
27
5
35
189
19
1
60
30
7
14
3
1,373
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
1
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
—
—
148 *
4 *
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
152
19
4
39
15
228
29
7
7
3
148
80
6
9
54
23
9
21
7
28
1
35
20
20
12
11
27
5
5
24
4
39
17
55
49
2
30
27
7
18
3
27
5
35
189
19
1
60
30
7
14
3
1,537
International
Brazil
Canada
Chile
Costa Rica
Dominican Republic
Greece
Guatemala
Honduras
Jordan
Kuwait
Lebanon
Mexico
Puerto Rico
Qatar
Saudi Arabia
Singapore
St. Croix, Virgin Islands
United Arab Emirates
Total International
Totals
Franchise
Applebee's
Company
Total
Franchise
IHOP
Company
Area License
Total
13
19
4
3
—
1
3
5
1
5
1
66
3
6
14
1
—
4
149
2,011
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
13
19
4
3
—
1
3
5
1
5
1
66
3
6
14
1
—
4
149
2,034
—
7
—
—
1
—
2
—
—
—
—
16
2
—
—
—
1
2
31
1,404
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12
—
13 *
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13
165
—
20
—
—
1
—
2
—
—
—
—
16
2
—
—
—
1
2
44
1,581
* of these restaurants 63 in Florida, 4 in Georgia and 11 in Canada have been sub-licensed by the area licensee
As of December 31, 2012, we operated 23 Applebee's restaurants and 12 IHOP restaurants for a total of 35 company-operated
restaurants. Our intention is to continue to operate the 23 Applebee's restaurants in the Kansas CIty market and 10 IHOP restaurants
in the Cincinnati market. Of these restaurants, we leased the building for five sites, owned the building and leased the land for 11
sites, owned the land and building for two sites and leased the land and building for 17 sites.
Of the 1,404 IHOP restaurants operated by franchisees, 61 were located on sites owned by us, 678 were located on sites leased
by us from third parties and 665 were located on sites owned or leased by franchisees. All of the IHOP restaurants operated by
area licensees and 2,010 of the franchisee-operated Applebee's restaurants were located on sites owned or leased by the area
licensees or the franchisees. We owned one site on which a franchisee-operated Applebee's restaurant was located.
Leases of IHOP restaurants generally provide for an initial term of 20 to 25 years, with most having one or more five-year
renewal options. Leases of Applebee's restaurants generally have an initial term of 10 to 20 years, with renewal terms of five to
20 years. In addition, a substantial number of the leases for both IHOP and Applebee's restaurants include provisions calling for
the periodic escalation of rents during the initial term and/or during renewal terms. The leases typically provide for payment of
rents in an amount equal to the greater of a fixed amount or a specified percentage of gross sales and for payment of taxes, insurance
premiums, maintenance expenses and certain other costs. Historically, it has been our practice to seek to extend, through negotiation,
those leases that expire without renewal options. However, from time to time, we choose not to renew a lease or are unsuccessful
in negotiating satisfactory renewal terms. When this occurs, the restaurant is closed and possession of the premises is returned to
the landlord.
Under our Applebee's franchise agreements, we have certain rights to gain control of a restaurant site in the event of default
under the franchise agreement. Because most IHOP franchised restaurants developed by us under our Previous Business Model
are subleased to the franchisees, IHOP has the ability to regain possession of the subleased restaurant if the franchisee defaults in
the payment of rent or other terms of the sublease.
We currently occupy our principal corporate offices and IHOP restaurant support center in Glendale, California, under a lease
expiring in June 2020. The Applebee's restaurant support center is located in Kansas City, Missouri under a lease expiring in
October 2021.
25
Item 3. Legal Proceedings.
We are subject to various lawsuits, administrative proceedings, audits, and claims arising in the ordinary course of business.
Some of these lawsuits purport to be class actions and/or seek substantial damages. We are required to record an accrual for
litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense
of all of our litigation are expensed as such fees and expenses are incurred. Management regularly assesses our insurance deductibles,
analyzes litigation information with our attorneys and evaluates our loss experience in connection with pending legal proceedings.
While we do not presently believe that any of the legal proceedings to which we are currently a party will ultimately have a material
adverse impact on us, there can be no assurance that we will prevail in all the proceedings we are party to, or that we will not incur
material losses from them.
As previously disclosed, we defended a collective action, Gerald Fast v. Applebee's International, Inc., in the United States
District Court for the Western District of Missouri, Central Division that commenced in July 2006. In this case, the plaintiffs
claimed that tipped servers and bartenders in Applebee's company-operated restaurants spent more than 20% of their time
performing general preparation and maintenance duties, or “non-tipped work,” for which they should be compensated at the
minimum wage. Under this action, plaintiffs sought unpaid wages and other relief of up to $17 million plus plaintiffs' attorneys'
fees and expenses. We entered into a settlement agreement on September 25, 2012 to settle the action for $9.1 million, and the
court granted final approval of the settlement and dismissed the action on November 1, 2012. We funded the settlement on
December 6, 2012.
Item 4. Mine Safety Disclosure.
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our common stock is traded on the NYSE under the symbol "DIN". The following table sets forth the high and low sales
prices of our common stock on the NYSE for each quarter of 2012 and 2011. We did not pay dividends on our common stock in
2012 and 2011.
Quarter
First...................................................................................... $
Second ................................................................................. $
Third .................................................................................... $
Fourth .................................................................................. $
Fiscal Year 2012
Prices
Fiscal Year 2011
Prices
High
Low
High
Low
54.74
53.90
57.40
68.47
$
$
$
$
40.28
41.63
41.49
55.51
$
$
$
$
60.11
56.78
56.37
49.64
$
$
$
$
49.46
46.26
35.47
35.20
Holders
The number of stockholders of record and beneficial owners of our common stock as of February 8, 2013 was estimated to
be 6,200.
Dividends
Under our Credit Agreement, we are limited as to the total amount of permitted restricted payments, including dividends on
common stock, that may be made (see "Management's Discussion and Analysis of Financial Condition and Results of Operations
- Restricted Payments"). At December 31, 2012, the permitted amount of restricted payments was approximately $85 million. We
evaluate dividend payments on our common stock within the context of our overall capital allocation strategy with our Board of
Directors on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements,
the limitations referenced above and other factors. On February 26, 2013, our Board of Directors approved payment of a cash
dividend of $0.75 per share of our common stock, payable at the close of business on March 29, 2013 to the stockholders of record
as of the close of business on March 15, 2013.
26
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2012, regarding shares outstanding and available for issuance
under our existing equity compensation plans:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security
holders ...............................................................
Equity compensation plans not approved by
security holders..................................................
Total.......................................................................
958,246
$
—
958,246
$
39.67
—
39.67
1,123,384
—
1,123,384
The number of securities remaining available for future issuance represents shares under our 2011 Stock Incentive Plan. Please
refer to Note 16, Stock-Based Incentive Plans, in the Notes to the Consolidated Financial Statements for a description of the Plan.
Issuer Purchases of Equity Securities
Under our Credit Agreement, we are limited as to the total amount of permitted restricted payments, including repurchase of
our common stock, that may be made (see "Management's Discussion and Analysis of Financial Condition and Results of Operations
- Restricted Payments"). At December 31, 2012, the permitted amount of restricted payments was approximately $85 million.
In August 2011, our Board of Directors authorized the repurchase of up to $45 million of common stock. Repurchases are
subject to prevailing market prices and may take place in open market transactions and in privately negotiated transactions, based
on business, market, applicable legal requirements and other considerations. The program does not require the repurchase of a
specific number of shares and may be terminated at any time. We did not repurchase any shares of our common stock during 2012.
As of December 31, 2012, we have repurchased 534,101 shares of common stock under this program at an average price of $39.64
per share.
On February 26, 2013, our Board of Directors approved a stock repurchase authorization of up to $100 million of our common
stock, replacing the previously announced $45 million stock repurchase authorization. We may now repurchase up to an additional
$78.8 million of our common stock under the revised authorization.
During 2012, a total of 34,829 shares of restricted stock were surrendered to the Company at an average price of $49.96 per
share to satisfy tax withholding obligations in connection with the vesting of restricted stock awards issued to employees under
our stock compensation plans. Of that total, 866 shares were surrendered during the fourth quarter at an average price of $56.17
per share.
27
Stock Performance Graph
The graph below shows a comparison of the cumulative total shareholder return on our common stock with the cumulative
total return on the Standard & Poor's 500 Composite Index and the Value-Line Restaurants Index ("Restaurant Index") over the
five-year period ended December 31, 2012. The graph and table assume $100 invested at the close of trading on the last day of
trading in 2007 in our common stock and in each of the market indices, with reinvestment of all dividends. Stockholder returns
over the indicated periods should not be considered indicative of future stock prices or stockholder returns.
Comparison of Five-Year Cumulative Total Shareholder Return
DineEquity, Inc., Standard & Poor's 500 And Value Line Restaurant Index
(Performance Results Through December 31, 2012)
DineEquity, Inc. ........................................ $
Standard & Poor's 500 ..............................
Restaurant Index .......................................
100.00
$
33.16
$
69.68
$
141.65
$
121.08
$
192.20
100.00
100.00
63.00
93.28
79.67
119.49
91.67
166.29
93.60
219.32
108.58
231.00
2007
2008
2009
2010
2011
2012
28
Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements
and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations information and the consolidated balance
sheet data for the years ended and as of December 31, 2012, 2011, 2010, 2009 and 2008 are derived from our audited consolidated
financial statements.
2012
Fiscal Year Ended December 31,
2009
2010
2011
(In millions, except per share amounts)
2008
Segment Revenues
Franchise revenues ............................................................................................... $
Company restaurant sales(a) ................................................................................
Rental income.......................................................................................................
Financing revenues...............................................................................................
Total revenues.................................................................................................
Segment Expenses
Franchise expenses ...............................................................................................
Company restaurant expenses(a)..........................................................................
Rental expenses ....................................................................................................
Financing expenses...............................................................................................
Total segment expenses..................................................................................
Gross segment profit ............................................................................................
General and administrative expenses ...................................................................
Interest expense ....................................................................................................
Impairment and closure charges...........................................................................
Amortization of intangible assets .........................................................................
Loss (gain) on extinguishment of debt and temporary equity..............................
421.4
291.1
122.9
14.5
849.9
109.9
249.3
97.2
1.6
458.0
391.9
163.2
114.3
4.2
12.3
5.6
(Gain) loss on disposition of assets ......................................................................
(102.6)
Other (income) expense, net.................................................................................
Income (loss) before income taxes .............................................................................
Income tax (provision) benefit ...................................................................................
Net income (loss)....................................................................................................... $
Net income (loss)........................................................................................................ $
Less: Series A preferred stock dividends....................................................................
Less: Accretion of Series B preferred stock ...............................................................
Less: Net (income) loss allocated to unvested participating restricted stock.............
Net income (loss) available to common stockholders ............................................ $
Net income (loss) available to common stockholders per share:
Basic ..................................................................................................................... $
Diluted .................................................................................................................. $
Weighted average shares outstanding:
Basic .....................................................................................................................
Diluted ..................................................................................................................
Dividends declared per common share(b).............................................................. $
Dividends paid per common share(b)..................................................................... $
Balance Sheet Data (end of year)
—
194.9
(67.2)
127.7
127.7
—
(2.5)
(2.7)
122.5
6.81
6.63
18.0
18.9
$
$
$
$
$
$
$
398.5
531.0
126.0
19.7
$
377.1
815.6
124.5
16.4
373.0
890.0
133.9
17.9
$
353.3
1,103.2
131.4
25.7
1,075.2
1,333.6
1,414.8
1,613.6
105.0
458.4
98.2
6.0
667.6
407.6
155.8
132.7
29.9
12.3
11.2
(43.3)
4.0
105.0
(29.8)
75.2
75.2
—
(2.6)
(1.9)
70.7
3.96
3.89
17.8
18.2
$
$
$
$
$
103.5
699.3
99.0
2.0
903.8
429.8
160.3
171.5
4.3
12.3
107.0
(13.5)
—
(12.1)
9.3
(2.8) $
(2.8) $
(25.9)
(2.5)
1.2
(30.0) $
(1.74) $
(1.74) $
17.2
17.2
102.2
766.5
100.2
0.4
969.3
445.5
157.7
186.3
105.6
12.3
(45.7)
(7.3)
—
36.6
(5.2)
31.4
31.4
(19.5)
(2.3)
(0.4)
9.2
0.55
0.55
16.9
16.9
$
$
$
$
96.2
978.2
98.1
7.3
1,179.8
433.8
182.3
203.2
240.6
12.1
(15.2)
0.3
(1.3)
(188.2)
33.7
(154.5)
(154.5)
(19.0)
(2.1)
6.4
(169.2)
(10.09)
(10.09)
16.8
16.8
1.00
1.00
— $
— $
— $
— $
— $
— $
— $
— $
Cash and cash equivalents.................................................................................... $
64.5
$
60.7
$
102.3
$
Restricted cash—short-term(c).............................................................................
Restricted cash—long-term(c) .............................................................................
Property and equipment, net.................................................................................
Total assets............................................................................................................
Long-term debt, less current maturities................................................................
Financing obligations, less current maturities......................................................
1.9
—
294.4
2,415.4
1,202.1
52.0
1.2
—
474.2
2,614.3
1,411.4
162.7
Capital lease obligations, less current maturities .................................................
Stockholders' equity .............................................................................................
134.4
155.2
_________________________________________________________________________
(a) We have refranchised 479 Applebee's company-operated restaurants since December 31, 2007.
(b) Effective December 11, 2008, the Company suspended payments of dividends on DineEquity common stock.
(c) Cash restrictions related to securitized debt were eliminated by a refinancing of long-term debt in 2010.
124.4
308.8
0.9
0.8
612.2
2,856.6
1,631.5
237.8
144.0
83.6
82.3
72.7
48.2
771.4
3,100.9
1,637.2
309.4
152.8
69.9
$
114.4
83.4
53.4
824.5
3,361.2
1,853.4
318.7
161.3
42.8
29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking Statements
Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may
cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-
looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and
other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading
“Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing
elsewhere in this report and our other filings with the United States Securities and Exchange Commission. The forward-looking
statements contained in this report are made as of the date hereof and the Company assumes no obligation to update or supplement
any forward-looking statements.
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in
conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report.
Business Overview
The Company
The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter, the
Company's predecessor began developing and franchising additional restaurants. The Company was incorporated under the laws
of the State of Delaware in 1976 with the name IHOP Corp. In November 2007, the Company completed the acquisition of
Applebee's International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the
Company was changed to DineEquity, Inc. ("DineEquity," "we" or "our"). Through various subsidiaries (see Exhibit 21,
Subsidiaries of DineEquity, Inc.) we own, franchise and operate two restaurant concepts: Applebee's Neighborhood Grill & Bar®
("Applebee's"), in the bar and grill segment of the casual dining category of the restaurant industry, and International House of
Pancakes® ("IHOP®"), in the family dining category of the restaurant industry. References herein to Applebee's and IHOP restaurants
are to these two restaurant concepts, whether operated by franchisees, area licensees or the Company.
Domestically, IHOP restaurants are located in all 50 states and the District of Columbia, while Applebee's restaurants are
located in every state except Hawaii. Internationally, IHOP restaurants are located in two United States territories and five foreign
countries; Applebee's restaurants are located in one United States territory and 15 foreign countries. With over 3,600 restaurants
combined, we believe we are the largest full-service restaurant company in the world.
Our Vision
To become the preferred franchisor of choice and deliver maximum franchisee and shareholder value.
Our Mission
To unite great franchisees, iconic brands and team members to create the world's leading restaurant company - one guest at
a time. To achieve this mission, our strategies are designed to ensure strong brands; drive profitable, organic growth; identify and
exploit complementary concepts and extensions; and create and monetize new value-added services.
2012 Highlights
2012 marked the fifth anniversary of bringing together two of the world's most-iconic dining brands under one enterprise.
The highlight of this anniversary year was the achievement of our vision of becoming a 99% franchised company with the
completion of refranchising the vast majority of the company-owned restaurants operated by Applebee’s when we closed the
acquisition five years ago. We believe a highly franchised business model requires less capital investment and general and
administrative overhead, generates higher gross profit margins and reduces the volatility of free cash flow performance, as compared
to a model based on operating a significant number of company-owned restaurants.
30
Other highlights of our fiscal 2012 performance include:
• Reducing our long-term debt by $332.6 million, which lowered our consolidated leverage ratio to 4.6:1 at December 31,
2012 from 5.3:1 at December 31, 2011. The reduction primarily came from a combination of after-tax cash proceeds and
elimination of financing obligations from the refranchising of Applebee's company-operated restaurants and from our
free cash flow;
•
Increasing Applebee's domestic same-restaurant sales by 1.2% during 2012, the third consecutive year of same-restaurant
sales growth. Applebee's same-restaurant sales have increased in nine of the last ten quarters;
• Opening 48 new restaurants worldwide by IHOP franchisees and area licensees and 34 new restaurants by Applebee's
franchisees. IHOP's international footprint was expanded with franchise openings in the Middle East and the Dominican
Republic;
• Remodeling over 560 restaurants system-wide during 2012. Applebee's and its franchisees remodeled 370 restaurants
during 2012, while IHOP and its franchisees remodeled 191 restaurants. Over the past two years, 51% of Applebee's
restaurants and approximately one-third of IHOP restaurants have been remodeled;
• Executing a comprehensive restructuring of general and administrative functions that will reduce future costs. While the
severance costs associated with headcount reductions exceeded savings in fiscal 2012, we estimate these actions will
save approximately $10 million to $12 million on a annualized basis in the future; and
• Establishing new Centers of Excellence to pool talent from across our organization to realize synergies, share best practices
and eliminate duplication of effort.
Key Performance Indicators
In evaluating and assessing the performance of our business, we consider our key performance indicators to be: (i) the
percentage change in domestic system-wide same-restaurant sales; (ii) net franchise restaurant development; (iii) consolidated
cash from operations; and (iv) consolidated free cash flow. An overview of our 2012 performance in these metrics is as follows:
Percentage change in domestic system-wide same-restaurant sales .......................
Net franchise restaurant development(1)....................................................................................
1.2%
15
(1.6)%
31
Applebee's
IHOP
(1) Franchise and area license openings, net of closings and the refranchising of 154 Applebee's company-operated restaurants and two rehabilitated
and refranchised IHOP restaurants
For the year ended December 31, 2012, our consolidated cash from operations was $52.9 million and our consolidated free
cash flow was $48.2 million.
We achieved mixed results on these metrics in 2012. Applebee's achieved an increase in domestic system-wide same-restaurant
sales for the third consecutive year. Applebee's cumulative increase over those three years is 3.5%, a significant achievement in
light of the headwinds we faced as the country and our guests recovered from the 2008 economic crisis. IHOP, on the other hand,
had a decline in its domestic system-wide same-restaurant sales for the second consecutive year, although the decline in 2012 was
less than in 2011.
IHOP franchisees and area licensees opened 48 new franchise restaurants in 2012, with net openings (openings less closings
and refranchisings) of 31 restaurants. Over the past three years, IHOP has achieved 125 net openings, an annual growth rate of
nearly 3%. Applebee's franchisees opened 34 new franchise restaurants in 2012, with net openings of 15 restaurants. Over the past
three years, Applebee's net openings totaled 33 restaurants, an annual growth rate of under 1%.
Both cash from operations and free cash flow decreased approximately 55% from the prior year. The majority of the decline
was the expected result of the refranchising of Applebee's company-operated restaurants in terms of both restaurant operating
profit foregone and payment of taxes on gains from the sale of restaurant assets. While proceeds from asset sales are an investing
cash inflow, all income taxes paid are an operating cash outflow.
Additional information on each of these metrics is presented under the captions "Restaurant Data," "Company Restaurant
Operations" and "Liquidity and Capital Resources" below.
31
Key Overall Strategies
DineEquity's Key Strategies
With the completion of our refranchising initiative, DineEquity is continuing with its efforts to drive shareholder and franchisee
value. We have an ongoing program to leverage core competencies across the entire enterprise that is focused on three primary
goals:
• Optimize organization capability;
• Drive profitable organic growth; and
• Reduce costs for both ourselves and our franchisees.
We have a fundamentally differentiated approach to brand management that centers on the powerful and strategic combination
of marketing, menu, operations and remodel initiatives that creates a distinctive and relevant connection with our guests. Additionally,
our shared services operating platform allows our brands to focus on key factors that drive the business while leveraging the
resources and expertise of our scalable, centralized support structure. We believe this is a competitive point of difference. Together,
this closely integrated approach is expected to result in strong brand performance that drives DineEquity's growth and delivers
results for our shareholders.
Applebee's Key Strategies
We are revitalizing the Applebee's brand. Applebee's domestic system-wide same-restaurant sales increased 1.2% in 2012.
This was Applebee's third year of increased same-restaurant sales and we outpaced our group of competitors. We are growing by
executing on the following key strategies: (i) drive profitable sales and traffic; (ii) invest in process and product innovation; (iii)
transform the business; and (iv) improve margins and restaurant level economics.
Drive Profitable Sales and Traffic
• Continued focus on meeting the consumer's need for value throughout 2012, with such promotions as the return of our
successful "Sizzling Entrées" starting at $9.99 nationwide, the introduction of our Fresh Flavors of the Season, and the
rotation of new products into our “2 for $20” offering. We ended the year with Spirited Cuisine featuring our new Napa
Chicken and Portobellos and highly popular new Brew Pub Pretzels & Beer Cheese Dip;
• Continued innovation of the menu. Since the acquisition in 2007, more than 90% of Applebee's menu now consists of
either new offerings or improved offerings with high quality ingredients;
• Continued our unique healthy food offerings by refreshing our "Under 550" calorie menu in January 2011, which
combined with our Weight Watchers menu has established us as a category leader in providing healthy dining options
to our guests; and
•
Focused on late-night business through beverage and appetizer innovation and local restaurant marketing efforts.
Invest in Process and Product Innovation
We continue to invest in and drive innovation at Applebee's from both a product and process perspective. We maintain a
significant test and implementation focus to both develop and discover new trends and opportunities within the casual dining
segment and beyond. Our history of innovation is readily apparent in our continual evolution of limited-time product offerings as
well as core menu items. We take a similar approach to evaluation of media strategies and consumer touch points
Transform the Business
In June 2010, we rolled out “Connections,” the new comprehensive restaurant revitalization program involving people, place
and promotional aspects. The people aspect involves re-training and re-certification for kitchen staff and team members. The place
aspect involves exterior and interior modifications to the restaurant to signal change. The promotional aspect involves a local public
relations and marketing plan to re-connect with the neighborhood. Our franchisees have embraced this initiative and by year-end
2012, over 50% of the restaurants in the domestic system have been revitalized.
The Company achieved its strategy to transition to a 99% franchise-operated Applebee's system in 2012 which includes buyers
who are financially qualified, share our vision for revitalizing the Applebee's brand, are willing to invest in the business, and have
32
well-qualified management teams. During 2012, we refranchised 154 company-operated restaurants. This highly franchised
business model is expected to require less capital investment and general and administrative overhead, improve overall segment
profit margins and reduce the volatility of cash flow performance.
Improve Margins and Restaurant Level Economics
We have continued to build upon process and system improvements deployed in prior years by improving our operating metrics.
Food inventory management and labor efficiencies were realized during the first half of 2012 in Company-operated restaurants.
These operational improvements helped mitigate the impact of increasing commodity costs and higher payroll expense. We continued
to reap the benefits of our supply chain co-op by leveraging our scale to manage through commodity cost inflation, which was also
mitigated by the realignment of our distribution centers in 2010.
With our transition to a 99% franchised system, restaurant operating margin at the remaining 23 company-operated restaurants
will become less impactful to our results of operations. Given that the primary focus of these restaurants in the future will be to
test new products and processes, their operating margin as a percentage of sales is expected to decline. However, we will continue
to invest in product and process innovation to help our franchisees maintain and improve their restaurant level economics for the
overall financial well-being of the overall Applebee's system.
We continue to monitor our franchisees through our franchisee operations rating system, which provides visibility concerning
their performance in relation to guest experience, food safety and training.
In a challenging economic environment and a highly competitive casual dining category, there can be no assurance that the
strategies described above, when implemented, will achieve the intended results.
IHOP's Key Strategies
To re-ignite growth we have been pursuing key initiatives within the three pillars of our strategic framework: (1) re-energize
and grow the IHOP brand; (2) improve operations performance; and (3) optimize franchise development.
Re-energize and Grow the IHOP Brand
To re-energize and grow the IHOP brand, we are implementing several key initiatives: 1) enhancing our menu; 2) increasing
media effectiveness and 3) improving our advertising. We continuously evolve our menu to maximize consumer acceptance, ease
of use and appeal of the individual items offered. This is an ongoing and continuous process. The expanded "Simple and Fit" line
of items with less than 600 calories and Signature Pancakes line of items are recent examples of this work. Substantially all IHOP
restaurants are using pollable point-of-sale systems to capture and report a broad range of sales and product mix data. This information
is used by management to, among other things, gauge guest acceptance of menu items and the success of promotions and limited
time offers.
Over the years, we have adjusted where and when our advertisements are run to maximize the impact of our advertising dollars.
These decisions are based on market conditions for advertising and an understanding of how best to reach our target customers.
Our focus remains national advertising as we believe this is the best way to drive traffic to our restaurants. Gaining the attention
of consumers in a highly competitive market requires that we constantly update and modify our advertising campaigns to maintain
guest engagement. Recently, we launched a campaign with the “Everything You Love About Breakfast” as the tagline and theme,
accompanied by a “Brandthem” which extols the customer satisfaction gained from dining at IHOP.
Finally, we have increased our efforts in key social media outlets, reflecting the growing importance of these channels. In
2012, we re-launched IHOP.com improving its interactivity and connections with key social media sites. Our e-club, launched in
2010, continues to grow and provide a valuable direct communication channel to a key group of IHOP consumers.
Improve Operations Performance
We constantly strive to improve every aspect of restaurant operations. To enhance our guest-centric culture, and enable our
franchisees to assess and improve their service and the condition of their restaurants, we have developed several new tools that
augment our guest feedback tool, the “Voice of the Guest” program, which provides real-time consumer responses to the operators
and the brand.
In 2012, we implemented an enhanced Operations Evaluations process whereby all IHOP locations are assessed three times
per year on a wide range of operational attributes, allowing franchisees to understand their performance against a set of predetermined
33
standards. Specific training is offered to franchisees to assist them in remediating any areas of opportunity identified in the Operations
Evaluation. In addition, IHOP modified its service procedures in 2012 to improve speed of service and improve guest satisfaction.
While results from both programs have been positive, we recognize that operations excellence is a continuous process without end.
Optimize Franchise Development and Franchise System Health
Under the Current Business Model, IHOP seeks to optimize franchise development by recruiting franchise developers within
and outside the current system and working with these franchise developers in the site selection and building process. This strategy
has proved successful as our franchisees have developed approximately 516 restaurants since the inception of the Current Business
Model and our franchisees have a pipeline of 285 additional new restaurants committed, optioned or pending. In 2012, an IHOP
franchisee opened the first IHOP restaurants in the Middle East demonstrating the interest in the IHOP brand outside of North
America. In 2013, a new international franchisee opened the first IHOP restaurant in the Philippines. We continue to explore
opportunities in new international markets. The existing franchisee base accounts for most of these future development obligations.
In addition, we may take steps to consolidate and rehabilitate existing markets if we believe that doing so is advisable in order
to fully realize development potential. We consistently monitor individual franchisee health and compliance with franchise
agreements and we may also take steps to exercise our contractual rights within the franchise agreement in the event of
noncompliance.
In a challenging economic environment and a highly competitive family dining category, there can be no assurance that the
strategies described above, when implemented, will achieve the intended results within the time frame anticipated.
Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons of Reported or
Future Results
Current Economic Conditions
The consumer continues to receive a mixture of positive and negative economic information. Gross Domestic Product ("GDP")
grew at a modest pace for the full year of 2012, but preliminary estimates for the fourth quarter of 2012 showed a slight decline.
The unemployment rate declined from December 2011 to December 2012, but the unemployment rate rose in January 2013. We
believe uncertainty over the degree and duration of the economic recovery, the impact of the expiration of the 2% payroll tax cut
that had been in place for the last two years and possible deficit reduction measures may continue to temper consumer discretionary
spending. A decline or lack of growth in disposable income for discretionary spending could cause our customers to change
purchasing behavior and choose lower-cost dining options or alternatives to dining out. These factors could have an adverse effect
on our business, results of operations and financial condition.
Sales Trends
Applebee’s
Quarter.......
YTD...........
IHOP
Quarter.......
YTD...........
Domestic System-wide Same-restaurant Sales
Increase (Decrease)
2011
2012
2010
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
(2.7)% (1.6)% 3.3 % 2.9% 3.9 % 3.1 % (0.3)% 1.0 % 1.2 % 0.7 % 2.0 % 0.9 %
(2.7)% (2.2)% (0.5)% 0.3% 3.9 % 3.5 % 2.3 % 2.0 % 1.2 % 1.0 % 1.3 % 1.2 %
(0.4)% (1.0)% 0.1 % 1.1% (2.7)% (2.9)% (1.5)% (1.0)% (0.5)% (1.4)% (2.0)% (2.6)%
(0.4)% (0.7)% (0.4)% 0.0% (2.7)% (2.8)% (2.4)% (2.0)% (0.5)% (0.9)% (1.3)% (1.6)%
Applebee’s domestic system-wide same-restaurant sales increased 1.2% for the year ended December 31, 2012. This marked
the third consecutive year of same-restaurant sales growth, with increases in nine of the last ten consecutive quarters. The increase
in same-restaurant sales during 2012 was driven by an increase in average guest check offset by a decline in guest traffic. The
higher average guest check came from an increase in menu pricing and an increase from favorable product mix changes.
IHOP’s domestic system-wide same-restaurant sales decreased 1.6% for the year ended December 31, 2012. The decrease
was primarily due to a decline in guest traffic, partially offset by a higher average guest check compared to fiscal 2011. The decline
in IHOP's domestic system-wide same-restaurant sales in 2012 reflects, in part, that the initiatives we are undertaking to improve
our sales performance were not fully implemented for all of 2012. We expect that it will take several visitation and product
promotion cycles for consumers to see, experience and taste the actions we have taken.
34
Capital Allocation Strategy
On February 26, 2013, our Board of Directors approved a capital allocation strategy that contemplates the return of a significant
portion of our free cash flow to our stockholders. The Board of Directors approved the payment of a cash dividend of $0.75 per
share of our common stock, payable at the close of business on March 29, 2013 to the stockholders of record as of the close of
business on March 15, 2013. The Board of Directors also approved a stock repurchase authorization of up to $100 million of our
common stock, replacing the previously announced $45 million authorization, pursuant to which $21.2 million of common stock
was repurchased.
Debt Modification and Retirements
On February 4, 2013, we entered into an amendment to our Credit Agreement. The amendment lowers the interest rate floor
on our term loan borrowings under the Credit Agreement by 0.50%, eliminates the interest rate floor on our revolving loans under
the Credit Agreement, reduces the amount of required debt repayments from our excess cash flow and modifies the calculation
of the permitted amount of restricted payments (see "Liquidity and Capital Resources of the Company - February 2013
Amendment"). We will recognize costs of approximately $1.2 million in our 2013 Consolidated Statements of Operations related
to this debt modification.
During the year ended December 31, 2012, we repaid $210.5 million of outstanding borrowings under the Credit Agreement
and we repurchased $5.0 million of our 9.5% Senior Notes. Including the write-off of the discount and deferred financing costs
related to the debt retired and a $0.5 million premium paid on the Senior Notes, we recognized a loss on the retirement of debt of
$5.6 million. Additionally, as the result of refranchising 154 Applebee’s company-operated restaurants, we were released from
financing obligations of $111.5 million related to 66 of the properties refranchised.
Financial Statement Effect of Refranchising Company-Operated Restaurants
As noted under “2012 Highlights” above, we have reached our goal of transitioning Applebee's to a 99% franchised system.
Compared to amounts that have been reported historically since the Applebee's acquisition, the amounts reported in future periods
for company-operated restaurant revenues and expenses will be considerably smaller, while franchise royalty revenues and expenses
should increase. Our segment profit margin percentage will increase but total segment profit will likely be smaller because royalties
from franchised restaurants are a smaller percentage of restaurant revenues than the historic restaurant operating profit margin
percentage of company-operated restaurants. However, changes in same-restaurant sales will create less of an impact on operating
income now that the Applebee's system is 99% franchised.
Additionally, our interest expense will be lower because the after-tax proceeds from the sale of restaurant assets were used
to retire debt. The completed refranchising of the Applebee’s company-operated restaurants also will result in a reduction of both
general and administrative expenses and required capital investment in restaurant assets as compared to amounts reported prior
to the completion of our refranchising strategy.
Significant Gains and Charges
There were several significant gains and charges that affect the comparisons of fiscal year 2012 results with the previous
periods presented herein, as shown in the following table:
Year ended December 31,
2012
2011
(In millions)
2010
Impairment and closure charges...................................................................... $
Loss on extinguishment of debt and temporary equity ...................................
Gain on disposition of assets...........................................................................
4.2
$
29.9
$
5.6
(102.6)
11.2
(43.3)
4.3
107.0
(13.6)
Each transaction is discussed in further detail as to the activity that occurred in each year under paragraphs captioned with
these descriptions elsewhere in Item 7. Our long-lived tangible and intangible assets (including goodwill) must be assessed
continually for indicators of impairment. Goodwill and intangible assets comprised 62% of our total assets as of December 31,
2012. While there have been no impairments of goodwill or intangible assets over the past three years, given the uncertainty as
to future economic and other assumptions used in assessing impairments, it is possible that significant impairment charges may
occur in future periods.
35
We incurred significant charges in connection with the refinancing of debt in October 2010. While we have retired more than
$200 million in debt each year subsequent to that refinancing, the loss on debt extinguishment has been substantially smaller than
the amount recorded in 2010. This decrease is because discount and deferred issuance costs associated with our refinanced debt
that are written off on a pro rata basis as debt is retired are substantially less than those associated with our debt instruments that
were extinguished in the 2010 refinancing. Therefore, while we may continue to dedicate a portion of excess cash flow towards
early debt retirement, we do not anticipate recognizing significant losses on the extinguishment of debt unless we enter into another
refinancing transaction that extinguishes all then-current debt.
Gains on disposition of assets relate primarily to the refranchising and sale of related restaurant assets of Applebee’s company-
operated restaurants. Since we have achieved our goal of becoming 99% franchised, we do not anticipate significant gains or
losses on the disposition of assets in the future.
36
Restaurant Data
The following table sets forth, for each of the past three years, the number of effective restaurants in the Applebee's and IHOP
systems and information regarding the percentage change in sales at those restaurants compared to the same period in the prior
year. "Effective restaurants" are the number of restaurants in a given period, adjusted to account for restaurants open for only a
portion of the period. Information is presented for all effective restaurants in the Applebee's and IHOP systems, which includes
company-operated restaurants, as well as those operated by franchisees and area licensees. Sales of restaurants that are operated
by franchisees and area licensees are not attributable to the Company. However, we believe that presentation of this information
is useful in analyzing our revenues because franchisees and area licensees pay us royalties and advertising fees that are generally
based on a percentage of their sales, as well as, in some cases, rental payments under leases that are usually based on a percentage
of their sales. Management also uses this information to make decisions about future plans for the development of additional
restaurants as well as evaluation of current operations.
Year Ended December 31,
2012
2011
2010
Applebee's Restaurant Data
Effective restaurants:(a)
Franchise ....................................................................................................
Company ....................................................................................................
Total.......................................................................................................
System-wide:(b)
Domestic sales percentage change(c) ..........................................................
Domestic same-restaurant sales percentage change(d)................................
Franchise:(e)
Domestic sales percentage change(c)(g) .......................................................
Domestic same-restaurant sales percentage change(d)................................
Domestic average weekly unit sales (in thousands)................................... $
Company:
Domestic sales percentage change(c)(g) .......................................................
Domestic same-restaurant sales percentage change(d)................................
Domestic average weekly unit sales (in thousands)................................... $
1,894
123
2,017
1.7 %
1.2 %
8.1 %
1.3 %
46.6
(47.4)%
0.6 %
42.0
$
$
1,770
240
2,010
2.6 %
2.0 %
11.3 %
2.0 %
46.4
(35.7)%
1.8 %
41.0
$
$
1,621
380
2,001
(1.8)%
0.3 %
(0.1)%
0.6 %
45.8
(8.4)%
(1.3)%
40.4
IHOP Restaurant Data
Effective restaurants:(a)
Franchise ....................................................................................................
Company ....................................................................................................
Area license ................................................................................................
Total
System-wide:(b)
Sales percentage change(c) ..........................................................................
Domestic same-restaurant sales percentage change(d)................................
Franchise:(e)
Sales percentage change(c) ..........................................................................
Domestic same-restaurant sales percentage change(d)................................
Average weekly unit sales (in thousands) .................................................. $
Company:(f)
Area License:(e)
Year Ended December 31,
2012
2011
2010
1,379
15
165
1,559
1,343
11
163
1,517
1.6 %
(1.6)%
1.3 %
(1.6)%
34.0
n/m
$
1.9 %
(2.0)%
1.7 %
(2.0)%
34.4
n/m
$
1,296
11
164
1,471
2.2 %
0.0 %
2.1 %
(0.1)%
35.1
n/m
IHOP sales percentage change(c) ................................................................
2.7 %
2.9 %
3.3 %
37
_________________________________
(a) "Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open for only
a portion of the period. Information is presented for all effective restaurants in the Applebee's and IHOP systems, which
includes restaurants owned by the Company as well as those owned by franchisees and area licensees.
(b) "System-wide sales" are retail sales of Applebee's and IHOP restaurants operated by franchisees and IHOP restaurants operated
by area licensees as reported to the Company, in addition to retail sales at company-operated restaurants. Sales at restaurants
that are owned by franchisees and area licensees are not attributable to the Company.
(c) "Sales percentage change" reflects, for each category of restaurants, the percentage change in sales in any given fiscal year
compared to the prior fiscal year for all restaurants in that category.
(d) "Domestic same-restaurant sales percentage change" reflects the percentage change in sales, in any given fiscal year compared
to the prior fiscal year, for restaurants that have been operated throughout both fiscal periods that are being compared and
have been open for at least 18 months. Because of new unit openings and restaurant closures, the restaurants open throughout
both fiscal periods being compared will be different from period to period. Same-restaurant sales percentage change does not
include data on IHOP restaurants located in Florida.
(e) Applebee's domestic franchise restaurant sales, IHOP franchise restaurant sales and IHOP area license restaurant sales for the
years ended December 31, 2012, 2011 and 2010 were as follows:
Reported sales (unaudited)
Applebee's franchise restaurant sales..............................................
IHOP franchise restaurant sales ......................................................
IHOP area license restaurant sales ..................................................
Year Ended December 31,
2012
$4,234.9
$2,437.2
$234.7
2011
(In millions)
$3,916.4
$2,405.3
$228.6
2010
$3,519.4
$2,364.7
$220.0
(f) Sales percentage changes and domestic same-restaurant sales percentage change for IHOP company-operated restaurants are
not meaningful (“n/m”) because there are few such restaurants, consisting of 10 restaurants in a single test market, along with
a variable, small number of restaurants that are reacquired from franchisees from time-to-time and temporarily operated by
the Company.
(g) The sales percentage change for Applebee's franchise and company-operated restaurants is impacted by the refranchising of
154 company-operated restaurants in 2012, 132 company-operated restaurants during 2011 and 83 company-operated
restaurants during 2010.
38
The following tables summarize Applebee's and IHOP restaurant development and franchising activity.
Applebee's Restaurant Development Activity
Total restaurants, beginning of year............................................................................
2,019
2,010
2,008
Year Ended December 31,
2011
2010
2012
New openings:
Franchise ..........................................................................................................
Total new openings.....................................................................................
Closings:
Company ..........................................................................................................
Franchise ..........................................................................................................
Total closings..............................................................................................
Total restaurants, end of year......................................................................................
Summary—end of year:
Franchise................................................................................................................
Company................................................................................................................
Total ............................................................................................................
Change over prior year ...............................................................................................
Applebee's Franchise Restaurant Activity
New franchise openings:
Domestic franchise openings ................................................................................
International franchise openings...........................................................................
Refranchised .........................................................................................................
Total restaurants franchised ........................................................................
Closings:
Domestic franchise ................................................................................................
International franchise ...........................................................................................
Total franchise closings ..............................................................................
Net franchise restaurant additions.....................................................................
34
34
—
(19)
(19)
2,034
2,011
23
2,034
24
24
—
(15)
(15)
2,019
1,842
177
2,019
27
27
(7)
(18)
(25)
2,010
1,701
309
2,010
0.7%
0.4%
0.1%
20
14
154
188
(6)
(13)
(19)
169
15
9
132
156
(6)
(9)
(15)
141
14
13
83
110
(14)
(4)
(18)
92
IHOP Restaurant Development Activity
Total restaurants, beginning of year............................................................................
1,550
1,504
1,456
New openings:
Franchise ..........................................................................................................
Area license......................................................................................................
Total new openings.....................................................................................
Closings:
Company ..........................................................................................................
Franchise ..........................................................................................................
Area license......................................................................................................
Total closings..............................................................................................
Total restaurants, end of year......................................................................................
Summary—end of year:
Franchise................................................................................................................
Company................................................................................................................
Area license ...........................................................................................................
Total ............................................................................................................
Change over prior year ...............................................................................................
IHOP Franchise Restaurant Activity
New franchise openings:
Domestic franchise openings ................................................................................
International franchise openings...........................................................................
Area license...........................................................................................................
Rehabilitated and refranchised..............................................................................
Total restaurants franchised ........................................................................
Closings:
Domestic franchise ................................................................................................
International franchise ...........................................................................................
Area license...........................................................................................................
Total franchise closings ..............................................................................
Reacquired by the Company.......................................................................................
Net franchise restaurant additions.....................................................................
39
47
1
48
(1)
(14)
(2)
(17)
1,581
1,404
12
165
1,581
52
6
58
—
(8)
(4)
(12)
1,550
1,369
15
166
1,550
60
4
64
(2)
(10)
(4)
(16)
1,504
1,329
11
164
1,504
2.0%
3.1%
3.3%
39
8
1
9
57
(15)
—
(2)
(17)
(7)
33
45
7
6
3
61
(8)
—
(4)
(12)
(7)
42
55
5
4
3
67
(10)
—
(4)
(14)
(3)
50
Comparison of the fiscal years ended December 31, 2012 and 2011
Overview
Our 2012 financial results compared to 2011 were significantly impacted by (i) the successful refranchising of 154 Applebee's
company-operated restaurants during 2012 that resulted in increased gains on the disposition of the restaurants partially offset by
lower segment profit; (ii) lower impairment and closure charges due to non-recurring costs related to the 2011 termination of the
sublease of Applebee's Restaurant Support Center; and (iii) lower interest expense due to the ongoing early retirement of debt
with both proceeds from the asset dispositions and excess cash flow. Highlights of comparisons between the two periods included:
• Revenues decreased $225.3 million to $849.9 million in 2012 from $1.1 billion in 2011. The decline was primarily due
to the net effect of refranchising 286 company-operated Applebee's restaurants in 2012 and 2011, and a 1.6% decrease
in IHOP domestic system-wide same-restaurant sales, partially offset by a 2.7% increase in IHOP effective franchise
restaurants and a 1.2% increase in Applebee's domestic system-wide same-restaurant sales.
•
Segment profit for 2012 decreased by $15.7 million, comprised as follows:
Year ended December 31,
2012
2011
(In millions)
Favorable
(Unfavorable)
Variance
Franchise operations ....................................................................... $
Company restaurant operations.......................................................
Rental operations.............................................................................
Financing operations .......................................................................
Total segment profit ........................................................................ $
311.5
$
293.5
$
41.8
25.7
12.9
72.6
27.8
13.7
391.9
$
407.6
$
18.0
(30.8)
(2.1)
(0.8)
(15.7)
The decrease in segment profit was primarily due to the net effect of refranchising 286 Applebee's company-operated
restaurants in 2012 and 2011, the decrease in IHOP domestic system-wide same-restaurant sales and a write-off of deferred
lease rental income associated with franchised restaurants whose lease agreements were prematurely terminated. These
unfavorable factors were partially offset by the increase in IHOP effective franchise restaurants and the increase in
Applebee's same-restaurant sales.
•
•
Impairment and closure charges were $25.7 million lower in 2012 primarily due to $27.5 million of charges related to
the 2011 termination of the sublease for Applebee's former Restaurant Support Center in Lenexa, Kansas that did not
recur.
Interest expense decreased $18.4 million due to the ongoing early retirement of debt with both proceeds from the asset
dispositions and excess cash flow and the repricing of our bank debt in February 2011.
• General and administrative ("G&A") expenses increased $7.4 million, primarily due to a $9.1 million charge for settling
certain litigation that commenced prior to our 2007 acquisition of Applebee's.
40
Franchise Operations
Year ended December 31,
2012
2011
Favorable
(Unfavorable)
Variance
%
Change(1)
Franchise revenues
Applebee's....................................................................... $
IHOP ...............................................................................
IHOP advertising ............................................................
Total franchise revenues......................................................
Franchise expenses
Applebee's.......................................................................
IHOP ...............................................................................
IHOP advertising ............................................................
Total franchise expenses......................................................
Franchise segment profit
185.9
159.1
76.4
421.4
5.5
28.0
76.4
109.9
$
$
(In millions)
169.2
153.8
75.5
398.5
2.8
26.7
75.5
105.0
Applebee's.......................................................................
IHOP ...............................................................................
Total franchise segment profit............................................. $
Segment profit as % of revenue(1) ..................................................
180.4
131.1
311.5
73.9%
$
166.4
127.1
293.5
73.7%
$
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
16.7
5.3
0.9
22.9
(2.7)
(1.3)
(0.9)
(4.9)
14.0
4.0
18.0
9.9 %
3.4 %
1.3 %
5.8 %
(95.1)%
(4.8)%
(1.3)%
(4.7)%
8.4 %
3.2 %
6.1 %
The increase in Applebee’s franchise revenue was attributable to increased royalty revenue resulting from a 7.0% increase in
the number of effective franchise restaurants, a 1.3% increase in domestic same-restaurant sales and an increase in fees associated
with franchisee-to-franchisee sales of Applebee's franchises. Applebee's effective franchise restaurant count increased by 124 due
to the refranchising of 154 Applebee’s company-operated restaurants during 2012 and a net increase of 15 restaurants due to
franchise development. Approximately $11.8 million of the revenue increase was attributable to refranchised restaurants.
The increase in IHOP franchise revenue (other than advertising) was primarily attributable to a 2.7% increase in the number
of effective franchise restaurants and an increase in both volume and pricing of pancake and waffle dry mix, partially offset by a
decrease of 1.6% in IHOP domestic franchise same-restaurant sales. IHOP added a net total of 33 franchise and area license
restaurants during 2012 due to development.
Applebee's franchise expenses increased primarily due to insurance costs associated with restaurants that were previously
company-operated. Applebee's franchise expenses are relatively smaller than IHOP's due to advertising expenses. Franchise fees
designated for IHOP's national advertising fund and local marketing and advertising cooperatives are recognized as revenue and
expense of franchise operations; however, Applebee's national advertising fund constitutes an agency transaction and therefore is
not recognized as franchise revenue and expense.
The higher franchise segment profit was due primarily to the increased revenue as the segment profit margin was essentially
unchanged from the prior year.
Company Restaurant Operations
Year ended December 31
2012
2011
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
Company restaurant sales .................................................... $
Company restaurant expenses .............................................
Company restaurant segment profit..................................... $
Segment profit as % of revenue(1) ..................................................
291.1
249.3
41.8
$
$
531.0
458.4
72.6
$
$
14.4%
13.7%
(239.9)
209.1
(30.8)
(45.2)%
45.6 %
(42.3)%
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
41
As of December 31, 2012, Company restaurant operations were comprised of 23 Applebee's company-operated restaurants
and 12 IHOP company-operated restaurants. The impact of the IHOP restaurants on all comparisons of fiscal 2012 with the same
period of 2011 was negligible.
Because of the refranchising of 154 company-operated restaurants during 2012 and 132 restaurants during 2011, company
restaurant sales decreased $239.9 million. On an effective (weighted days operated) basis, Applebee's operated 123 restaurants
during 2012 as compared with 240 restaurants during 2011. Applebee's company restaurant sales declined $244.0 million, primarily
due to the refranchising as well as a 1.0% decrease in same-restaurant sales at the remaining 23 company-operated restaurants.
Over the course of 2012, company same-restaurant sales increased 0.6% at all restaurants, including those operated prior to the
completion of refranchising. This increase in same-restaurant sales was driven mainly by an increase in average guest check
partially offset by a decline in guest traffic.
Because of the refranchising of company-operated restaurants, company restaurant expenses declined $209.1 million.
Applebee's company restaurant expenses declined $213.7 million million . The overall operating margin for Applebee's company
restaurant operations increased to 16.3% for 2012 from 14.5% for the same period of last year, as shown below:
Applebee's Company-Operated Expenses
As Percentage of Restaurant Sales
Revenue ...................................................................
Food and beverage...................................................
Labor........................................................................
Direct and occupancy ..............................................
Year Ended
December 31,
2012
100.0%
26.1%
32.4%
25.2%
2011
100.0%
25.7%
32.7%
27.1%
Restaurant operating profit margin(1) .............................
16.3%
14.5%
Favorable (Unfavorable)
Components of Total Variance
Total
Variance
Refranchised
Current
Restaurants
(0.4)%
0.3 %
1.9 %
1.8 %
0.2%
0.7%
1.2%
2.1%
(0.6)%
(0.4)%
0.7 %
(0.3)%
_________________________________________
(1) Percentages may not add due to rounding.
The restaurants refranchised had a net favorable impact of 2.1% on restaurant operating profit margin, primarily because the
markets refranchised had lower-than-average labor and occupancy costs. In terms of specific cost categories at currently operating
company restaurants:
•
Food and beverage costs as a percentage of company restaurant sales increased 0.6%, primarily due to an increase in
commodity costs.
• Labor costs as a percentage of restaurant sales increased 0.4% due to higher group insurance and bonus costs.
• Direct and occupancy costs as a percentage of company restaurant sales decreased 0.7% due to lower depreciation and
general liability insurance costs, partially offset by incremental investment in local advertising, increased repair and
maintenance costs and higher rents.
As noted previously under "Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons
of Reported or Future Results," the total revenues, segment profit and operating margin of Applebee's company-operated restaurants
will be significantly lower in future periods.
Rental Operations
Year ended December 31,
2012
2011
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
Rental revenues ................................................................... $
Rental expenses ...................................................................
Rental operations segment profit......................................... $
Segment profit as % of revenue(1)........................................
122.9
97.2
25.7
$
$
126.0
98.2
27.8
$
$
20.9%
22.1%
(3.1)
1.0
(2.1)
(2.5)%
1.0 %
(7.6)%
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
42
Rental operations relate primarily to IHOP franchise restaurants that were developed under the Previous Business Model
described under "Item 1. - Business - Restaurant Concepts - IHOP - Franchising." Rental revenue includes income from operating
leases and interest income from direct financing leases. Rental expenses are costs of prime operating leases and interest expense
on prime capital leases on franchisee-operated restaurants.
Rental revenue declined due to the write-off of deferred lease rental revenue associated with franchise restaurants whose lease
agreements were prematurely terminated, a decline in operating lease revenue from restaurants taken back from franchisees and
temporarily operated by the Company or closed, and a normal, progressive decline in interest income as direct financing leases
are repaid. Rental expenses declined due to the normal, progressive decline in interest expense as capital lease obligations are
repaid.
Rental segment profit decreased by $2.1 million primarily due to the write-off of deferred lease rental revenue associated with
franchise restaurants whose lease agreements were prematurely terminated.
Financing Operations
Year ended December 31
2012
2011
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
Financing revenues.............................................................. $
Financing expenses..............................................................
Financing operations segment profit ................................... $
Segment profit as % of revenue(1) ..................................................
14.5
1.6
12.9
$
$
19.7
6.0
13.7
$
$
88.8%
69.7%
(5.2)
4.4
(0.8)
(26.5)%
72.8 %
(6.4)%
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
Financing operations relate relate primarily to IHOP franchise restaurants that were developed under the Previous Business
Model described under "Item 1. - Business - Restaurant Concepts - IHOP - Franchising." Financing operations revenue primarily
consists of interest income from the financing of franchise fees and equipment leases, as well as sales of equipment associated
with refranchised IHOP restaurants. Financing expenses are primarily the cost of restaurant equipment.
The variance in both revenue and expense is primarily related to a 2011 transaction in which 40 restaurants operated by a
former franchisee that defaulted on its obligations under the franchise agreement were refranchised to an existing IHOP franchisee.
Certain equipment related to the refranchised restaurants was sold to the new operator. Financing revenues and expenses for the
year ended December 31, 2011 included $5.9 million of revenue and $6.0 million of costs related to equipment sales, of which
$5.0 million and $5.2 million, respectively, related to that single equipment sale. Financing revenues and expenses for the year
ended December 31, 2012 included $1.6 million related to several individually insignificant equipment and franchise sales. There
was also a $1.0 million decrease in interest revenue due to the progressive decline in note balances due to repayments.
The decline in financing operations segment profit was primarily due to the decrease in interest revenue resulting from the
progressive decline in note balances due to repayments.
Other Expense and Income Components
Year ended December 31,
2012
2011
Favorable
(Unfavorable)
Variance
%
Change(1)
(In millions)
General and administrative expenses ...................................... $
Interest expense.......................................................................
Impairment and closure charges..............................................
Amortization of intangible assets............................................
Loss on extinguishment of debt ..............................................
Debt modification costs ..........................................................
Gain on disposition of assets...................................................
Income tax provision...............................................................
$
163.2
114.3
4.2
12.3
5.6
—
(102.6)
67.2
$
155.8
132.7
29.9
12.3
11.2
4.0
(43.3)
29.8
(7.4)
18.4
25.7
—
5.6
4.0
59.3
(37.4)
(4.7)%
13.8 %
85.9 %
—
50.2 %
n.m.
(137.2)%
(125.6)%
___________________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
n.m. - not meaningful
43
General and Administrative Expenses
General and administrative expenses increased $7.4 million, primarily due to a $9.1 million charge for settling certain litigation
that commenced prior to our 2007 acquisition of Applebee's. The settlement agreement was approved by the court November 1,
2012. Stock-based compensation expense increased $5.7 million primarily due to the impact of a higher stock price on both
liability-based and equity-based stock awards to employees and non-employee directors. Severance costs were $3.8 million higher,
primarily related to our staff reduction initiative implemented in the third quarter of 2012; however, the severance costs were more
than offset by lower salary and benefits as the result of the staff reductions, the refranchising of Applebee's company-operated
restaurants and payroll credits related to the relocation of the Applebee's Restaurant Support Center in the fourth quarter of 2011.
In total, employee compensation costs were essentially unchanged from 2011. Recruiting and relocation expenses were lower in
2012 primarily due to the hiring of more executive level positions in 2011 and the latter part of 2010 that impacted recruiting and
relocation expenses in 2011.
Interest Expense
The $18.4 million decrease in interest expense is due to our reduction of debt balances and an amendment to our Credit
Agreement that reduced the interest rate on term loan borrowings by 1.75% in February, 2010. During 2012, we repaid $210.5
million of Term Loans and $5.0 million of Senior Notes and our financing obligations were reduced by $114.4 million primarily
as the result of refranchising Applebee's company-operated restaurants. Average interest-bearing debt (Term Loans, Senior Notes
and financing obligations) outstanding during 2012 was approximately $260 million lower than the prior year.
Impairment and Closure Charges
Impairment and closure charges for the years ended December 31, 2012 and 2011 were as follows:
Year Ended
December 31,
2012
2011
(In millions)
Long-lived tangible asset impairment .............................................................. $
Lenexa lease termination ..................................................................................
Other closure charges .......................................................................................
Total impairment and closure charges.............................................................. $
1.9
—
2.3
4.2
$
$
4.9
23.0
2.0
29.9
On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying
value of tangible long-lived assets, primarily assets related to company-operated restaurants, may not be recoverable. Recoverability
of a restaurant's assets is measured by comparing the assets' carrying value to the undiscounted future cash flows expected to be
generated over the assets' remaining useful lives or remaining lease terms, whichever is less. If the total expected undiscounted
future cash flows are less than the carrying amount of the assets, this may be an indicator of impairment. If it is decided that there
has been an impairment, the carrying amount of the asset is written down to the estimated fair value. The fair value is primarily
determined by discounting the future cash flows based on our cost of capital.
Impairment charges for the year ended December 31, 2012 primarily related to equipment at five IHOP franchise restaurants
whose lease agreements were prematurely terminated and the restaurants subsequently refranchised. Closure charges primarily
related to equipment at one franchise restaurant whose lease agreement was prematurely terminated and the restaurant closed, as
well as adjustments to the reserve for previously closed surplus IHOP properties.
Impairment and closure charges for the year ended December 31, 2011 were primarily comprised of closure costs of $23.0
million related to termination of our sublease of the commercial space occupied by Applebee’s Restaurant Support Center in
Lenexa, Kansas through October 31, 2011 and a $4.5 million impairment charge related to the furniture, fixtures and leasehold
improvements at that facility. Other closure charges primarily related to adjustments to the reserve for previously closed surplus
IHOP properties.
Amortization of Intangible Assets
Amortization of intangible assets relates to intangible assets arising from the November 2007 acquisition of Applebee's,
primarily franchising rights. Absent any impairment, amortization will begin to decline in 2015 as intangible assets with shorter
lives become fully amortized.
44
Loss on Extinguishment of Debt
Instrument Retired/Repaid(1)
Face Amount
Retired/Repaid
Cash Paid
Loss(2)
(In millions)
$
Term Loans .............................................
Senior Notes............................................
Loss on extinguishment of debt, 2012....
Term Loans .............................................
Senior Notes............................................
Loss on extinguishment of debt, 2011 ....
$
$
$
$
210.5
5.0
215.5
161.5
59.3
220.8
$
$
$
210.5
5.5
216.0
161.5
64.2
225.7
$
$
$
$
4.9
0.7
5.6
3.2
8.0
11.2
(1) For a description of the respective instruments, refer to Note 8 of the Notes to Consolidated Financial Statements.
(2) Including write-off of the discount and deferred financing costs related to the debt retired.
During 2012 and 2011, our Senior Notes were selling at a premium to face value. For the years ended December 31, 2012
and 2011, we paid a total premium of $0.5 million and $4.9 million, respectively, to repurchase Senior Notes.
We may continue to dedicate a portion of excess cash flow towards opportunistic debt retirement.
Gain on Disposition of Assets
We recognized a gain on disposition of assets of $102.6 million in 2012, primarily related to the refranchising and sale of
related restaurant assets of 154 Applebee's company-operated restaurants, comprised as follows: 17 restaurants in a six-state market
area geographically centered around Memphis, Tennessee; 33 restaurants located primarily in Missouri and Indiana; 65 restaurants
located in Michigan and 39 restaurants located in Virginia.
In 2011, we recognized a gain on disposition of assets of $43.3 million, primarily related to the refranchising and sale of
related restaurant assets of 132 Applebee's company-operated restaurants, of which 66 were located in Massachusetts, New
Hampshire, Maine, Rhode Island, Vermont and parts of New York state (collectively, the New England market area), 36 were
located in the St. Louis market area and 30 were located in the Washington, D.C. market area.
Debt Modification Costs
In 2011, we incurred costs paid to third parties of $4.0 million in connection with an amendment to our Credit Agreement
that were expensed in accordance with U.S. GAAP guidance for debt modifications. There were no such costs in 2012.
Income Tax Provision
We recorded a tax provision of $67.2 million in 2012 as compared to a tax provision of $29.8 million in 2011. The change
was primarily due to the increase in our pretax book income. The 2012 effective tax rate of 34.5% applied to pretax book income
was lower than the statutory Federal tax rate of 35% primarily related to a reduction in state deferred taxes as a result of the
refranchising and sale of Applebee's company-operated restaurants and compensation-related tax credits.
Comparison of the fiscal years ended December 31, 2011 and 2010
Overview
Our 2011 financial results compared to 2010 were significantly impacted by (i) the successful refranchising of 215 Applebee's
company-operated restaurants since October 2010; (ii) a loss on extinguishment of debt and temporary equity of $107.0 million
primarily related to the write off of deferred financing costs, prepayment penalties and tender premiums associated with our 2010
debt refinancing that did not recur; (iii) lower interest expense due to our refinancing of long-term debt in October 2010, the
ongoing early retirement of debt with excess cash flow and the repricing of our bank debt in February 2011; and (iv) impairment
and closure charges related to termination of the sublease of Applebee's Restaurant Support Center in Lenexa, Kansas. Highlights
of comparison between the two periods included:
45
• Revenues decreased $258.4 million to $1.1 billion in 2011 from $1.3 billion in 2010. The decline was primarily due to
the net effect of refranchising 132 company-operated Applebee's restaurants in 2011 and 83 in the fourth quarter of 2010,
and a decrease in IHOP domestic system-wide same-restaurant sales of 2.0% , partially offset by a 3.6% increase in IHOP
effective franchise units and a 2.0% increase in Applebee's domestic system-wide same-restaurant sales.
•
Segment profit for 2011 decreased by $22.2 million, comprised as follows:
Year ended December 31,
2011
2010
(In millions)
Favorable
(Unfavorable)
Variance
Franchise operations ....................................................................... $
Company restaurant operations.......................................................
Rental operations.............................................................................
Financing operations .......................................................................
Total segment profit ........................................................................ $
293.5
$
273.6
$
72.6
27.8
13.7
116.3
25.5
14.4
407.6
$
429.8
$
19.9
(43.7)
2.3
(0.7)
(22.2)
The decrease in segment profit was primarily due to the net effect of refranchising 215 Applebee's company-operated
restaurants since October 2010, a decline in margins at Applebee's company-operated restaurants and a 2.0% decrease
in IHOP domestic system-wide same-restaurant sales. These unfavorable factors were partially offset by $7.7 million of
charges associated with an IHOP franchisee that defaulted in 2010, the increase in IHOP effective franchise units and the
increase in Applebee's same-restaurant sales.
• Loss on extinguishment of debt was $11.2 million in 2011, compared with a loss on the extinguishment of debt of $107.0
million in 2010. The significant loss in 2010 included charges of $110.2 million related to our debt refinancing in October
2010 and the redemption of Series A Preferred Stock.
•
•
Interest expense decreased $38.8 million due to lower non-cash interest charges as the result of the October 2010
refinancing, the ongoing early retirement of debt with excess cash flow and the repricing of our bank debt in February
2011.
Impairment and closure charges were $25.6 million higher in 2011 primarily due to $27.5 million of charges related to
termination of the sublease for Applebee's former Restaurant Support Center in Lenexa, Kansas.
Franchise Operations
Year ended December 31,
2011
2010
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
Franchise revenues
Applebee's....................................................................... $
IHOP ...............................................................................
IHOP advertising ............................................................
Total franchise revenues......................................................
Franchise expenses
Applebee's.......................................................................
IHOP ...............................................................................
IHOP advertising ............................................................
Total franchise expenses......................................................
Franchise segment profit
$
169.2
153.8
75.5
398.5
2.8
26.7
75.5
105.0
$
153.5
149.2
74.4
377.1
1.9
27.2
74.4
103.5
Applebee's.......................................................................
IHOP ...............................................................................
Total franchise segment profit............................................. $
Segment profit as % of revenue(1)........................................
166.4
127.1
293.5
73.7%
$
151.6
122.0
273.6
72.6%
$
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
46
15.7
4.6
1.1
21.4
(0.9)
0.5
(1.1)
(1.5)
14.8
5.1
19.9
10.3 %
3.1 %
1.4 %
5.7 %
(53.5)%
1.9 %
(1.4)%
(1.4)%
9.7 %
4.2 %
7.3 %
The increase in Applebee’s franchise revenue was primarily attributable to increased royalty revenue resulting from a 9.2%
increase in the number of effective franchise restaurants and a 2.0% increase in domestic same-restaurant sales. Applebee's effective
franchise restaurant count increased by 149 due to the refranchising of 132 Applebee’s company-operated restaurants during 2011
and net franchise restaurant development. Approximately $11.4 million of the revenue increase was attributable to refranchised
restaurants.
The increase in IHOP franchise revenue (other than advertising) was primarily attributable to an increase of 3.6% in the
number of effective franchise restaurants and an increase in both volume and pricing of pancake and waffle dry mix, partially
offset by a decrease of 2.0% in IHOP domestic franchise same-restaurant sales.
The decrease in IHOP franchise expenses was due to lower bad debt expense of $2.3 million partially offset by higher cost
of sales associated with the increased revenues from pancake and waffle dry mix sales. In 2010, bad debt expense included a
reserve of approximately $2.0 million related to a former franchise operator of 40 IHOP franchise restaurants that defaulted on
its obligations in the fourth quarter of 2010.
IHOP advertising revenues and expenses increased due to the increase in IHOP franchise restaurants partially offset by the
decrease in IHOP domestic franchise same-restaurant sales. Applebee's franchise expenses are relatively smaller than IHOP's due
to advertising expenses. Franchise fees designated for IHOP's national advertising fund and local marketing and advertising
cooperatives are recognized as revenue and expense of franchise operations; however, Applebee's national advertising fund
constitutes an agency transaction and therefore is not recognized as franchise revenue and expense.
Company Restaurant Operations
Company restaurant sales .................................................... $
Company restaurant expenses .............................................
Company restaurant segment profit..................................... $
Segment profit as % of revenue(1)........................................
Year ended December 31,
2011
2010
Favorable
(Unfavorable)
Variance
%
Change(1)
531.0
458.4
72.6
13.7%
$
$
(In millions)
815.6
699.3
116.3
14.3%
$
$
(284.6)
240.9
(43.7)
(34.9)%
34.4 %
(37.6)%
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
As of December 31, 2011, Company restaurant operations were comprised of 177 Applebee's company-operated restaurants
and 15 IHOP company-operated restaurants. The impact of the IHOP restaurants on all comparisons of fiscal 2011 with the same
period of 2010 was negligible.
Company restaurant sales decreased $284.6 million. In the past 15 months Applebee's refranchised 215 company-operated
restaurants (132 during 2011 and 83 in the fourth quarter of 2010) and closed seven company-operated restaurants during 2010.
As a result, Applebee's company restaurant sales declined $292.7 million, partially offset by a $6.9 million increase in revenue
from currently operating restaurants, which represents a 1.8% increase in company same-restaurant sales. The increase in same-
restaurant sales was driven mainly by an increase in average guest check that resulted from an increase of approximately 1.4% in
menu pricing and an increase from favorable product mix changes. Traffic was flat compared to the prior year.
Company restaurant expenses declined $240.9 million. Applebee's company restaurant expenses declined $253.3 million
because of the refranchising of company-operated restaurants and closures noted above, partially offset by an increase of $11.1
million in costs at currently operating restaurants. The overall operating margin for Applebee's company restaurant operations
declined to 14.5% for 2011 from 14.8% for the same period of last year, as shown below:
47
Applebee's Company-Operated Expenses
As Percentage of Restaurant Sales
Revenue ............................................................
Food and beverage ...........................................
Labor ................................................................
Direct and occupancy .......................................
Restaurant operating profit margin(1)................
_________________________________________
(1) Percentages may not add due to rounding.
Year Ended
December 31,
2011
100.0%
25.7%
32.7%
27.1%
14.5%
2010
100.0%
25.5%
33.2%
26.6%
14.8%
Favorable (Unfavorable)
Total
Variance
Components of Total Variance
Refranchising
and Closures
Current
Restaurants
(0.2)%
0.5 %
(0.6)%
(0.3)%
0.0%
1.1%
0.0%
1.1%
(0.2)%
(0.6)%
(0.5)%
(1.4)%
The restaurant refranchising and closures noted above had a net favorable impact of 1.1% on restaurant operating profit
margin, primarily because the markets refranchised had higher-than-average labor costs. In terms of specific cost categories at
currently operating company restaurants:
•
Food and beverage costs as a percentage of company restaurant sales increased 0.2%, primarily due to a 3.2% increase
in overall commodity costs (primarily produce, poultry, seafood and dairy) as well as menu changes, partially offset by
improvement in waste variances and savings associated with distribution center realignment.
• Labor costs as a percentage of restaurant sales increased 0.6% due to higher payroll-related costs, increased management
staffing levels and salaries, partially offset by decreased use of hourly shift supervisors and lower bonus costs. Payroll-
related costs increased because of the expiration of Hire Act FICA credits along with higher costs of workers compensation
insurance and hourly vacation expense.
• Direct and occupancy costs as a percentage of company restaurant sales increased 0.5% due to incremental investment
in local advertising, higher rates for both natural gas and electricity and higher facilities expenses.
Rental Operations
Year ended December 31,
2011
2010
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
Rental revenues ................................................................... $
Rental expenses ...................................................................
Rental operations segment profit......................................... $
Segment profit as % of revenue(1)........................................
126.0
98.2
27.8
$
$
124.5
99.0
25.5
$
$
22.1%
20.5%
1.5
0.8
2.3
1.2%
0.9%
9.2%
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
Rental operations relate primarily to IHOP restaurants. Rental revenue includes income from operating leases and interest
income from direct financing leases. Rental expenses are costs of prime operating leases and interest expense on prime capital
leases on franchisee-operated restaurants.
Rental segment profit increased by $2.3 million primarily due to charges related to a franchisee default in 2010 that did not
recur in 2011. Segment profit in 2010 was adversely impacted by $5.7 million because of the write-off of deferred lease costs
associated with 21 of the 40 franchise restaurants operated by a former franchise operator that defaulted on its obligations in the
fourth quarter of 2010. This favorable effect on the comparison of 2011 with 2010 was partially offset by lower rent on refranchised
properties and the unfavorable impact on sales-based rent of the 2.0% decline in IHOP's domestic franchise same-restaurant sales
in 2011.
48
Financing Operations
Year ended December 31,
2011
2010
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
Financing revenues.............................................................. $
Financing expenses..............................................................
Financing operations segment profit ................................... $
Segment profit as % of revenue(1)........................................
19.7
6.0
13.7
$
$
16.4
2.0
14.4
$
$
69.7%
88.0%
3.3
(4.0)
(0.7)
20.0 %
(203.4)%
(4.9)%
____________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
Substantially all of our financing operations relate to IHOP franchise restaurants developed under our business model in effect
prior to 2003. Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment
leases, as well as sales of equipment associated with refranchised IHOP restaurants. Financing expenses are primarily the cost of
restaurant equipment.
As noted above, 40 restaurants that previously had been operated by a former franchisee that defaulted on its obligations
under the franchise agreements were refranchised to an affiliate of an existing IHOP franchisee in the first quarter of 2011. The
equipment related to those restaurants was sold to the new operator and as a result, segment revenues and expenses for 2011
increased $5.0 million and $5.2 million, respectively, compared to the same period of 2010. The increase in revenue was partially
offset by a $1.4 million decrease in interest revenue primarily due to the progressive decline in note balances due to repayments
and a decline in refranchising activity other than that related to the defaulted franchisee. The increase in expense because of the
equipment sale was partially offset by a decline in refranchising activity other than that related to the defaulted franchisee.
The decline in financing operations segment profit was primarily due to the decrease in interest revenue resulting from the
progressive decline in note balances due to repayments.
Other Expense and Income Components
Year ended December 31
2011
2010
(In millions)
Favorable
(Unfavorable)
Variance
%
Change(1)
General and administrative expenses .................................. $
Interest expense ...................................................................
Impairment and closure charges..........................................
Amortization of intangible assets ........................................
Loss on extinguishment of debt and temporary equity .......
Gain on disposition of assets ...............................................
Debt modification costs.......................................................
Income tax provision (benefit) ............................................
$
155.8
132.7
29.9
12.3
11.2
(43.3)
4.0
29.8
$
160.3
171.5
4.3
12.3
107.0
(13.6)
—
(9.3)
4.5
38.8
(25.6)
—
95.8
29.7
(4.0)
(39.1)
2.8 %
22.6 %
(597.0)%
—
89.6 %
(218.6)%
n.m.
420.8 %
___________________________________________________________________
(1) Percentages are calculated on actual amounts, not the rounded amounts presented above
n.m. - not meaningful
General and Administrative Expenses
General and administrative expenses decreased $4.5 million, primarily due to lower stock-based compensation costs, savings due
to the refranchising of Applebee's company-operated restaurants and lower expenses for legal and other professional services, partially
offset by increases in expenses for salaries and benefits, recruiting and relocation, and travel. Stock-based compensation costs decreased
primarily because expenses in 2010 related to the acceleration of equity grants due to the retirement of an executive and changes
related to vesting of certain equity grants to directors that did not recur and the impact of a lower stock price as of December 31, 2011
on equity grants accounted for as liabilities. The increase in salaries and benefits and recruiting and relocation expenses was primarily
due to the hiring of more executive level positions in 2011 and the latter part of 2010.
49
Interest Expense
The $38.8 million decrease in interest expense is primarily due to lower non-cash interest charges in 2011 compared to 2010 and
a reduction in long-term debt over the past twelve months, partially offset by an increase in overall weighted interest rates. Non-cash
interest charges declined to $6.2 million in 2011 from $34.4 million because deferred financing costs and discounts associated with
our debt instruments that were refinanced in October 2010 were written off at that time and the deferred financing costs and discounts
associated with new debt instruments are substantially less than those related to the refinanced debt. During 2011, we repaid $161.5
million of Term Loans and $59.3 million of Senior Notes.
Impairment and Closure Charges
Impairment and closure charges for the years ended December 31, 2011 and 2010 were as follows:
Long-lived tangible asset impairment.................................................................................... $
Lenexa lease termination .......................................................................................................
Closure charges......................................................................................................................
Total impairment and closure charges................................................................................... $
Year Ended
December 31,
2011
2010
(In millions)
4.9
$
23.0
2.0
29.9
$
1.5
—
2.8
4.3
On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying
value of tangible long-lived assets, primarily assets related to company-operated restaurants, may not be recoverable. Recoverability
of a restaurant's assets is measured by comparing the assets' carrying value to the undiscounted future cash flows expected to be
generated over the assets' remaining useful lives or remaining lease terms, whichever is less. If the total expected undiscounted future
cash flows are less than the carrying amount of the assets, this may be an indicator of impairment. If it is decided that there has been
an impairment, the carrying amount of the asset is written down to the estimated fair value. The fair value is primarily determined by
discounting the future cash flows based on our cost of capital.
Impairment and closure charges for the year ended December 31, 2011 were primarily comprised of $23.0 million related to
termination of our sublease of the commercial space occupied by Applebee’s Restaurant Support Center in Lenexa, Kansas through
October 31, 2011 and a $4.5 million impairment charge related to the furniture, fixtures and leasehold improvements at that facility.
Other closure charges primarily related to adjustments to the reserve for previously closed surplus IHOP properties.
For the year ended December 31, 2010, we recognized impairment charges of $1.5 million and closure charges of $2.8 million.
The impairment charges primarily related to properties associated with Applebee's company-operated restaurants in the Minnesota
market expected to be sold and to a single Applebee's restaurant and the land on which it is situated. The closure charges related
primarily to two company-operated IHOP Cafe restaurants, a non-traditional restaurant test format that was evaluated but will no longer
be utilized, and to the closure of the only company-operated Applebee's restaurant in China.
Amortization of Intangible Assets
Amortization of intangible assets relates to intangible assets arising from the November 2007 acquisition of Applebee's,
primarily franchising rights. In the absence of future impairment charges, amortization charges should remain consistent from year
to year.
50
Loss/Gain on Extinguishment of Debt and Temporary Equity
Instrument
Face Amount
Retired/Repaid
Cash Paid
(In millions)
Loss (Gain)(3)
Term Loans(1) ....................................................................................................
Senior Notes(1) ..................................................................................................
Total 2011 loss on extinguishment of debt ..................................
Class A-2-II-X Notes(2) .................................................................................
Term Loans(1) ....................................................................................................
October 2010 Refinancing and redemption of Series A Stock ....
Total 2010 loss on extinguishment of debt and Series A
Preferred Stock.............................................................................
$
$
$
$
$
$
$
161.5
59.3
220.8
68.2
56.0
—
$
$
$
161.5
64.2
225.7
61.8
56.0
—
124.2
$
117.8
$
3.2
8.0
11.2
(4.6)
1.4
110.2
107.0
__________________________________________________________________________
(1) For a description of the respective instruments, refer to Note 8 of the Notes to Consolidated Financial Statements.
(2) For a description of the instrument, refer to Note 8 of the Notes to Consolidated Financial Statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2010.
(3) Including write-off of the discount and deferred financing costs related to the debt retired.
In 2011, at the dates of repurchase, our Senior Notes were selling at a premium to face value. For the year ended December 31,
2011, we paid a total premium of $4.9 million to repurchase Senior Notes.
In 2010, we recognized a loss on extinguishment of debt and the redemption of Series A Preferred stock of $107.0 million. The
loss in 2010 was comprised of charges of $110.2 million resulting from the October 2010 Refinancing and the redemption of Series A
Stock and a $1.4 million loss on extinguishment of debt subsequent to the October 2010 Refinancing, partially offset by gains on
extinguishment of debt of $4.6 million that arose prior to the October 2010 Refinancing. The charges resulting from the October 2010
Refinancing consisted of approximately $64 million of deferred financing costs associated with our previous securitized debt structure,
including the remaining balance in Accumulated Other Comprehensive Income of a loss related to an interest rate swap designated as
a cash flow hedge, and approximately $46 million of prepayment costs and tender premiums associated with the retirement of the
securitized debt. Tender premiums associated with the Series A Stock were included as dividends paid and not part of the loss on
extinguishment.
We may continue to dedicate a portion of excess cash flow towards opportunistic debt retirement.
Gain on Disposition of Assets
We recognized a gain on disposition of assets of $43.3 million in 2011, primarily related to the refranchising and sale of related
restaurant assets of 132 Applebee's company-operated restaurants, of which 66 were located in Massachusetts, New Hampshire, Maine,
Rhode Island, Vermont and parts of New York state (collectively, the New England market area), 36 were located in the St. Louis
market area and 30 were located in the Washington, D.C. market area. In 2010, we recognized a gain on disposition of assets of $13.6
million primarily related to the refranchising and sale of related restaurant assets of 63 Applebee's company-operated restaurants in
the Minnesota market area and 20 restaurants in the Roanoke/Lynchburg market area in Virginia.
Debt Modification Costs
Pursuant to an amendment to our Credit Agreement, we incurred costs paid to third parties of $4.0 million in connection with this
transaction that were expensed in accordance with U.S. GAAP guidance for debt modifications.
Income Tax Provision (Benefit)
We recorded a tax provision of $29.8 million in 2011 as compared to a recognized tax benefit of $9.3 million in 2010. The change
was primarily due to the increase in our pretax book income. The 2011 effective tax rate of 28.4% applied to pretax book income was
lower than the statutory Federal tax rate of 35% primarily due to tax credits and changes in tax rates and the release of liabilities for
unrecognized tax benefits. The tax credits are primarily FICA tip and other compensation-related credits associated with Applebee's
company-owned restaurant operations.
51
Liquidity and Capital Resources of the Company
Credit Facilities
In October 2010, we entered into a credit agreement with a group of lenders and financial institutions (the "Credit Agreement")
that established a senior secured credit facility (the "Credit Facility") consisting of a $900 million term facility (the "Term Facility")
maturing in October 2017 and a $50 million senior secured revolving credit facility (the "Revolving Facility") maturing in October
2015. The Credit Agreement also provides for an uncommitted incremental facility that permits us, subject to certain conditions,
to increase the Credit Facility by up to $250 million; provided that the aggregate amount of the commitments under the Revolving
Facility may not exceed $150 million.
The original interest rates provided for in the Credit Agreement were as follows: Loans made under the Term Facility ("Term
Loans") and the Revolving Facility ("Revolving Loans") bore interest, at our option, at an annual rate equal to (i) a LIBOR-based
rate (which was subject to a floor of 1.50%) plus a margin of 4.50% or (ii) the base rate (the "Base Rate") (which was subject to
a floor of 2.50%), which was equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate and (c) the one-month
LIBOR rate (which was subject to a floor of 1.50%) plus 1.00%, plus a margin of 3.50%. The margin for the Revolving Facility
was subject to debt leverage-based step-downs.
February 2011 Amendment
In February 2011, we entered into Amendment No. 1 ("Amendment No. 1") to the Credit Agreement. Pursuant to Amendment
No. 1, the interest rate margin applicable to LIBOR-based Term Loans was reduced from 4.50% to 3.00%, and the interest rate
floors used to determine the LIBOR and Base Rate reference rates for Term Loans were reduced from 1.50% to 1.25% for LIBOR-
based loans and from 2.50% to 2.25% for Base Rate-denominated loans. Given the relative stability of LIBOR rates since February
2011 and the amended rate floors, Amendment No. 1 effectively lowered our interest rate on LIBOR-based Term Loans from
6.00% to 4.25%, the rate in effect for all of 2012. Taking into account fees and expenses associated with the Credit Agreement
and Amendment No. 1 that are amortized as additional non-cash interest expense over a seven-year period, the weighted average
effective interest rate for the Credit Facility as of December 31, 2012 was 7.8%.
Amendment No. 1 did not change the interest rates on Revolving Loans, but it did increase the available lender commitments
under the Revolving Facility from $50 million to $75 million. The Revolving Facility is utilized, among other purposes, to
collateralize certain letters of credit we are required to maintain. Such collateralization does not constitute a draw-down under the
Revolving Facility but does reduce the amount that can be borrowed under the Revolving Facility. Unused amounts of the Revolving
Facility bear interest at the rate of 75 basis points per annum.
Concurrent with Amendment No. 1, in February 2011, we borrowed $742 million under the Term Facility, retiring the same
amount of then-outstanding borrowings under the Credit Agreement. Pursuant to Amendment No. 1, our mandatory repayment
of 1% per year in effect as of December 31, 2012 was based on this balance of $742 million, as compared to the previous outstanding
balance of $900 million borrowed under the Credit Agreement.
Amendment No. 1 also modified certain restrictive covenants of the Credit Agreement, including those relating to repurchases
of other debt securities, permitted acquisitions and payments on equity.
Revolving Loans
During the year ended December 31, 2012, we borrowed and repaid a cumulative total of $50.0 million under the Revolving
Facility. On a daily weighted average basis there was $3.1 million outstanding under the Revolving Facility during 2012. The
annualized weighted average interest rate on borrowings under the Revolving Facility during 2012 was 6.55%. The highest balance
outstanding under the Revolving Facility at any point during 2012 was $25.0 million and there were no amounts outstanding under
the Revolving Facility as of December 31, 2012. Our available borrowing capacity under the Revolving Facility is reduced by
outstanding letters of credit, which totaled $12.1 million at December 31, 2012.
Mandatory Repayments
Term Loans under the Credit Agreement were subject to the following prepayment requirements :
• Mandatory prepayments equal to 0.25% of the aggregate principal amount of the Term Loan borrowing ($742.0 million
borrowed concurrent with Amendment No. 1) must be made on a quarterly basis (1.0% for a fiscal year);
• 50% of excess cash flow (as defined in the Credit Agreement) ("Excess Cash Flow"), paid, at a minimum, on an annual
basis; and
• 100% of asset sales and insurance proceeds (subject to certain exclusions).
52
Beginning with fiscal 2012, the percentage of Excess Cash Flow required to be applied as a prepayment was subject to two
stepdowns: 25% of Excess Cash Flow if the consolidated leverage ratio (as defined in the Credit Agreement) is less than 4.5:1 but
greater than or equal to 3:1 as of the end of the fiscal year; and 0% of Excess Cash Flow if the consolidated leverage ratio is less
than 3:1 as of the end of the fiscal year.
We may voluntarily prepay loans under both the Term Facility and the Revolving Facility without premium or penalty.
Restricted Payments
The Credit Agreement contains covenants considered customary for similar types of facilities that limit certain permitted
restricted payments, including those related to dividends and repurchases of our common stock. Such restricted payments are
limited to a cumulative amount comprised of (i) a general restricted payments allowance of $35.0 million, plus (ii) 50% of Excess
Cash Flow for each fiscal year in which the consolidated leverage ratio is greater than 5.5:1; (iii) 100% of Excess Cash Flow for
each fiscal year if the consolidated leverage ratio is less than 5.5:1; and (iv) proceeds from the exercise of options to purchase our
common stock, less any amounts paid as dividends or to repurchase our common stock.
February 2013 Amendment
On February 4, 2013, we entered into Amendment No. 2 ("Amendment No. 2") to the Credit Agreement. Pursuant to
Amendment No. 2, the interest rate margin for Term Loans was reduced from 2.00% to 1.75% for Base Rate-denominated loans
and from 3.00% to 2.75% for LIBOR-based loans. The interest rate margin for Revolving Loans was reduced from 3.50% to 1.75%
for Base Rate-denominated loans and from 4.50% to 2.75% for LIBOR-based loans. The interest rate floors used to determine the
Base Rate and LIBOR reference rates for Term Loans were reduced from 2.25% to 2.00% for Base Rate-denominated Term Loans
and from 1.25% to 1.00% for LIBOR-based Term Loans. The commitment fee for the unused portion of the revolving credit
facility was reduced from 0.75% to 0.50% and, if the consolidated leverage ratio is reduced below 4.75:1, from 0.50% to 0.375%.
Assuming LIBOR rates in effect as of December 31, 2012, we anticipate Amendment No. 2 will have the effect of lowering interest
rates on our LIBOR-based Term Loans from 4.25% to 3.75%.
In addition, Amendment No. 2 establishes the following consolidated leverage ratio thresholds for Excess Cash Flow
prepayments: 50% if the consolidated leverage ratio is 5.75:1 or greater; 25% if the consolidated leverage ratio is less than 5.75:1
and greater than or equal to 5.25:1; and 0% if the consolidated leverage ratio is less than 5.25:1. Amendment No. 2 also revised
the definition of “Permitted Amount” so that it is now measured on a quarterly basis for purposes of computing the permitted
amount of restricted payments, which includes payment of dividends on and repurchases of our common stock. Finally, Amendment
No.2 revised the definition of "Excess Cash Flow" to eliminate the deduction for any extraordinary receipts or disposition proceeds.
All of these provisions will be retroactively applied to the calculation of Excess Cash Flow for fiscal 2012. All other material
provisions, including maturity and covenants under the Credit Agreement, remain unchanged.
Concurrent with Amendment No. 2, on February 4, 2013, we borrowed $472.0 million under the Term Facility, retiring the
same amount of then-outstanding borrowings under Amendment No. 1. Pursuant to Amendment No. 2, our mandatory repayment
of 1% per year is now based on this balance of $472 million, as compared to the previous outstanding balance of $742 million
borrowed concurrent with Amendment No. 1.
As a result of applying the revision of the definition of Excess Cash Flow retroactively as provided for in Amendment No. 2,
there were no mandatory repayments of Term Loans required in 2012 and our permitted amount of restricted payments is
approximately $85 million as of December 31, 2012.
Based on our current level of operations, we believe that our cash flow from operations, available cash and available borrowings
under our Revolving Facility will be adequate to meet our liquidity needs during 2013. We have not entered into hedging agreements
to mitigate the effect of changes in variable interest rates charged on borrowings under the Credit Agreement.
9.5% Senior Notes due 2018
In October 2010, we issued $825.0 million aggregate principal amount of 9.5% Senior Notes due October 30, 2018 (the
"Senior Notes") pursuant to an Indenture (the "Indenture") by and among the Company, the Guarantors party thereto and Wells
Fargo Bank, National Association, as trustee. The Senior Notes are unsecured senior obligations of the Company and are jointly
and severally guaranteed on a senior unsecured basis by the Guarantors under the Credit Agreement. There are no mandatory
repayments of the Senior Notes, although under certain conditions we may be required to repurchase Senior Notes with excess
proceeds of assets sales or upon a change of control, as described in the Indenture under which the Senior Notes were issued.
There were no such required repurchases during 2012.
53
Debt Covenants
Pursuant to the Credit Agreement, we are required to comply with a maximum consolidated leverage ratio and a minimum
consolidated cash interest coverage ratio. The Company's current required maximum consolidated leverage ratio of total debt (net
of unrestricted cash not to exceed $75 million) to adjusted EBITDA is 7.25:1. Our current required minimum ratio of adjusted
EBITDA to consolidated cash interest is 1.5:1. Compliance with each of these ratios is required quarterly, on a trailing four-quarter
basis. These ratio thresholds become more rigorous over time. The maximum consolidated leverage ratio, originally 7.5:1, will
decline, in annual 25-basis-point decrements beginning with the first quarter of 2012, to 6.5:1 by the first quarter of 2015, then to
6.0:1 for the first quarter of 2016 until the Credit Agreement expires in October 2017. The minimum consolidated cash interest
coverage ratio will increase to 1.75:1 commencing in the first quarter of 2013 and to 2.0:1 commencing in the first quarter of 2016
and remain at that level until the Credit agreement expires in October 2017.
For the trailing twelve months ended December 31, 2012, our consolidated leverage ratio was 4.6:1 and our consolidated cash
interest coverage ratio was 2.5:1.
There are no financial maintenance covenants associated with the Senior Notes.
The Senior Notes, the Term Facility and the Revolving Facility are also subject to affirmative and negative covenants considered
customary for similar types of facilities, including, but not limited to, covenants with respect to incremental indebtedness, liens,
investments, affiliate transactions, and capital expenditures. These covenants are subject to a number of important limitations,
qualifications and exceptions. Certain of these covenants will not be applicable to the Senior Notes during any time that the Senior
Notes maintain investment grade ratings.
The EBITDA used in calculating these ratios is considered to be a non-U.S. GAAP measure. The reconciliation between our
income before income taxes, as determined in accordance with U.S. GAAP, and EBITDA used for covenant compliance purposes
is as follows:
Trailing Twelve Months Ended December 31, 2012
U.S. GAAP income before income taxes ............................................................................................................... $
Interest charges.......................................................................................................................................................
Loss on extinguishment of debt .............................................................................................................................
Depreciation and amortization ...............................................................................................................................
Non-cash stock-based compensation .....................................................................................................................
Impairment and closure charges.............................................................................................................................
Other.......................................................................................................................................................................
Gain on disposition of assets..................................................................................................................................
EBITDA................................................................................................................................................................. $
194,923
131,869
5,554
39,538
11,442
4,218
15,304
(102,597)
300,251
(in thousands)
We believe this non-U.S. GAAP measure is useful in evaluating our results of operations in reference to compliance with the
debt covenants discussed above. This non-U.S. GAAP measure is not defined in the same manner by all companies and may not
be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition
to, and not as a substitute for, the U.S. GAAP information contained within our financial statements.
Franchising of Applebee's Company-Operated Restaurants
In October 2012, we achieved our stated goal of transitioning Applebee's to a 99% franchised system, similar to IHOP's 99%
franchised system. We believe a highly franchised business model requires less capital investment and general and administrative
overhead, generates higher gross and operating profit margins (as a percentage of revenue) and reduces the volatility of free cash
flow performance, as compared to a model based on operating a significant number of company restaurants.
During 2012, we completed the refranchising and sale of related restaurant assets of 154 Applebee's company-operated
restaurants. Proceeds from asset dispositions, including the 154 restaurants, totaled $168.9 million for the year ended December 31,
2012, the majority of which was used to retire debt, after payment of income taxes related to the transactions. With the completion
of our strategy to refranchise and sell the related restaurant assets of Applebee's company-operated restaurants, we do not anticipate
significant proceeds from asset dispositions in the foreseeable future.
54
Cash Flows
In summary, our cash flows were as follows:
Net cash provided by operating activities ....................................................... $
Net cash provided by investing activities .......................................................
Net cash used in financing activities...............................................................
Net increase (decrease) in cash and cash equivalents ..................................... $
52.9
165.4
(214.5)
3.8
$
$
$
121.7
101.7
(265.0)
(41.6) $
179.3
53.5
(212.8)
20.0
2012
2011
(In millions)
2010
Operating Activities
Cash provided by operating activities is primarily driven by revenues earned and collected from our franchisees, operating
earnings from our company-operated restaurants and profit from our rental operations and financing operations. Franchise revenues
consist of royalties, IHOP advertising fees and sales of proprietary products for IHOP, each of which fluctuates with increases or
decreases in franchise retail sales. Franchise retail sales are impacted by the development of IHOP and Applebee's restaurants by
our franchisees and by fluctuations in same-restaurant sales. Operating earnings from company-operated restaurants are impacted
by many factors which include but are not limited to changes in traffic patterns, pricing activities and changes in operating expenses.
Rental operations profit is rental income less rental expenses. Rental income includes revenues from operating leases and interest
income from direct financing leases. Rental income is impacted by fluctuations in same-restaurant sales as some operating leases
include a provision for contingent rent based on retail sales and a progressive decline in rental income as leases expire. Rental
expenses are costs of prime operating leases and interest expense on prime capital leases on franchisee-operated restaurants.
Financing operations revenue consists of interest income from the financing of franchise fees and equipment leases as well as
periodic sales of equipment. Financing income is impacted by a progressive decline in interest revenue as the obligations financed
are repaid. Financing expenses are primarily the cost of restaurant equipment.
Cash provided by operating activities totaled $52.9 million during the year ended December 31, 2012 compared to $121.7
million in the same period in 2011, a decrease of $68.8 million. The primary reasons for this unfavorable change were an increase
of $67.2 million in income taxes paid in cash, and a $26.3 million decrease in segment profit, excluding depreciation and other
non-cash changes, partially offset by a decrease of $25.1 million in cash interest payments. The increase in income taxes paid was
primarily due to gains on the refranchising and sale of related restaurant assets of Applebee's company-operated restaurants, as
well as a tax refund of $20 million received in 2011 that did not recur in 2012. Proceeds from asset sales are an investing cash
inflow while all income taxes paid are an operating cash outflow. The lower segment profit was due, in large part, to the refranchising
of 286 Applebee's company-operated restaurants over the past two years. Cash interest expense was lower due to the retirement
of debt.
Investing Activities
Net cash provided by investing activities in 2012 was primarily attributable to $168.9 million of proceeds from dispositions
of assets, primarily the refranchising of 154 Applebee's company-operated restaurants, and $12.3 million of principal receipts
from notes, equipment contracts and other long-term receivables, partially offset by $17.0 million of capital expenditures. Capital
expenditures decreased from $26.3 million in 2011 due primarily to a decline in the number of company-operated restaurants. We
expect capital expenditures to range between approximately $8 million and $10 million in fiscal 2013, also because of the decline
in the number of company-operated restaurants.
The following table represents the principal receipts on various long-term receivables due from our franchisees as of
December 31, 2012:
2013
2014
Principal Receipts Due By Period
2015
2017
Thereafter
Total
2016
(In millions)
8.0
$
8.9
0.3
17.2
$
8.5
10.2
0.1
18.8
$
$
84.3
54.4
0.1
138.8
$
$
122.4
95.1
3.2
220.7
Equipment leases(1) ........................ $
Direct financing leases(2).................
Franchise notes and other(3) ..............
Total.................................................. $
6.8
6.2
1.2
14.2
$
$
7.1
7.3
0.8
15.2
$
$
7.7
8.1
0.7
16.5
$
$
_______________________________
(1) Equipment lease receivables extend through the year 2029.
(2) Direct financing lease receivables extend through the year 2024.
(3) Franchise note receivables extend through the year 2020.
55
Financing Activities
Financing activities used net cash of $214.5 million during 2012. Cash used in financing activities primarily consisted of
$226.9 million in repayments of long-term debt, partially offset by a net financing cash inflow of $13.2 million from equity-based
compensation transactions. Of the long-term debt repayments, $210.5 million related to Term Loans, $5.5 million related to Senior
Notes (including $0.5 million of premiums) and $10.8 million was scheduled repayments of capital leases and financing obligations.
During 2012, we borrowed and repaid $50.0 million under our Revolving Facility.
Free Cash Flow
We define "free cash flow" for a given period as cash provided by operating activities, plus receipts from notes, equipment
contracts and other long-term receivables ("long-term receivables"), less dividends paid and capital expenditures. We believe this
information is helpful to investors to determine our cash available for general corporate and strategic purposes, including the
implementation of our capital allocation strategy.
Free cash flow is considered to be a non-U.S. GAAP measure. Reconciliation of the cash provided by operating activities to
free cash flow is as follows:
Year Ended December 31,
2012
2011
2010
(In millions)
Cash flows provided by operating activities............................... $
52.9
$
121.7
$
179.3
Principal receipts from notes, equipment contracts and other
long-term receivables ..............................................................
Dividends paid ............................................................................
Additions to property and equipment .........................................
Free cash flow............................................................................ $
12.3
—
(17.0)
48.2
$
13.1
—
(26.3)
108.5
$
19.4
(26.1)
(18.7)
153.9
This non-U.S. GAAP measure is not defined in the same manner by all companies and may not be comparable to other
similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute
for, the U.S. GAAP information contained within our financial statements.
Free cash flow totaled $48.2 million during the year ended December 31, 2012 compared to $108.5 million in the same period
in 2011, a decline of $60.3 million. This decline was due to the decrease in cash provided by operating activities discussed above,
partially offset by a decrease in capital expenditures.
Dividends
We did not pay dividends on our common stock in 2012. As discussed in "Restricted Payments" above, payment of dividends
is subject to limitations under our Credit Agreement. We evaluate dividend payments on common stock within the context of our
overall capital allocation strategy with our Board of Directors on an ongoing basis, giving consideration to our current and forecast
earnings, financial condition, cash requirements, limitations under the Credit Agreement and other factors. On February 26, 2013,
our Board of Directors approved payment of a cash dividend of $0.75 per share of the our common stock, payable at the close of
business on March 29, 2013 to the stockholders of record as of the close of business on March 15, 2013.
Share Repurchases
As discussed in "Restricted Payments" above, repurchases of common stock are subject to limitations under our Credit
Agreement. We evaluate repurchases of common stock within the context of our overall capital allocation strategy with our Board
of Directors on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements,
limitations under the Credit Agreement and other factors.
In August 2011, our Board of Directors authorized the repurchase up to $45 million of DineEquity common stock. Repurchases
are subject to prevailing market prices and may take place in open market transactions and in privately negotiated transactions,
based on business, market, applicable legal requirements and other considerations. The program does not require the repurchase
of a specific number of shares and may be terminated at any time. There were no repurchases of our common stock during 2012.
As of December 31, 2012, we have repurchased 534,101 shares under this program at an average price of $39.64 per share.
56
On February 26, 2013, our Board of Directors approved a stock repurchase authorization of up to $100 million of our common
stock, replacing the previously announced $45 million stock repurchase authorization. We may now repurchase up to an additional
$78.8 million of our common stock under the revised authorization.
We do, from time to time, repurchase shares owned and tendered by employees to satisfy tax withholding obligations on the
vesting of restricted stock awards. Such shares are purchased at the closing price of our common stock on the vesting date.
Off-Balance Sheet Arrangements
As of December 31, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of SEC
Regulation S-K.
Contractual Obligations and Commitments
The following are our significant contractual obligations and commitments as of December 31, 2012:
Payments Due By Period
Contractual Obligations
1 Year
2 - 3 Years
4 - 5 Years
More than
5 Years
Total
(In millions)
Debt(1).......................................................................... $
Operating leases ..........................................................
Capital leases(1)............................................................
Financing obligations(1)...............................................
Purchase commitments ...............................................
Unrecognized income tax benefits(2) ...........................
Total minimum payments............................................
Less interest.................................................................
Total............................................................................. $
100.9
$
201.9
$
632.3
$
821.0
$
1,756.1
74.8
24.8
5.5
111.9
3.3
148.1
49.7
12.7
25.6
—
144.0
46.5
11.7
—
—
473.1
96.6
104.2
—
3.4
840.0
217.6
134.1
137.5
6.7
321.2
(112.7)
208.5
$
438.0
(222.9)
215.1
$
834.5
(211.4)
623.1
$
1,498.3
(140.8)
1,357.5
$
3,092.0
(687.8)
2,404.2
Commitments
Expiration By Period
1 Year
2 - 3 Years
4 - 5 Years
More than
5 Years
Total
(In millions)
Lease guarantees(3) ...................................................... $
Letters of credit(4) ........................................................
Food purchases(5).........................................................
Total.............................................................................
19.8
12.1
9.6
41.5
$
41.0
$
38.9
$
348.8
$
448.5
—
—
41.0
—
—
38.9
—
—
348.8
12.1
9.6
470.2
(1) Includes interest calculated on balances as of December 31, 2012 using interest rates in effect as of December 31, 2012.
(2) While up to $3.3 million is expected to be paid within one year, there is no contractual obligation to do so. For the remaining liability, due to the uncertainties
related to these tax matters, we are unable to make a reasonably reliable estimate when a cash settlement with a taxing authority will occur.
(3) This amount represents the maximum potential liability for future payment guarantees under leases that have been assigned to third-party buyers of Applebee's
company-operated restaurants and expire at the end of the respective lease terms, which range from 2013 through 2048. See Note 13 of Notes to Consolidated
Financial Statements.
(4) Primarily to satisfy insurance-related collateral requirements. These letters of credit expire annually, but are typically renewed in the same amount each year
unless collateral requirements change.
(5) In some instances, IHOP and Applebee's may be required to guarantee their purchase of any remaining inventory of certain food and other items purchased
on their behalf for the purpose of supplying limited time promotions.
57
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues
and expenses in the reporting period. We base our estimates and assumptions on current facts, historical experience and various
other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other
sources. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation
of our consolidated financial statements:
Goodwill and Intangibles
Goodwill is recorded when the aggregate purchase price of an acquisition exceeds the estimated fair value of the net identified
tangible and intangible assets acquired. Intangible assets resulting from the acquisition are accounted for using the purchase method
of accounting and are estimated by management based on the fair value of the assets received. Identifiable intangible assets are
comprised primarily of trademarks, tradenames and franchise agreements. Identifiable intangible assets with finite lives (franchise
agreements, recipes, menus and favorable leaseholds) are amortized over the period of estimated benefit using the straight-line
method and estimated useful lives. Goodwill and intangible assets considered to have an indefinite life (primarily tradename and
liquor licenses) are not subject to amortization. The determination of indefinite life is subject to reassessment if changes in facts
and circumstances indicate the period of benefit has become finite.
Goodwill has been allocated to three reporting units, the Applebee's company-operated restaurants unit ("Applebee's company
unit"), the Applebee's franchised restaurants unit ("Applebee's franchise unit") and the IHOP franchised restaurants unit ("IHOP
franchise unit"), in accordance with U.S. GAAP. The significant majority of our goodwill resulted from the November 29, 2007
acquisition of Applebee's and was allocated between the two Applebee's units. The goodwill allocated to the Applebee's company
unit was fully impaired in 2008.
We have elected to bypass the option allowed under U.S. GAAP to perform a qualitative assessment of goodwill and other
indefinite life intangible assets for impairment. We perform a quantitative test for impairment on an annual basis. The impairment
test of goodwill of the Applebee's franchise unit and the tradename of the Applebee's company and franchise units is performed
as of October 31 of each year. The impairment test of the goodwill of the IHOP franchise unit is performed as of December 31 of
each year. In addition to the annual test of impairment, goodwill and indefinite life intangible assets are evaluated more frequently
if we believe indicators of impairment exist. Such indicators include, but are not limited to, events or circumstances such as a
significant adverse change in the business climate, unanticipated competition, a loss of key personnel, adverse legal or regulatory
developments or a significant decline in the market price of our common stock.
In the process of our annual impairment review of goodwill, we primarily use the income approach method of valuation that
includes the discounted cash flow method as well as other generally accepted valuation methodologies to determine the fair value
of goodwill and intangible assets. Significant assumptions used to determine fair value under the discounted cash flows model
include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working
capital, along with an appropriate discount rate based on our estimated cost of equity capital and after-tax cost of debt. The first
step of the quantitative impairment test compares the fair value of each of our reporting units to their carrying value. If the fair
value is in excess of the carrying value, no impairment exists. If the first step does indicate an impairment, a second step must
take place. Under the second step, the fair value of the assets and liabilities of the reporting unit are estimated as if the reporting
unit were acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its
assets and liabilities is the implied fair value of the goodwill, to which the carrying value of the goodwill must be adjusted. The
fair value of all reporting units is then compared to the current market value of our common stock to determine if the fair values
estimated in the impairment testing process are reasonable in light of the current market value.
In the process of our annual impairment review of the tradename, the most significant indefinite life intangible asset, we
primarily use the relief of royalty method under 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.
Long-Lived Assets
We assess long-lived and intangible assets with finite lives for impairment when events or changes in circumstances indicate
that the carrying value of the assets may not be recoverable. We test impairment using historical cash flows and other relevant
facts and circumstances as the primary basis for our estimates of future cash flows. We consider factors such as the number of
years the restaurant has been operated by us, sales trends, cash flow trends, remaining lease life, and other factors which apply on
58
a case-by-case basis. The analysis is performed at the individual restaurant level for indicators of permanent impairment.
Recoverability of the restaurant's assets is measured by comparing the assets' carrying value to the undiscounted cash flows
expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. If the total expected
undiscounted future cash flows are less than the carrying amount of the assets, the carrying amount is written down to the estimated
fair value, and a loss resulting from impairment is recognized by a charge to earnings. This process requires the use of estimates
and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required
to record impairment charges for these assets.
Revenue Recognition
We record revenue in four categories: franchise operations, company restaurant operations, rental operations and financing
operations.
The franchise operations revenue consists primarily of royalty revenues, sales of proprietary IHOP products, IHOP advertising
fees and the portion of the franchise fees allocated to our intellectual property. Company restaurant sales are retail sales at company-
operated restaurants. Rental operations revenue includes revenue from operating leases and interest income from direct financing
leases. Financing operations revenue consists of interest income from the financing of franchise fees and equipment leases, as
well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants taken back
from franchisees not allocated to IHOP intellectual property.
Revenues from franchised and area licensed restaurants include royalties, continuing rent and service fees and initial franchise
fees. Royalties are recognized in the period in which the sales are reported to have occurred. Continuing rent and fees are recognized
in the period earned. Initial franchise fees are recognized upon the opening of a restaurant, which is when we have performed
substantially all initial services required by the franchise agreement. Fees from development agreements are deferred and recorded
into income as restaurants under the development agreement are opened.
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.
We record a liability in the period in which a gift card is sold. As gift cards are redeemed, this liability is reduced, with revenue
recognized on redemptions at company-operated restaurants. We recognize gift card breakage income on gift cards issued by
Applebee's when the assessment of the likelihood of redemption of the gift card becomes remote. This assessment is based upon
Applebee's historical experience with gift card redemptions. We currently do not record breakage income on gift cards issued by
IHOP due to the limited historical experience with IHOP gift card redemptions because the IHOP gift card program has not been
in existence as long as the Applebee's program.
Allowance for Credit Losses
The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing receivables;
however, changes in circumstances relating to receivables may result in additional allowances in the future. We determine the
allowance based on historical experience, current payment patterns, future obligations and our assessment of the ability to pay
outstanding balances. The primary indicator of credit quality is delinquency, which is considered to be a receivable balance greater
than 90 days past due. We continually review our allowance for doubtful accounts. Past due balances and future obligations are
reviewed individually for collectability. Account balances are charged against the allowance after all collection efforts have been
exhausted and the potential for recovery is considered remote.
Leases
Our restaurants are located on (i) sites owned by us, (ii) sites leased by us from third parties and (iii) sites owned or leased
by franchisees. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as
an operating or capital lease in accordance with the provisions of U.S. GAAP governing the accounting for leases.
The lease term used for straight-line rent expense is calculated from the date we obtain possession of the leased premises
through the lease termination date. Prior to January 2, 2006, we capitalized rent expense from possession date through construction
completion and reported the related asset in property and equipment. Capitalized rent was amortized through depreciation and
amortization expense over the estimated useful life of the related assets limited to the lease term. Straight-line rent recorded during
the preopening period (construction completion through restaurant open date) was recorded as expense. Commencing January 2,
2006, we expense rent from possession date through restaurant open date. Once a restaurant opens for business, we record straight-
line rent over the lease term plus contingent rent to the extent it exceeds the minimum rent obligation per the lease agreement. We
use a consistent lease term when calculating depreciation of leasehold improvements, when determining straight-line rent expense
and when determining classification of our leases as either operating or capital.
59
There is potential for variability in the rent holiday period, which begins on the possession date and ends on the restaurant
open date, during which no cash rent payments are typically due under the terms of the lease. Factors that may affect the length
of the rent holiday period generally relate to construction related delays. Extension of the rent holiday period due to delays in
restaurant openings will result in greater preopening rent expense recognized during the rent holiday period and lesser occupancy
expense during the rest of the lease term (post-opening).
For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on the
straight-line basis over the term of the lease (including the rent holiday period beginning upon our possession of the premises),
and record the difference between the minimum rent paid and the straight-line rent as a lease obligation. Certain leases contain
provisions that require additional rental payments based upon restaurant sales volume ("contingent rent"). Contingent rentals are
accrued each period as the liabilities are incurred, in addition to the straight-line rent expense noted above.
Certain of our lease agreements contain tenant improvement allowances. For purposes of recognizing incentives, we amortize
the incentives over the shorter of the estimated useful life or lease term. For tenant improvement allowances, we also record a
deferred rent liability or an obligation in our non-current liabilities on the consolidated balance sheets.
Management makes judgments regarding the probable term for each restaurant property lease, which can impact the
classification and accounting for a lease as capital or operating, the rent holiday and/or escalations in payment that are taken into
consideration when calculating straight-line rent and the term over which leasehold improvements for each restaurant are amortized.
These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported
if different assumed lease terms were used.
Stock-Based Compensation
We account for stock-based compensation in accordance with U.S. GAAP governing share-based payments. Accordingly, we
measure stock-based compensation expense at the grant date, based on the fair value of the award, and recognize the expense over
the employee's requisite service period using the straight-line method. The fair value of each employee stock option and restricted
stock award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the
Black-Scholes option pricing model to estimate the fair value of our share-based compensation. The Black-Scholes model meets
the requirements of U.S. GAAP. The measurement of stock-based compensation expense is based on several criteria including,
but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility,
risk free interest rate and forfeiture rate. These inputs are subjective and are determined using management's judgment. If differences
arise between the assumptions used in determining stock-based compensation expense and the actual factors which become known
over time, we may change the input factors used in determining future stock-based compensation expense. Any such changes
could materially impact our operations in the period in which the changes are made and in subsequent periods.
Income Taxes
We provide for income taxes based on our estimate of federal and state income tax liabilities. We make certain estimates and
judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise
from temporary differences between the tax and financial statement recognition of revenue and expense. Tax laws are complex
and subject to different interpretations by the taxpayers and respective governmental authorities. We review our tax positions
quarterly and adjust the balances as new information becomes available.
We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between the
financial reporting basis and the tax basis of recorded assets and liabilities. Deferred tax accounting requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that some portions or all of the net deferred tax assets will
not be realized. This test requires projection of our taxable income into future years to determine if there will be taxable income
sufficient to realize the tax assets. The preparation of the projections requires considerable judgment and is subject to change to
reflect future events and changes in the tax laws. When we establish or reduce the valuation allowance against our deferred tax
assets, our income tax expense will increase or decrease, respectively, in the period such determination is made.
U.S. GAAP addressing the accounting for uncertainty in income taxes requires that a position taken or expected to be taken
in a tax return be recognized (or derecognized) in the financial statement when it is more likely than not (i.e. a likelihood of more
than 50 percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then
measured on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Recently Adopted Accounting Standards
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2011-04, Fair Value Measurement - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs (“ASU 2011-04”). The amendments in ASU 2011-04 result in common fair value measurement and
60
disclosure requirements in U.S. GAAP and international financial reporting standards (“IFRS”). ASU 2011-04 also provides for
certain changes in current GAAP disclosure requirements. The adoption of ASU 2011-04 did not have a material impact on our
consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-05, Comprehensive Income - Presentation of Comprehensive Income (“ASU
2011-05”). ASU 2011-05 requires the presentation of the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate
but consecutive statements. The amendments in this update did not change the items that must be reported in other comprehensive
income. The adoption of ASU 2011-05 did not have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other - Testing Goodwill for Impairment
("ASU 2011-08"). The amendments in ASU No. 2011-08 are intended to simplify goodwill impairment testing by adding a
qualitative review step to assess whether the required quantitative impairment analysis that exists today is necessary. Under these
amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on
the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. We adopted ASU
2011-08 as of January 1, 2012, but did not elect to utilize the option of qualitative assessment of goodwill impairment. The adoption
of ASU 2011-08 did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Testing Indefinite Lived Intangibles for Impairment (“ASU
2012-02”). ASU 2012-02 allows an entity the option to first assess qualitative factors to determine whether it is necessary to
perform a quantitative impairment test on indefinite-lived intangibles. An entity electing to perform a qualitative assessment is no
longer required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on the qualitative
assessment, that it is more likely than not that the asset is impaired. The guidance is effective for impairment tests for our fiscal
2013, however, earlier adoption is allowed. As the guidance does not change the underlying principle that the carrying amount
of an indefinite-lived intangible asset should not exceed its fair value, the adoption of ASU 2012-02 is not anticipated to have a
material impact on our consolidated financial statements.
We reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to our
operations or that no material effect is expected on our financial statements as a result of future adoption.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to financial market risk, including interest rates and commodity prices. We address these risks through
controlled risk management that may include the use of derivative financial instruments to economically hedge or reduce these
exposures. We do not enter into financial instruments for trading or speculative purposes.
Interest Rate Risk
Our interest expense and income is sensitive to fluctuations in the London Inter-Bank Offered Rate ("LIBOR") and the general
level of United States interest rates. Changes in LIBOR can affect the interest expense on our Senior Secured Credit Facility while
changes in the United States Treasury-based interest rates affect the interest earned on our cash and cash equivalents, restricted
cash and investments. Our future investment income and interest expense may differ from expectations due to changes in interest
rates.
At December 31, 2012, we had $472.0 million of variable rate debt (the Term Loan under our Credit Agreement). If the interest
rate on the Term Loan were to increase by 1% per annum, annual interest expense would increase by approximately $4.7 million
based on the outstanding Term Loan balance at December 31, 2012. A decrease in interest rates from December 31, 2012 rates
would have no impact on interest expense as the current interest rate is at the floor rate as defined in the Credit Agreement.
Investments in instruments earning a fixed rate of interest carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates. We currently do not hold any fixed rate investments. As
of December 31, 2012, our long-term investments are comprised primarily of certificates of deposits, mutual funds invested in
auction rate securities and one auction rate security; these investments are included in restricted assets related to the captive
insurance subsidiary. We have classified these investments as available-for-sale. Due to the short time period between reset dates
of the interest rates, there are no unrealized gains or losses associated with the interest rate related to the auction rate securities.
The one auction rate security has a contractual maturity of December 2030. Based on our cash and cash equivalents, restricted
cash and long-term restricted investment holdings as of 2012, a 1% increase in interest rates would increase our annual interest
income by approximately $0.2 million. A 1% decline in interest rates would decrease our annual interest income by less than
61
$0.2 million as the majority of our cash and cash equivalents, restricted cash and long-term investment holdings are currently
yielding less than 1%.
Commodity Prices
Many of the food products purchased by us and our franchisees and area licensees are affected by commodity pricing and
are, therefore, subject to unpredictable price volatility. Extreme increases in commodity prices and/or long-term changes could
affect our franchisees, area licensees and company-operated restaurants adversely. The risk with respect to company-operated
restaurants has lessened now that both of our brands are 99% franchised. We expect that, in most cases, the IHOP and Applebee's
systems would be able to pass increased commodity prices through to our consumers via increases in menu prices. From time to
time, competitive circumstances could limit short-term menu price flexibility, and in those cases, margins would be negatively
impacted by increased commodity prices. We believe that any changes in commodity pricing that cannot be adjusted for by changes
in menu pricing or other strategies would not be material to our financial condition, results of operations or cash flows.
In February 2009, the Company and owners of Applebee's and IHOP franchise restaurants formed CSCS to manage
procurement activities for the Applebee's and IHOP restaurants choosing to join the Co-op. We believe the larger scale created by
combining the supply chain requirements of both brands under one organization can provide cost savings and efficiency in the
purchasing function. As of December 31, 2012, 100% of Applebee's franchise restaurants and 99% of IHOP franchise restaurants
are members of CSCS. In some instances, IHOP and Applebee's may be required to guarantee their purchase of any remaining
inventory of certain food and other items purchased by CSCS for the purpose of supplying limited time promotions on behalf of
the IHOP Applebee's and IHOP systems as a whole. None of these food product guarantees is a derivative instrument. At
December 31, 2012, our outstanding guarantees for food product purchases were $9.6 million.
62
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2012 and 2011 ..................................................................................
Consolidated Statements of Operations and Comprehensive Income for each of the three years in the period ended
December 31, 2012...................................................................................................................................................
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2012
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2012...............
Notes to the Consolidated Financial Statements..............................................................................................................
Report of Independent Registered Public Accounting Firm............................................................................................
Page
Reference
64
65
66
67
68
106
63
DineEquity, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2012
2011
Current assets:
Assets
Cash and cash equivalents ..................................................................................................... $
Receivables, net .....................................................................................................................
Prepaid income taxes .............................................................................................................
Prepaid gift cards ...................................................................................................................
Deferred income taxes ...........................................................................................................
Assets held for sale ................................................................................................................
Other current assets................................................................................................................
Total current assets............................................................................................................
Long-term receivables ................................................................................................................
Property and equipment, net .......................................................................................................
Goodwill .....................................................................................................................................
Other intangible assets, net .........................................................................................................
Other assets, net ..........................................................................................................................
Total assets ........................................................................................................................ $
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt ..................................................................................... $
Accounts payable ...................................................................................................................
Accrued employee compensation and benefits......................................................................
Gift card liability....................................................................................................................
Accrued interest payable........................................................................................................
Current maturities of capital lease and financing obligations................................................
Other accrued expenses..........................................................................................................
Total current liabilities ......................................................................................................
Long-term debt, less current maturities ......................................................................................
Financing obligations, less current maturities ............................................................................
Capital lease obligations, less current maturities........................................................................
Deferred income taxes ................................................................................................................
Other liabilities ...........................................................................................................................
Total liabilities...................................................................................................................
$
$
$
64,537
128,610
16,080
50,242
21,772
—
13,214
294,455
212,269
294,375
697,470
806,093
110,738
2,415,400
7,420
30,751
22,435
161,689
13,236
10,878
21,351
267,760
1,202,063
52,049
124,375
362,171
98,177
2,106,595
60,691
115,667
13,922
45,412
20,579
9,363
11,313
276,947
226,526
474,154
697,470
822,361
116,836
2,614,294
7,420
29,013
26,191
146,955
12,537
13,480
22,048
257,644
1,411,448
162,658
134,407
383,810
109,107
2,459,074
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, Series B, at accreted value; shares: 10,000,000 authorized;
2012 - none issued or outstanding; 2011 - 35,000 issued, 34,900 outstanding.......................
Common stock, $0.01 par value; shares: 40,000,000 authorized; 2012 - 25,362,946 issued,
19,197,899 outstanding; 2011 - 24,658,985 issued, 18,060,206 outstanding ........................
Additional paid-in-capital .......................................................................................................
Retained earnings ....................................................................................................................
Accumulated other comprehensive loss..................................................................................
Treasury stock, at cost; shares: 2012 - 6,165,047; 2011 - 6,598,779......................................
Total stockholders' equity.................................................................................................
Total liabilities and stockholders' equity .......................................................................... $
—
44,508
254
264,342
322,045
(152)
(277,684)
308,805
2,415,400
247
205,663
196,869
(294)
(291,773)
155,220
2,614,294
$
See the accompanying notes to the consolidated financial statements.
64
DineEquity, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
Year Ended December 31,
2012
2011
2010
Segment Revenues:
Franchise revenues ....................................................................................... $
Company restaurant sales.............................................................................
Rental revenues ............................................................................................
Financing revenues.......................................................................................
Total segment revenues.....................................................................................
Segment Expenses:
Franchise expenses .......................................................................................
Company restaurant expenses ......................................................................
Rental expenses ............................................................................................
Financing expenses ......................................................................................
Total segment expenses.....................................................................................
Gross segment profit .......................................................................................
General and administrative expenses ................................................................
Interest expense.................................................................................................
Impairment and closure charges........................................................................
Amortization of intangible assets......................................................................
Loss on extinguishment of debt and temporary equity .....................................
Debt modification costs ....................................................................................
Gain on disposition of assets.............................................................................
Income (loss) before income taxes....................................................................
Income tax (provision) benefit ..........................................................................
Net income (loss)..............................................................................................
Other comprehensive income (loss), net of tax:
Adjustment to unrealized loss on available-for-sale investments .................
Foreign currency translation adjustment .......................................................
Interest rate swap...........................................................................................
Total other comprehensive income (loss) ..................................................
Total comprehensive income.......................................................................... $
Net income (loss) available to common stockholders:
Net income (loss) .............................................................................................. $
Less: Series A preferred stock dividends ..........................................................
Less: Accretion of Series B preferred stock......................................................
Less: Net (income) loss allocated to unvested participating restricted stock....
Net income (loss) available to common stockholders ...................................... $
Net income (loss) available to common stockholders per share:
Basic .............................................................................................................. $
Diluted ........................................................................................................... $
Weighted average shares outstanding:
Basic ..............................................................................................................
Diluted ...........................................................................................................
421,459
$
398,539
$
291,121
122,859
14,489
849,928
109,900
249,296
97,165
1,623
457,984
391,944
163,215
114,338
4,218
12,293
5,554
—
(102,597)
194,923
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127,674
140
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122,458
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$
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530,984
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19,715
377,137
815,572
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16,424
1,075,198
1,333,641
105,006
458,443
98,147
5,973
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155,822
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29,865
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11,159
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104,998
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75,192
—
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75,192
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(1,886)
70,733
3.96
3.89
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18,185
$
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103,505
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99,030
1,969
903,840
429,801
160,330
171,537
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1,173
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(1.74)
(1.74)
17,240
17,240
See the accompanying notes to the consolidated financial statements.
65
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DineEquity, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income (loss) ........................................................................................ $
Adjustments to reconcile net income (loss) to cash flows provided by
operating activities:
Depreciation and amortization ...............................................................
Non-cash interest expense ......................................................................
Loss on extinguishment of debt and temporary equity ..........................
Impairment and closure charges.............................................................
Deferred income taxes............................................................................
Non-cash stock-based compensation expense........................................
Tax benefit from stock-based compensation..........................................
Excess tax benefit from stock options exercised....................................
Gain on disposition of assets..................................................................
Other.......................................................................................................
Changes in operating assets and liabilities:
Receivables........................................................................................
Current income tax receivables and payables ...................................
Other current assets ...........................................................................
Accounts payable...............................................................................
Accrued employee compensation and benefits .................................
Gift card liability ...............................................................................
Other accrued expenses .....................................................................
Cash flows provided by operating activities.................................
Cash flows from investing activities
Additions to property and equipment.....................................................
Proceeds from sale of property and equipment and assets held for sale
Principal receipts from notes, equipment contracts and other long-
term receivables......................................................................................
Other.......................................................................................................
Cash flows provided by investing activities .................................
Cash flows from financing activities
Borrowings under revolving credit facilities..........................................
Repayments under revolving credit facilities.........................................
Proceeds from issuance of long-term debt .............................................
Repayment of long-term debt (including tender premiums) ..................
Redemption of Series A Preferred Stock................................................
Payment of debt issuance costs ..............................................................
Dividends paid (including Series A redemption premiums) ..................
Purchase of DineEquity common stock .................................................
Principal payments on capital lease and financing obligations..............
Repurchase of restricted stock................................................................
Proceeds from stock options exercised ..................................................
Excess tax benefit from stock options exercised....................................
Change in restricted cash........................................................................
Cash flows used in financing activities ........................................
Net change in cash and cash equivalents ...............................................
Cash and cash equivalents at beginning of year.....................................
Cash and cash equivalents at end of year ............................................... $
Year Ended December 31,
2011
2010
2012
127,674
$
75,192
$
(2,788)
39,538
5,985
5,554
3,931
(22,832)
11,442
6,814
(5,669)
(102,597)
(8,991)
(11,629)
1,272
(9,119)
1,778
(3,756)
14,735
(1,251)
52,879
(16,952)
168,881
12,250
1,238
165,417
50,000
(50,000)
—
(216,037)
—
—
—
—
(10,849)
(1,740)
9,254
5,669
(747)
(214,450)
3,846
60,691
64,537
50,220
6,160
11,159
8,448
11,835
9,492
6,494
(5,443)
(43,253)
(1,765)
(16,722)
20,479
(5,354)
(3,533)
(6,656)
21,983
(17,050)
121,686
(26,332)
115,642
13,122
(753)
101,679
40,000
(40,000)
—
(225,681)
—
(12,295)
—
(21,170)
(13,391)
(5,080)
6,725
5,443
466
(264,983)
(41,618)
102,309
60,691
148,982
24,139
61,427
34,379
107,003
3,482
(15,484)
13,085
2,692
(4,775)
(13,574)
5,431
3,736
(27,703)
(9,411)
27
(5,000)
19,507
7,248
179,282
(18,677)
51,642
19,452
1,087
53,504
—
—
1,725,000
(1,777,946)
(190,000)
(57,602)
(26,117)
—
(16,118)
(1,884)
7,968
4,775
119,133
(212,791)
19,995
82,314
102,309
141,139
33,389
$
$
$
$
$
$
Supplemental disclosures
Interest paid ............................................................................................ $
Income taxes paid................................................................................... $
123,926
91,354
See the accompanying notes to the consolidated financial statements.
67
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
1. The Company
The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter, the
Company's predecessor began developing and franchising additional restaurants. The Company was incorporated under the laws
of the State of Delaware in 1976 with the name IHOP Corp. In November 2007, the Company completed the acquisition of
Applebee's International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the
Company was changed to DineEquity, Inc. ("DineEquity"). The Company owns, franchises and operates two restaurant concepts:
Applebee's Neighborhood Grill and Bar® ("Applebee's"), in the bar and grill segment of the casual dining category of the restaurant
industry, and International House of Pancakes® ("IHOP®"), in the family dining category of the restaurant industry.
As of December 31, 2012, there were a total of 1,581 IHOP restaurants, of which 1,404 were subject to franchise agreements,
165 were subject to area license agreements and 12 were company-operated restaurants. IHOP restaurants were located in all 50
states of the United States, the District of Columbia, two United States territories and five countries outside of the United States.
As of December 31, 2012, there were a total of 2,034 Applebee's restaurants, of which 2,011 were subject to franchise agreements
and 23 were company-operated restaurants. Applebee's restaurants were located in 49 states, one United States territory and 15
countries outside of the United States.
References herein to Applebee's and IHOP restaurants are to these two restaurant concepts, whether operated by franchisees,
area licensees or the Company. Retail sales at restaurants that are owned by franchisees and area licensees are not attributable to
the Company.
2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of DineEquity, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Periods
The Company has a 52/53 week fiscal year that ends on the Sunday nearest to December 31 of each year. In a 52-week fiscal
year, each fiscal quarter contains 13 weeks, comprised of two, four-week fiscal months followed by a five-week fiscal month. In
a 53-week fiscal year, the last month of the fourth fiscal quarter contains six weeks. For convenience, the Company refers to all
fiscal years as ending on December 31 and fiscal quarters as ending on March 31, June 30 and September 30. The 2012, 2011 and
2010 fiscal years presented herein ended December 30, 2012, January 1, 2012 and January 2, 2011, respectively, and each contained
52 weeks.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles
("U.S. GAAP") requires the Company's management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure 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. On an ongoing basis, the Company evaluates its estimates,
including those related to provisions for doubtful accounts, legal contingencies, income taxes, and the valuation of goodwill and
intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company's cash, cash equivalents, accounts receivable and investments are potentially subject to concentration of credit
risk. Cash, cash equivalents and investments are placed with financial institutions that management believes are creditworthy. The
Company does not believe that it is exposed to any significant credit risk on cash and cash equivalents. At times, cash and cash
equivalent balances may be in excess of FDIC insurance limits.
Accounts receivable are derived from revenues earned from franchisees and area licensees located primarily in the United
States. Financing receivables arise from the financing of restaurant equipment, leases or franchise fees by IHOP franchisees. The
Company is subject to a concentration of credit risk with respect to receivables from franchisees that own a large number of
Applebee's or IHOP restaurants. As of December 31, 2012, there are 15 franchisees that own 59 or more restaurants each (12
Applebee's franchisees and three IHOP franchisees). These franchisees operated 1,556 Applebee's and IHOP restaurants in the
68
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
United States, which comprised 45% of the total Applebee's and IHOP restaurants in the United States. Receivables from these
franchisees totaled $48.8 million at December 31, 2012.
The Company maintains an allowance for credit losses based upon historical experience while taking into account current
economic conditions.
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.
Restricted Assets
Restricted Cash
The Company receives funds from Applebee's franchisees pursuant to franchise agreements, usage of which is restricted to
advertising activities. Restricted cash balances as of December 31, 2012 and 2011 totaled $1.9 million and $1.2 million, respectively.
These balances were included as other current assets in the consolidated balance sheet.
Other Restricted Assets
At December 31, 2012 and 2011, restricted assets related to a captive insurance subsidiary totaled $2.0 million and $3.6
million, respectively, and were included in other assets in the consolidated balance sheets. The captive insurance subsidiary, which
has not underwritten coverage since January 2006, was formed to provide insurance coverage to Applebee's and its franchisees.
These restricted assets were primarily investments, use of which is restricted to the payment of insurance claims for incidents that
occurred during the period the insurance coverage had been provided.
Investments
The Company's investments comprise certificates of deposit, money market funds and auction rate securities that are the
restricted assets related to the captive insurance subsidiary. The Company has classified all investments as available-for-sale with
any unrealized gain or loss included in Accumulated Other Comprehensive Loss. The contractual maturity of the auction rate
security is 2030.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Equipment under capital leases is stated at the
present value of the minimum lease payments. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets or remaining useful lives. Leasehold improvements and equipment under capital leases are amortized on a
straight-line basis over their estimated useful lives or the lease term, if less. The Company has capitalized certain costs incurred
in connection with the development of internal-use software which are included in equipment and fixtures and amortized over the
expected useful life of the asset. The general ranges of depreciable and amortizable lives are as follows:
Category
Buildings and improvements
Leaseholds and improvements
Equipment and fixtures
Properties under capital leases
Depreciable Life
25 - 40 years
Shorter of primary lease term or between three to 40 years
Two to 10 years
Primary lease term or remaining primary lease term
Property and equipment are reported as assets held for sale when they meet the criteria of U.S. GAAP. The Company ceases
recording depreciation on assets classified as held for sale.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in accordance with U.S. GAAP. The Company tests
impairment using historical cash flows and other relevant facts and circumstances as the primary basis for estimates of future cash
flows. The Company considers factors such as the number of years the restaurant has been in operation, sales trends, cash flow
trends, remaining lease life and other factors which apply on a case-by-case basis. The analysis is performed at the individual
restaurant level for indicators of permanent impairment.
69
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Recoverability of a restaurant's assets is measured by comparing the assets' carrying value to the undiscounted future cash
flows expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. If the total expected
undiscounted future cash flows are less than the carrying amount of the assets, this may be an indicator of impairment. If it is
decided that there has been an impairment, the carrying amount of the asset is written down to the estimated fair value as determined
in accordance with U.S. GAAP governing fair value measurements. The primary method of estimating fair value is by discounting
the future cash flows based on the Company's cost of capital. A loss resulting from impairment is recognized as a charge against
operations.
The Company may decide to close certain company-operated restaurants. Typically such decisions are based on operating
performance or strategic considerations. In these instances, the Company reserves, or writes off, the full carrying value of these
restaurants as impaired.
On a regular (at a minimum, semi-annual) basis, the Company assesses whether events or changes in circumstances have
occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. See Note 15, Impairment and
Closure Charges.
Goodwill and Intangible Assets
Goodwill is recorded when the aggregate purchase price of an acquisition exceeds the estimated fair value of the net identified
tangible and intangible assets acquired. Intangible assets resulting from the acquisition are accounted for using the purchase method
of accounting and are estimated by management based on the fair value of the assets received. Identifiable intangible assets are
comprised primarily of trademarks, tradenames and franchise agreements. Identifiable intangible assets with finite lives (franchise
agreements, recipes, menus and favorable leaseholds) are amortized over the period of estimated benefit using the straight-line
method and estimated useful lives. Goodwill and intangible assets considered to have an indefinite life (primarily tradename and
liquor licenses) are not subject to amortization. The determination of indefinite life is subject to reassessment if changes in facts
and circumstances indicate the period of benefit has become finite.
Goodwill has been allocated to three reporting units, the Applebee's company-operated restaurants unit ("Applebee's company
unit"), the Applebee's franchised restaurants unit ("Applebee's franchise unit") and the IHOP franchised restaurants unit ("IHOP
franchise unit"), in accordance with U.S. GAAP. The significant majority of the Company's goodwill resulted from the
November 29, 2007 acquisition of Applebee's and was allocated between the two Applebee's units. The goodwill allocated to the
Applebee's company unit was fully impaired in 2008.
The Company has elected to bypass the option allowed under U.S. GAAP to perform a qualitative assessment of goodwill
and other indefinite life intangible assets for impairment. The Company performs a quantitative test for impairment on an annual
basis. The impairment test of goodwill of the Applebee's franchise unit and the tradename of the Applebee's company and franchise
units is performed as of October 31 of each year. The impairment test of the goodwill of the IHOP franchise unit is performed as
of December 31 of each year. In addition to the annual test of impairment, goodwill and indefinite life intangible assets are evaluated
more frequently if the Company believes indicators of impairment exist. Such indicators include, but are not limited to, events or
circumstances such as a significant adverse change in the business climate, unanticipated competition, a loss of key personnel,
adverse legal or regulatory developments or a significant decline in the market price of the Company's common stock.
In the process of the Company's annual impairment review of goodwill, the Company primarily uses the income approach
method of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies
to determine the fair value of goodwill and intangible assets. Significant assumptions used to determine fair value under the
discounted cash flows 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. The first step of the quantitative impairment test compares the fair value of each of our
reporting units to their carrying value. If the fair value is in excess of the carrying value, no impairment exists. If the first step
does indicate impairment, a second step must take place. Under the second step, the fair value of the assets and liabilities of the
reporting unit are estimated as if the reporting unit were acquired in a business combination. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill, to which the carrying
value of the goodwill must be adjusted. The fair value of all reporting units is then compared to the current market value of the
Company's common stock to determine if the fair values estimated in the impairment testing process are reasonable in light of the
current market value.
70
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
In the process of the Company's annual impairment review of the tradename, the most significant indefinite life intangible
asset, the Company primarily uses the relief of royalty method under 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.
There were no impairments of goodwill or intangible assets recorded in 2012, 2011 or 2010.
Revenue Recognition
The Company's revenues are recorded in four categories: franchise operations, company restaurant operations, rental operations
and financing operations.
The franchise operations revenue consists primarily of royalty revenues, sales of proprietary IHOP products, IHOP advertising
fees and the portion of the franchise fees allocated to the Company's intellectual property. Company restaurant sales are retail sales
at company-operated restaurants. Rental operations revenue includes revenue from operating leases and interest income from
direct financing leases. Financing operations revenue consists of interest income from the financing of franchise fees and equipment
leases, as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants
taken back from franchisees not allocated to IHOP intellectual property.
Revenues from franchised and area licensed restaurants include royalties, continuing rent and service fees and initial franchise
fees. Royalties are recognized in the period in which the sales are reported to have occurred. Continuing rent and fees are recognized
in the period earned. Initial franchise fees are recognized upon the opening of a restaurant, which is when the Company has
performed substantially all initial services required by the franchise agreement. Fees from development agreements are deferred
and recorded into income as restaurants under the development agreement are opened.
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.
The Company records a liability in the period in which a gift card is sold. As gift cards are redeemed, this liability is reduced,
with revenue recognized on redemptions at company-operated restaurants. The Company recognizes gift card breakage income
on gift cards issued by Applebee's when the assessment of the likelihood of redemption of the gift card becomes remote. This
assessment is based upon Applebee's historical experience with gift card redemptions. The Company currently does not record
breakage income on gift cards issued by IHOP due to the limited historical experience with IHOP gift card redemptions because
the IHOP gift card program has not been in existence as long as the Applebee's program. The Company recorded gift card breakage
revenue of $1.3 million, $2.1 million and $2.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Allowance for Credit Losses
The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in existing
receivables; however, changes in circumstances relating to receivables may result in additional allowances in the future. The
Company determines the allowance based on historical experience, current payment patterns, future obligations and the Company's
assessment of the ability to pay outstanding balances. The primary indicator of credit quality is delinquency, which is considered
to be a receivable balance greater than 90 days past due. The Company continually reviews the allowance for doubtful accounts.
Past due balances and future obligations are reviewed individually for collectability. Account balances are charged against the
allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Leases
The Company leases more than half of all IHOP restaurants. The restaurants are subleased to IHOP franchisees or, in a few
instances, are operated by the Company. The Company's IHOP leases generally provide for an initial term of 15 to 25 years, with
most having one or more five-year renewal options at the Company's option. In addition, the Company leases a majority of its
Applebee's company-operated restaurants. Franchisees are responsible for financing their properties. The Applebee's company-
operated leases generally have an initial term of 10 to 20 years, with renewal terms of five to 20 years, and provide for a fixed
rental plus, in certain instances, percentage rentals based on gross sales. The rental payments or receipts on leases that meet the
operating lease criteria are recorded as rental expense or rental income. Rental expense and rental income for these operating
leases are recognized on the straight-line basis over the original terms of the leases. The difference between straight-line rent
expense or income and actual amounts paid or received represents deferred rent and is included in the consolidated balance sheets
as other assets or other liabilities, as appropriate.
71
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
The rental payments or receipts on those property leases that meet the capital lease criteria will result in the recognition of
interest expense or interest income and a reduction of capital lease obligation or financing lease receivable. Capital lease obligations
are amortized based on the Company's incremental borrowing rate and direct financing leases are amortized using the implicit
interest rate.
The lease term used for straight-line rent expense is calculated from the date the Company obtains possession of the leased
premises through the lease termination date. The Company records rent from the possession date through restaurant open date as
expense. Once a restaurant opens for business, the Company records straight-line rent over the lease term plus contingent rent to
the extent it exceeded the minimum rent obligation per the lease agreement. The Company uses a consistent lease term when
calculating depreciation of leasehold improvements, when determining straight-line rent expense and when determining
classification of its leases as either operating or capital. For leases that contain rent escalations, the Company records the total rent
payable during the lease term, as determined above, on the straight-line basis over the term of the lease (including the rent holiday
period beginning upon our possession of the premises), and records the difference between the minimum rents paid and the straight-
line rent as a lease obligation. Certain leases contain provisions that require additional rental payments based upon restaurant sales
volume ("contingent rent"). Contingent rentals are accrued each period as the liabilities are incurred, in addition to the straight-
line rent expense noted above.
Certain lease agreements contain tenant improvement allowances, rent holidays and lease premiums, which are amortized
over the shorter of the estimated useful life or lease term. For tenant improvement allowances, the Company also records a deferred
rent liability or an obligation in non-current liabilities on the consolidated balance sheets and amortizes the deferred rent over the
term of the lease as a reduction to company restaurant expenses in the consolidated statements of operations.
Pre-opening Expenses
Expenditures related to the opening of new or relocated restaurants are charged to expense when incurred.
Advertising
Franchise fees designated for IHOP's national advertising fund and local marketing and advertising cooperatives are recognized
as revenue as the fees are earned and become receivables from the franchisee in accordance with U.S. GAAP governing the
accounting for franchise fee revenue. In accordance with U.S. GAAP governing advertising costs, related advertising obligations
are accrued and the costs expensed at the same time the related revenue is recognized. Franchise fees designated for Applebee's
national advertising fund and local advertising cooperatives constitute agency transactions and are not recognized as revenues and
expenses. In both cases, the advertising fees are recorded as a liability against which specific costs are charged. Advertising fees
included in IHOP franchise revenue and expense for the years ended December 31, 2012, 2011 and 2010 were $76.4 million,
$75.5 million and $74.4 million, respectively.
Advertising expense reflected in the consolidated statements of operations includes local marketing advertising costs incurred
by company-operated restaurants, contributions to the national advertising fund made by Applebee's and IHOP company-operated
restaurants and certain advertising costs incurred by the Company to benefit future franchise operations. Costs of advertising are
expensed either as incurred or the first time the advertising takes place. Advertising expense included in company restaurant
operations for the years ended December 31, 2012, 2011 and 2010 was $13.1 million, $23.3 million and $32.2 million, respectively.
In addition, advertising expenses may be incurred by franchisees through the national advertising funds and local marketing and
advertising cooperatives.
Derivative Financial Instruments
The Company accounts for derivative instruments and hedging activities in accordance with U.S. GAAP. All derivatives are
recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, management
formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and
strategies for undertaking various hedge transactions.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge (a
"swap"), to the extent that the hedge is effective, are recorded in accumulated other comprehensive income, until earnings are
affected by the variability of cash flows of the hedged transaction. The Company measures effectiveness of the swap at each
quarter end, using the hypothetical derivative method. Under this method, hedge effectiveness is measured based on a comparison
of the change in fair value of the actual swap designated as the hedging instrument and the change in fair value of the hypothetical
swap which would have the terms that identically match the critical terms of the hedged cash flows from the anticipated debt
issuance. The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the
72
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
fair value of the swap over the cumulative change in the fair value of the plain vanilla swap lock, as defined in the accounting
literature. Once a swap is settled, the effective portion is amortized over the estimated life of the hedged item.
The Company has, in the past, utilized derivative financial instruments to manage its exposure to interest rate risks, but is not
currently a party to any derivative financial instruments. The Company does not enter into derivative financial instruments for
trading purposes.
Fair Value Measurements
The Company determines the fair market values of its financial assets and liabilities, as well as non-financial assets and
liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy established in
U.S. GAAP. The Company measures its financial assets and liabilities using inputs from the following three levels of the fair value
hierarchy:
• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access at the measurement date.
• Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated inputs).
• Level 3 includes unobservable inputs that reflect our assumptions about the assumptions that market participants would
use in pricing the asset or liability. The Company develops these inputs based on the best information available, including
our own data.
For more information on the financial instruments the Company measures at fair value, see Note 11, Fair Value Measurements.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are
determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted
tax rates. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
The Company also determines its tax contingencies in accordance with U.S. GAAP governing the accounting for contingencies.
The Company records estimated tax liabilities to the extent the contingencies are probable and can be reasonably estimated.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution.
Stock-Based Compensation
Members of the Board of Directors and certain employees are eligible to receive stock options, restricted stock, restricted
stock units and performance units pursuant to the DineEquity, Inc. 2011 Stock Incentive Plan. The Company accounts for all stock-
based payments to employees and non-employee directors, including grants of stock options, restricted stock and restricted stock
units to be recognized in the financial statements, based on their respective grant date fair values. The value of the portion of the
award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company reports
the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow.
The grant date fair value of restricted stock and stock-settled restricted stock units is determined based on the Company's
stock price on the grant date. The Company estimates the grant date fair value of stock option awards using the Black-Scholes
option pricing model, which considers, among other factors, a risk-free interest rate, the expected life of the award and the historical
volatility of the Company's stock price. The amount of certain cash-settled awards is determined based on factors, including the
Company's stock price, that are ultimately determined at the date of payment. These awards are classified as liabilities and
compensation expense related to cash-settled awards is adjusted to fair value at each balance sheet date.
Net Income (Loss) Per Share
Earnings per share is calculated using the two-step method prescribed in U.S. GAAP. Basic net income (loss) per share is
computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss)
73
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
available to common stockholders for the period by the weighted average number of common shares and potential shares of
common stock outstanding during the period if their effect is dilutive. The Company uses the treasury stock method to calculate
the weighted average shares used in the diluted earnings per share calculation. Potentially dilutive common shares include the
assumed exercise of stock options, assumed vesting of restricted stock and assumed conversion of Series B Preferred Stock using
the if-converted method.
Other Comprehensive Income (Loss)
For the years ended December 31, 2012 and 2011, the income tax benefit or provision allocated to items of other comprehensive
income was not significant. The amount of income tax benefit allocated to an interest rate swap was $9.5 million for the year
ended December 31, 2010.
Treasury Stock
The Company may from time to time utilize treasury stock when vested stock options are exercised, when restricted stock
awards are granted and restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is determined on
the first-in, first-out method.
Business Segments
The Company identifies its reporting segments based on the organizational units used by management to monitor performance
and make operating decisions. The Company's reporting segments are as follows: franchise operations, company restaurant
operations, rental operations and financing operations. Within the franchise and company restaurant segments, the Company
operates two different restaurant concepts, Applebee's and IHOP. Applebee's has no material rental or financing operations.
Franchise Segment
As of December 31, 2012, the franchise operations segment consisted of 2,011 restaurants operated by Applebee's franchisees
in the United States, one United States territory and 15 countries outside of the United States and 1,569 restaurants operated by
IHOP franchisees and area licensees in the United States, two United States territories and five countries outside of the United
States. Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products (primarily
IHOP pancake and waffle dry-mixes) and the portion of the franchise fees allocated to IHOP and Applebee's intellectual property.
Additionally, franchise fees designated for IHOP's national advertising fund and local marketing and advertising cooperatives are
recognized as revenue and expense of franchise operations; however, Applebee's national advertising fund activity constitutes
agency transactions and therefore is not recognized as franchise revenue and expense.
Franchise operations expenses include IHOP advertising expense, the cost of proprietary products, pre-opening training
expenses and other franchise-related costs.
Company Segment
As of December 31, 2012, the company restaurant operations segment consisted of 23 Applebee's company-operated
restaurants, 10 IHOP company-operated restaurants and two restaurants reacquired from franchisees and operated by IHOP on a
temporary basis until refranchised. All company-operated restaurants are located in the United States.
Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating
expenses at company-operated restaurants and include food, beverage, labor, benefits, utilities, rent and other operating costs.
Rental Segment
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental
operations expenses are costs of operating leases and interest expense on capital leases on franchisee-operated restaurants. The
rental operations revenue and expenses are primarily generated by IHOP. Applebee's has an insignificant amount of rental activity
related to properties that are retained after refranchising company-operated restaurants. Rental activity occurs until such time as
the properties can be disposed of by sale.
Financing Segment
Financing operations revenue primarily consists of interest income from the financing of IHOP franchise fees and equipment
leases, as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants
taken back from franchisees not allocated to IHOP intellectual property. Financing expenses are the cost of restaurant equipment.
74
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Reclassifications
Amounts previously reported as inventories at December 31, 2011 have been restated to conform to current classifications.
Food and beverage inventories at company restaurants are now included in "other current assets" and inventories of unactivated
gift cards are now included in "prepaid gift cards."
Inventories.......................................................................... $
Prepaid gift cards ............................................................... $
Other current assets............................................................ $
As Originally
Reported
As Currently
Reported
(In thousands)
12,031
36,643
8,051
$
$
$
—
45,412
11,313
Recently Adopted Accounting Standards
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2011-04, Fair Value Measurement - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs (“ASU 2011-04”). The amendments in ASU 2011-04 result in common fair value measurement and
disclosure requirements in U.S. GAAP and international financial reporting standards (“IFRS”). ASU 2011-04 also provides for
certain changes in current GAAP disclosure requirements. The adoption of ASU 2011-04 did not have a material impact on the
Company's consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-05, Comprehensive Income - Presentation of Comprehensive Income (“ASU
2011-05”). ASU 2011-05 requires the presentation of the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate
but consecutive statements. The amendments in this update did not change the items that must be reported in other comprehensive
income. The adoption of ASU 2011-05 did not have a material impact on the Company's consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other - Testing Goodwill for Impairment
("ASU 2011-08"). The amendments in ASU No. 2011-08 are intended to simplify goodwill impairment testing by adding a
qualitative review step to assess whether the required quantitative impairment analysis that exists today is necessary. Under these
amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on
the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company adopted
ASU 2011-08 as of January 1, 2012, but did not elect to utilize the option of qualitative assessment of goodwill impairment. The
adoption of ASU 2011-08 did not have a material impact on the Company's consolidated financial statements.
New Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Testing Indefinite Lived Intangibles for Impairment (“ASU
2012-02”). ASU 2012-02 allows an entity the option to first assess qualitative factors to determine whether it is necessary to
perform a quantitative impairment test on indefinite-lived intangibles. An entity electing to perform a qualitative assessment is no
longer required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on the qualitative
assessment, that it is more likely than not that the asset is impaired. The guidance is effective for impairment tests for the Company's
fiscal 2013, however, earlier adoption is allowed. As the guidance does not change the underlying principle that the carrying
amount of an indefinite-lived intangible asset should not exceed its fair value, the adoption of ASU 2012-02 is not anticipated to
have a material impact on the Company's consolidated financial statements.
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 as a result of future
adoption.
75
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
3. Receivables
Accounts receivable.................................................................................................................... $
Gift card receivables ...................................................................................................................
Credit card receivables ...............................................................................................................
Notes receivable..........................................................................................................................
Financing receivables:
Equipment leases receivable ...................................................................................................
Direct financing leases receivable...........................................................................................
Franchise fee notes receivable ................................................................................................
Other ...........................................................................................................................................
Less: allowance for doubtful accounts .......................................................................................
Less: current portion ...................................................................................................................
Long-term receivables ................................................................................................................ $
2012
2011
$
(In millions)
67.4
44.6
0.4
2.2
122.4
95.1
2.7
8.8
343.6
(2.7)
340.9
(128.6)
212.3
$
57.3
37.7
3.3
1.8
131.5
100.0
4.3
9.9
345.8
(3.6)
342.2
(115.7)
226.5
Accounts receivable primarily includes receivables due from franchisees and distributors. Gift card receivables consist
primarily of amounts due from third-party vendors. Credit card receivables consist primarily of amounts due from credit card
companies used by the Company to process customer transactions. Interest is not charged on gift card and credit card receivables.
Financing receivables primarily relate to IHOP franchise development activity prior to 2003 when IHOP typically leased or
purchased the restaurant site, built and equipped the restaurant then franchised the restaurant to a franchisee. IHOP provided the
financing for the franchise fee, leasing of the equipment and leasing or subleasing the site. Equipment lease contracts are due in
equal weekly installments, primarily bear interest averaging 9.84% and 9.92% per annum at December 31, 2012 and 2011,
respectively, and are collateralized by the equipment. The term of an equipment lease contract coincides with the term of the
corresponding restaurant building lease. The IHOP franchise fee notes have a term of five to eight years and are due in equal
weekly installments, primarily bear interest averaging 6.8% and 7.4% per annum at December 31, 2012 and 2011, respectively,
and are collateralized by the franchise. Where applicable, franchise fee notes, equipment contracts and building leases contain
cross-default provisions wherein a default under one constitutes a default under all. There is not a disproportionate concentration
of credit risk in any geographic area.
The primary indicator of the credit quality of financing receivables is delinquency. As of December 31, 2012, approximately
$0.4 million of financing receivables were delinquent more than 90 days.
The following table summarizes the activity in the allowance for doubtful accounts:
Allowance for Doubtful Accounts
Balance at December 31, 2009
Provision
Charge-offs
Recoveries
Balance at December 31, 2010
Provision
Charge-offs
Recoveries
Balance at December 31, 2011
Provision
Charge-offs
Recoveries
Balance at December 31, 2012
(In millions)
3.4
3.4
(0.8)
0.2
6.2
0.4
(3.1)
0.1
3.6
0.5
(1.9)
0.5
2.7
$
$
As of December 31, 2012, approximately $0.5 million of the allowance for doubtful accounts related to financing receivables.
76
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
4. Assets Held For Sale
The Company classifies assets as held for sale and ceases the depreciation of the assets when there is a plan for disposal of
the assets and those assets meet the held for sale criteria as defined in U.S. GAAP. Reacquired franchises, property and equipment
and other assets held for sale are accounted for on the specific identification basis.
At December 31, 2011, assets held for sale consisted of assets of 17 Applebee's company-operated restaurants located in a
six-state market area geographically centered around Memphis, Tennessee, one parcel of land on which a refranchised Applebee's
restaurant is situated and three parcels of land previously intended for future restaurant development.
The following table summarizes the changes in the balance of assets held for sale during fiscal 2012:
Balance December 31, 2011................................................................................................................................... $
Assets transferred to held for sale ..........................................................................................................................
Assets sold..............................................................................................................................................................
Assets transferred out of held for sale ....................................................................................................................
Other.......................................................................................................................................................................
Balance December 31, 2012................................................................................................................................... $
9.4
54.1
(60.0)
(3.1)
(0.4)
—
(In millions)
During the twelve months ended December 31, 2012, the Company entered into three agreements for the refranchising and
sale of related restaurant assets of 137 Applebee's company-operated restaurants located in the following market areas: 39
restaurants in Virginia, 33 restaurants primarily in Missouri and Indiana and 65 restaurants in Michigan. Accordingly, $54.1
million, representing the net book value of the assets related to these restaurants, was transferred to assets held for sale.
Assets sold totaling $60.0 million consisted of the 17 Applebee's company-operated restaurants located in a six-state market
area geographically centered around Memphis, Tennessee, the 137 Applebee's company-operated restaurants transferred into assets
held for sale during 2012 and two parcels of land previously intended for future restaurant development. Additionally, the one
parcel of land on which a refranchised Applebee's restaurant is situated and one parcel of land previously intended for future
restaurant development were transferred out of assets held for sale as the Company no longer intends to sell those assets.
5. Property and Equipment
Property and equipment by category is as follows:
2012
2011
Land ............................................................................................................................................ $
Buildings and improvements ......................................................................................................
Leaseholds and improvements....................................................................................................
Equipment and fixtures...............................................................................................................
Construction in progress .............................................................................................................
Properties under capital lease .....................................................................................................
Property and equipment, gross ...................................................................................................
Less accumulated depreciation and amortization .......................................................................
Property and equipment, net ....................................................................................................... $
$
(In millions)
65.4
60.1
279.8
74.9
4.7
60.8
545.7
(251.3)
294.4
$
111.6
58.8
409.8
100.4
4.2
61.4
746.2
(272.0)
474.2
The Company recorded depreciation expense on property and equipment of $27.9 million, $37.7 million and $48.1 million
for the years ended December 31, 2012, 2011 and 2010, respectively.
Accumulated depreciation and amortization includes accumulated amortization for properties under capital lease in the amount
of $32.5 million and $29.7 million at December 31, 2012 and 2011, respectively.
77
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
6. Goodwill
The significant majority of the Company's goodwill and other intangible assets arose from the November 29, 2007 acquisition
of Applebee's. As of December 31, 2012 and 2011, the balance of goodwill was $697.5 million, of which $686.7 million has been
allocated to the Applebee's franchise reporting unit and $10.8 million to the IHOP franchise reporting unit.
In accordance with U.S. GAAP, goodwill must be evaluated for impairment, at a minimum, on an annual basis, and more
frequently if the Company believes indicators of impairment exist. Such indicators include, but are not limited to, events or
circumstances such as a significant adverse change in the business climate, unanticipated competition, a loss of key personnel,
adverse legal or regulatory developments, or a significant decline in the market price of the Company's common stock. In the
process of the Company's annual impairment review, the Company primarily uses the income approach method of valuation that
utilizes a discounted cash flow model to estimate the fair value of its reporting units. Significant assumptions used to determine
fair value under the discounted cash flows model include future trends in sales, operating expenses, overhead expenses, depreciation,
capital expenditures, and changes in working capital, along with an appropriate discount rate.
During the fiscal years ended 2012 and 2011, the Company made periodic assessments as to whether there were indicators
of impairment, particularly with respect to the significant assumptions underlying the discounted cash flow model, and determined
an interim test of goodwill was not warranted. Accordingly, the Company performed a quantitative test of goodwill impairment
in the fourth quarter of 2012 and 2011. In the first step of each year's impairment test, the estimated fair value of both the IHOP
and Applebee's franchising units exceeded their respective carrying values and the Company concluded there was no impairment
of goodwill.
7. Other Intangible Assets
As of December 31, 2012 and 2011, intangible assets were as follows:
Not Subject to Amortization
Subject to Amortization
Tradename
Liquor
Licenses
Other
Franchising
Rights
Recipes and
Menus
Leaseholds
Total
Balance, December 31, 2009 ...... $
Amortization expense .................
Impairment..................................
Refranchising..............................
Other ...........................................
Balance, December 31, 2010 ......
Amortization expense .................
Refranchising..............................
Other ...........................................
Balance, December 31, 2011 ......
Amortization expense .................
Refranchising..............................
Balance, December 31, 2012 ...... $
652.4
—
—
—
—
652.4
—
—
—
652.4
—
—
652.4
$
$
2.9
—
(0.3)
—
—
2.6
—
(1.1)
—
1.5
—
(1.5)
$
— $
(In millions)
179.5
$
(10.0)
—
(0.2)
—
169.3
(10.0)
—
—
159.3
(10.0)
(0.3)
149.0
$
$
$
0.2
—
—
—
0.1
0.3
—
—
0.2
0.5
—
(0.1)
0.4
11.2
(2.3)
—
—
—
8.9
(2.3)
—
—
6.6
(2.3)
—
4.3
$
$
3.4
(1.0)
—
(1.2)
1.2
2.4
(0.6)
0.3
—
2.1
(0.2)
(1.9)
$
— $
849.6
(13.3)
(0.3)
(1.4)
1.3
835.9
(12.9)
(0.8)
0.2
822.4
(12.5)
(3.8)
806.1
Annual amortization expense for the next five fiscal years is estimated to be approximately $10.9 million per year. The
weighted average life of the intangible assets subject to amortization is 19.0 and 18.8 years at December 31, 2012 and 2011,
respectively.
Gross and net carrying amounts of intangible assets subject to amortization at December 31, 2012 and 2011 are as follows:
December 31, 2012
December 31, 2011
Gross
Accumulated
Amortization
Net
Gross
(In millions)
Accumulated
Amortization
Net
Franchising rights........................................ $
Recipes and menus......................................
Leaseholds/other .........................................
Total.............................................................. $
200.0
15.7
0.3
216.0
$
$
(51.0) $
(11.4)
(0.3)
(62.7) $
149.0
4.3
—
153.3
$
$
200.4
15.7
4.7
220.8
$
$
(41.1) $
(9.1)
(2.6)
(52.8) $
159.3
6.6
2.1
168.0
78
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt
Long-term debt consists of the following components:
Senior Secured Credit Facility, due October 2017, at a variable interest rate of 4.25% as of
December 31, 2012 and 2011 ..................................................................................................... $
Senior Notes due October 2018, at a fixed rate of 9.5% ............................................................
Discount......................................................................................................................................
Total debt ....................................................................................................................................
Less current maturities................................................................................................................
Long-term debt ........................................................................................................................... $
Senior Secured Credit Facility
2012
2011
(In millions)
472.0
760.8
(23.3)
1,209.5
(7.4)
1,202.1
$
$
682.5
765.8
(29.4)
1,418.9
(7.4)
1,411.4
On October 8, 2010, the Company entered into a Credit Agreement, by and among the Company, a group of lenders and other
financial institutions party thereto (the "Credit Agreement"). The Credit Agreement established a senior secured credit facility (the
"Credit Facility") consisting of a $900.0 million senior secured term loan facility maturing in October 2017 (the "Term Facility")
and a $50.0 million senior secured revolving credit facility maturing in October 2015 (the "Revolving Facility"). The Revolving
Facility originally provided for borrowings up to $50.0 million, with sub-limits for the issuance of letters of credit and for swing-
line borrowings, and may be used for general corporate purposes, including working capital, permitted acquisitions, capital
expenditures, dividends and investments. The Credit Agreement also provides for an uncommitted incremental facility that permits
the Company, subject to certain conditions, to increase the Credit Facility by up to $250.0 million, provided that the aggregate
amount of the commitments under the Revolving Facility may not exceed $150.0 million. See "Amendment to Credit Agreement".
Interest Rate
Loans made under the Term Facility (“Term Loans”) and the Revolving Facility ("Revolving Loans") bear interest, at the
Company's option, at an annual rate equal to (i) a LIBOR-based rate (originally subject to a floor of 1.50%) plus a margin (originally
4.50%) or (ii) the base rate (the "Base Rate") (originally subject to a floor of 2.50%) which will be equal to the highest of (a) the
federal funds rate plus 0.50%, (b) the prime rate and (c) the one month LIBOR rate (originally subject to a floor of 1.50%) plus
1.00%, plus a margin of 3.50%. The margin for the Revolving Facility is subject to debt leverage-based step-downs. Both the
Term Facility and the Revolving Facility are subject to upfront fees of 1.00% of the principal amount thereof. See "Amendment
to Credit Agreement".
Amendment to Credit Agreement
On February 25, 2011, the Company entered into Amendment No. 1 (''Amendment No. 1'') to the Credit Agreement. Pursuant
to Amendment No. 1, the interest rate margin applicable to LIBOR-based Term Loans was reduced from 4.50% to 3.00%, and the
interest rate floors used to determine the LIBOR and Base Rate reference rates for Term Loans was reduced from 1.50% to 1.25%
for LIBOR-based Term Loans and from 2.50% to 2.25% for Base Rate-denominated Term Loans. In addition, Amendment No. 1
increased the lender commitments under the Revolving Facility from $50.0 million to $75.0 million. Amendment No. 1 also
modified certain restrictive covenants of the Credit Agreement, including those relating to repurchases of other debt securities,
permitted acquisitions and payments on equity. See Note 23, Subsequent Events.
The Company paid $12.3 million in fees and costs related to Amendment No. 1, of which $7.4 million in fees paid to lenders
was recorded as additional discount on debt and $0.8 million of costs related to the increase in the Revolving Facility was recorded
as deferred financing costs. Fees paid to third parties of $4.0 million were recorded as “Debt modification costs” in the Consolidated
Statement of Operations for the year ended December 31, 2011.
79
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
Borrowings Under Senior Secured Credit Facility
Concurrent with Amendment No. 1, on February 25, 2011, the Company borrowed $742.0 million under the Term Facility
(the "New Term Loan"), retiring the amount then outstanding of the original $900.0 million borrowed under the Credit Agreement.
There was $472.0 million of the New Term Loan outstanding at December 31, 2012.
During 2012, the Company borrowed a total of $50.0 million under the Revolving Facility, all of which was repaid. As of
December 31, 2012, there were no amounts outstanding under the Revolving Facility; however, available borrowing capacity
under the Revolving Facility is reduced by $12.1 million of letters of credit outstanding as of December 31, 2012 pursuant to sub-
limits of the Credit Agreement.
Guarantees
The loans made under the Credit Agreement are guaranteed by the Company's domestic wholly-owned restricted subsidiaries,
other than immaterial subsidiaries (the "Guarantors"), and are secured by a perfected first priority security interest in substantially
all of the tangible and intangible assets of the Company and the Guarantors, including, without limitation, (i) substantially all
personal, real and mixed property, (ii) all intercompany debt owing to the Company and the Guarantors and (iii) 100% of the
equity interests held by the Company and each of the Guarantors (with customary limits for foreign subsidiaries), subject to certain
customary exceptions.
Mandatory Prepayment
Term Loans under the Credit Agreement are subject to the following prepayment requirements:
• Mandatory prepayments equal to 0.25% of the aggregate principal amount of the New Term Loan must be made on a
quarterly basis (1.0% for a fiscal year);
• 50% of excess cash flow (as defined in the Credit Agreement), paid, at a minimum, on an annual basis; and
• 100% of asset sales and insurance proceeds (subject to certain exclusions).
Beginning with fiscal 2012, the percentage of excess cash flow required to be applied as a prepayment is subject to two
stepdowns: 25% of excess cash flow if the consolidated leverage ratio (as defined in the Credit Agreement) is less than 4.5:1 but
greater than or equal to 3:1 as of the end of the fiscal year; and 0% of excess cash flow if the consolidated leverage ratio is less
than 3:1 as of the end of the fiscal year. See Note 23, Subsequent Events.
The Credit Agreement permits the Company to purchase loans under the Term Facility pursuant to customary Dutch auction
provisions and subject to customary conditions and limitations.
Covenants/Restrictions
The Credit Agreement requires the Company to comply with certain financial covenants, including a minimum consolidated
interest coverage ratio and a maximum consolidated leverage ratio, in each case, commencing with the fiscal quarter ending
March 31, 2011. The Credit Agreement also includes certain negative covenants customary for transactions of this type, that restrict
the ability of the Company and the Company's existing and future restricted subsidiaries to, among other things, modify material
agreements and/or incur additional debt, incur liens, make certain investments and acquisitions, make fundamental changes, transfer
and sell assets, pay dividends and make distributions, modify the nature of the Company's business, enter into agreements with
shareholders and affiliates, enter into burdensome agreements, change the Company's fiscal year, make capital expenditures and
prepay certain indebtedness, subject to certain customary exceptions, including carve-outs and baskets. See Note 23, Subsequent
Events.
The Credit Agreement contains certain customary representations and warranties, affirmative covenants and events of default,
including change of control provisions and cross-defaults to other debt. Upon the occurrence of an event of default, the lenders,
by a majority vote, will have the ability to direct the Administrative Agent to terminate the loan commitments, accelerate all loans
and exercise any of the lenders' other rights under the Credit Agreement and the related loan documents on behalf of the lenders.
Effective Interest Rate
Taking into account fees and expenses associated with the Credit Agreement and Amendment No. 1 that will be amortized
as additional non-cash interest expense over a seven-year period, the weighted average effective interest rate for the Credit Facility
as of December 31, 2012 was 7.8%.
80
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
9.5% Senior Notes due 2018
On October 19, 2010, the Company issued $825.0 million aggregate principal amount of its 9.5% Senior Notes due October 30,
2018 (the "Notes") pursuant to an Indenture (the "Indenture"), by and among the Company, the Guarantors and Wells Fargo Bank,
National Association, as trustee (the "Trustee"). The Notes are unsecured senior obligations of the Company and are jointly and
severally guaranteed on a senior unsecured basis by the Guarantors under the Credit Agreement.
Interest/Effective Interest
The Notes bear interest at the rate of 9.5% per annum. Interest on the Notes is payable on April 30 and October 30 of each
year, beginning on April 30, 2011. Taking into account fees and expenses associated with the Notes that will be amortized as
additional non-cash interest expense over an eight-year period, the weighted average effective interest rate for the Notes as of
December 31, 2012 was 10.9%.
Prepayment
The Company may redeem the Notes for cash in whole or in part, at any time or from time to time, on and after October 30,
2014, at specified redemption premiums, plus accrued and unpaid interest, as specified in the Indenture. In addition, prior to
October 30, 2014, the Company may redeem the Notes for cash in whole or in part, at any time and from time to time, at a
redemption price equal to 100% of the principal amount plus accrued and unpaid interest and a "make-whole" premium, as specified
in the Indenture. In addition, prior to October 30, 2013, the Company may redeem up to 35% of the aggregate principal amount
of Notes issued with the net proceeds raised in one or more equity offerings. If the Company undergoes a change of control under
certain circumstances, the Company may be required to offer to purchase the Notes at a purchase price equal to 101% of the
principal amount plus accrued and unpaid interest. If the Company sells assets under certain circumstances, the Company may be
required to offer to purchase the Notes at a purchase price equal to 100% of the principal amount plus accrued and unpaid interest.
Covenants/Restrictions
The Indenture limits the ability of the Company and its restricted subsidiaries to incur additional indebtedness (excluding
certain indebtedness under the Credit Facility), issue certain preferred shares, pay dividends and make other equity distributions,
purchase or redeem capital stock, make certain investments, create certain liens on its assets to secure certain debt, enter into
certain transactions with affiliates, agree to any restrictions on the ability of the Company's restricted subsidiaries to make payments
to the Company, merge or consolidate with another company, transfer and sell assets, engage in business other than certain permitted
businesses and designate its subsidiaries as unrestricted subsidiaries, in each case as set forth in the Indenture. These covenants
are subject to a number of important limitations, qualifications and exceptions, including that during any time that the Notes
maintain investment grade ratings, certain of these covenants will not be applicable to the Notes.
The Indenture also contains customary event of default provisions including, among others, the following: default in the
payment of the principal of the Notes when the same becomes due and payable; default for 30 days in the payment when due of
interest on the Notes; failure to comply with certain covenants in the Indenture, in some cases without notice from the Trustee or
the holders of Notes; and certain events of bankruptcy or insolvency with respect to the Company or any significant restricted
subsidiary, in each case as set forth in the Indenture. In the case of an event of default, other than a bankruptcy default with respect
to the Company, the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding, by written
notice to the Company (and to the Trustee if the notice is given by the holders of the Notes), may, and the Trustee at the written
request of the holders of at least 25% in aggregate principal amount of the Notes then outstanding shall, declare the principal of
and accrued interest on the Notes to be immediately due and payable.
Registration Rights Agreement for 9.5% Senior Notes due 2018
On October 19, 2010, in connection with the issuance of the Notes, the Company entered into a Registration Rights Agreement
(the "Registration Rights Agreement"), by and among the Company, the Guarantors and Barclays Capital Inc. and Goldman,
Sachs & Co., as representatives of the initial purchasers of the Notes.
Pursuant to the Registration Rights Agreement, the Company and the Guarantors agreed to register with the SEC, exchange
notes (the "Exchange Notes"), having substantially identical terms as the Notes, as part of an offer to exchange freely tradable
Exchange Notes for the Notes. Pursuant to the Registration Rights Agreement, the Company and the Guarantors agreed to use
their commercially reasonable efforts to file an exchange offer registration statement with the SEC within 210 days from October
19, 2010, and to use their commercially reasonable efforts to cause it to become or be declared effective by the SEC no later than
81
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
270 days after October 19, 2010. The Company complied with this requirement by filing a Registration Statement on Form S-4
that was declared effective by the SEC on June 14, 2011.
Deferred Financing Costs
In connection with the Credit Agreement and the issuance of the Notes, the Company recorded approximately $28.2 million
of deferred financing costs. In connection with the increase to the Revolving Credit Facility the Company recorded an additional
$0.8 million of deferred financing costs. These deferred financing costs are being amortized using the effective interest method
over the estimated life of the related debt. Amortization of the deferred financing costs associated with the Credit Agreement and
the issuance of the Notes included in interest expense for the years ended December 31, 2012, 2011 and 2010 was $2.6 million,
$2.7 million and $0.6 million, respectively and an additional $2.3 million, $3.1 million and $0.8 million, respectively, of deferred
issuance costs was written off in connection with debt retirement and is reflected in the loss on extinguishment of debt in the
consolidated statement of operations.
As of December 31, 2012 and 2011, $16.8 million and $21.7 million, respectively, of deferred financing costs was reported
as Other Assets in the consolidated balance sheets.
Discount on Debt
The Company recorded a discount on debt from the October 2010 Refinancing of $29.6 million. In connection with Amendment
No. 1, the Company recorded an additional discount of $7.4 million. The discount on debt reflects the difference between the
proceeds received from the issuance of the debt and the face amount to be repaid over the life of the debt. The discount will be
amortized as additional interest expense over the weighted average estimated life of the debt under the effective interest method.
For the years ended December 31, 2012, 2011, and 2010, $3.4 million, $3.4 million and $0.6 million, respectively, of the discount
was amortized as additional interest expense under the effective interest method and an additional $2.7 million, $3.1 million and
$0.5 million, respectively, was written off in connection with debt retirement and is reflected in the loss on extinguishment of debt
in the consolidated statement of operations.
Maturities of Long-term Debt
At December 31, 2012, the aggregate principal amounts of existing long-term debt maturing in each of the next five years
and thereafter are as follows:
2013........................................................................................................................................................................ $
2014........................................................................................................................................................................
2015........................................................................................................................................................................
2016........................................................................................................................................................................
2017........................................................................................................................................................................
Thereafter ...............................................................................................................................................................
$
(In millions)
7.4
7.4
7.4
7.4
442.4
760.8
1,232.8
9. Financing Obligations
On May 19, 2008, the Company entered into a Purchase and Sale Agreement relating to the sale and leaseback of 181 parcels
of real property (the "Sale-Leaseback Transaction"), each of which is improved with a restaurant operating as an Applebee's
Neighborhood Grill and Bar (the "Properties"). On June 13, 2008, the closing date of the Sale-Leaseback Transaction, the Company
entered into a Master Land and Building Lease ("Master Lease") for the Properties. The proceeds received from the transaction
were $337.2 million. The Master Lease calls for an initial term of twenty years and four, five-year options to extend the term.
The Company has an ongoing obligation related to the Properties until such time as the lease related to each of the Properties
is assigned to a qualified franchisee in a transaction meeting certain parameters set forth in the Master Lease. Due to this continuing
involvement, the transaction was recorded under the financing method in accordance with U.S. GAAP. Accordingly, the value of
the land and leasehold improvements will remain on the Company's books and the leasehold improvements will continue to be
depreciated over their remaining useful lives. The net proceeds received have been recorded as a financing obligation. A portion
of the lease payments is recorded as a decrease to the financing obligation and a portion is recognized as interest expense. In the
event the lease obligation of any individual property or group of properties is assumed by a qualified franchisee the Company's
continuing involvement will cease. At that time, that portion of the transaction related to that property or group of properties is
82
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
9. Financing Obligations (Continued)
expected to be recorded as a sale in accordance with U.S. GAAP and the net book value of those properties will be removed from
the Company's books, along with a ratable portion of the remaining financing obligation.
As of December 31, 2012, the Company's continuing involvement with 146 of the 181 Properties ended by assignment of
the lease obligation to a qualified franchisee or a release from the lessor. In accordance with the accounting described above, the
transactions related to these properties have been recorded as a sale with property and equipment and financing obligations each
reduced by approximately $261.3 million.
As of December 31, 2012, future minimum lease payments under financing obligations during the initial terms of the leases
related to the sale-leaseback transactions are as follows:
Fiscal Years
2013.................................................................................................................................................................. $
2014..................................................................................................................................................................
2015(1) ..............................................................................................................................................................
2016..................................................................................................................................................................
2017..................................................................................................................................................................
Thereafter.........................................................................................................................................................
Total minimum lease payments .......................................................................................................................
Less interest .....................................................................................................................................................
Total financing obligations ..............................................................................................................................
Less current portion(2)......................................................................................................................................................
Long-term financing obligations...................................................................................................................... $
___________________________________
(1) Due to the varying closing date of the Company's fiscal year, 13 monthly payments will be made in fiscal 2015.
Included in current maturities of capital lease and financing obligations on the consolidated balance sheet.
(2)
(In millions)
5.5
6.1
6.6
6.1
5.6
104.2
134.1
(82.0)
52.1
(0.1)
52.0
10. Leases
The Company leases the majority of all IHOP franchise restaurants. The restaurants are subleased to IHOP franchisees or in
a few instances operated by the Company. These noncancelable leases and subleases consist primarily of land, buildings and
improvements.
The following is the Company's net investment in direct financing lease receivables:
December 31,
2012
2011
(In millions)
Total minimum rents receivable ................................................................................................. $
Less unearned income.................................................................................................................
Net investment in direct financing lease receivables..................................................................
Less current portion ....................................................................................................................
Long-term direct financing lease receivables ............................................................................. $
163.4
(68.3)
95.1
(6.2)
88.9
$
$
180.0
(80.0)
100.0
(5.4)
94.6
Contingent rental income, which is the amount above and beyond base rent, for the years ended December 31, 2012, 2011
and 2010 was $12.5 million, $13.1 million and $14.4 million, respectively.
83
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
10. Leases (Continued)
The following is the Company's net investment in equipment leases receivable:
December 31,
2012
2011
(In millions)
Total minimum leases receivable................................................................................................ $
Less unearned income.................................................................................................................
Net investment in equipment leases receivables ........................................................................
Less current portion ....................................................................................................................
Long-term equipment leases receivable ..................................................................................... $
209.3
(86.9)
122.4
(6.8)
115.6
$
$
234.2
(102.7)
131.5
(6.5)
125.0
The following are minimum future lease payments on noncancelable leases as lessee at December 31, 2012:
Capital
Leases
Operating
Leases
2013 ........................................................................................................................................ $
2014 ........................................................................................................................................
2015 ........................................................................................................................................
2016 ........................................................................................................................................
2017 ........................................................................................................................................
Thereafter................................................................................................................................
Total minimum lease payments ..............................................................................................
Less interest ............................................................................................................................
Capital lease obligations .........................................................................................................
Less current portion(1) .........................................................................................................................................
Long-term capital lease obligations........................................................................................ $
(1) Included in current maturities of capital lease and financing obligations on the consolidated balance sheet.
74.8
74.4
73.7
72.5
71.5
473.1
840.0
$
(In millions)
24.8
24.9
24.8
23.9
22.5
96.7
217.6
(82.4)
135.2
(10.8)
124.4
$
The asset cost and carrying amount on company-owned property leased at December 31, 2012 was $90.1 million and $67.8
million, respectively. The asset cost and carrying amount on company-owned property leased at December 31, 2011, was $89.8
million and $69.5 million, respectively. The asset cost and carrying amounts represent the land and building asset values and net
book values on sites leased to franchisees.
The minimum future lease payments shown above have not been reduced by the following future minimum rents to be received
on noncancelable subleases and leases of owned property at December 31, 2012:
Direct
Financing
Leases
Operating
Leases
2013 ............................................................................................................................................ $
2014 ............................................................................................................................................
2015 ............................................................................................................................................
2016 ............................................................................................................................................
2017 ............................................................................................................................................
Thereafter....................................................................................................................................
Total minimum rents receivable ................................................................................................. $
$
(In millions)
18.2
18.2
18.0
17.8
17.9
73.3
163.4
$
95.8
95.6
96.1
95.7
95.5
741.4
1,220.1
The Company has noncancelable leases, expiring at various dates through 2032, which require payment of contingent rents
based upon a percentage of sales of the related restaurant as well as property taxes, insurance and other charges. Subleases to
franchisees of properties under such leases are generally for the full term of the lease obligation at rents that include the Company's
obligations for property taxes, insurance, contingent rents and other charges. Generally, the noncancelable leases include renewal
options. Contingent rent expense for all noncancelable leases for the years ended December 31, 2012, 2011 and 2010 was $2.7
million, $2.8 million and $3.4 million, respectively. Minimum rent expense for all noncancelable operating leases for the years
ended December 31, 2012, 2011 and 2010 was $78.0 million, $81.8 million and $87.2 million, respectively.
84
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
11. Fair Value Measurements
U.S. GAAP pertaining to fair value measurements defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). U.S. GAAP
establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. These tiers include: Level 1,
defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market
data exists; therefore requiring an entity to develop its own assumptions.
The Company does not have a material amount of financial instruments that are required under U.S. GAAP to be measured
on a recurring basis at fair value. None of the Company's non-financial assets or non-financial liabilities is required to be measured
at fair value on a recurring basis. The Company has not elected to use fair value measurement, as provided under U.S. GAAP, for
any assets or liabilities for which fair value measurement is not presently required.
12. Fair Value of Financial Instruments
The Company believes the fair values of cash equivalents, accounts receivable, accounts payable and the current portion of
long-term debt approximate their carrying amounts due to their short duration.
The fair values of non-current financial instruments, determined based on Level 2 inputs, are shown in the following table:
Long-term debt, less current maturities
$
1,202.1
$
1,334.2
$
1,411.4
$
1,486.2
December 31, 2012
December 31, 2011
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(In millions)
13. Commitments and Contingencies
Purchase Commitments
In some instances, the Company enters into commitments to purchase advertising and other items. Most of these agreements
are fixed price purchase commitments. At December 31, 2012, the outstanding purchase commitments were $137.5 million, the
majority of which related to advertising.
Lease Guarantees and Contingencies
In connection with the sale of Applebee's restaurants to franchisees and other parties, the Company has, in certain cases,
guaranteed or had potential continuing liability for lease payments. As of December 31, 2012 and 2011, the Company has
outstanding lease guarantees or is contingently liable for approximately $448.5 million and $349.6 million, respectively. This
amount represents the maximum potential liability of future payments under these leases. These leases have been assigned to the
buyers and expire at the end of the respective lease terms, which range from 2013 through 2048. In the event of default, the
indemnity and default clauses in our sale or assignment agreements govern our ability to pursue and recover damages incurred.
No material liabilities have been recorded as of December 31, 2012.
In 2004, Applebee's arranged for a third-party financing company to provide up to $250.0 million to qualified franchisees for
loans to fund development of new restaurants, subject to its approval. The Company provided a limited guarantee of 10% of certain
loans advanced under this program. The Company will be released from its guarantee if certain operating results are met after the
restaurant has been open for at least two years. As of December 31, 2012, there were loans outstanding under this program to one
franchisee for approximately $13.1 million, net of any guarantees from which the Company was released. This program expired
on October 31, 2007; however, the Company's guarantee will remain outstanding until the provisions for release have been satisfied,
as defined in the related agreement.
85
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Commitments and Contingencies (Continued)
Litigation, Claims and Disputes
The Company is subject to various lawsuits, governmental inspections, administrative proceedings, audits, and claims arising
in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The Company
is required to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and
expenses associated with the defense of all of the Company's litigation are expensed as such fees and expenses are incurred. In
the opinion of management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of
such a nature or involve amounts that would not have a material adverse impact on the Company's business or consolidated financial
statements. Management regularly assesses the Company's insurance deductibles, analyzes litigation information with the
Company's attorneys and evaluates its loss experience in connection with pending legal proceedings. While the Company does
not presently believe that any of the legal proceedings to which the Company is currently a party will 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.
As previously disclosed, the Company defended a collective action, Gerald Fast v. Applebee's International, Inc., in the United
States District Court for the Western District of Missouri, Central Division that commenced in July 2006. In this case, the plaintiffs
claimed that tipped servers and bartenders in Applebee's company-operated restaurants spent more than 20% of their time
performing general preparation and maintenance duties, or “non-tipped work,” for which they should be compensated at the
minimum wage. Under this action, plaintiffs sought unpaid wages and other relief of up to $17 million plus plaintiffs' attorneys'
fees and expenses. The Company entered into a settlement agreement on September 25, 2012 to settle the collective action for
$9.1 million, and the court granted final approval of the settlement and dismissed the action on November 1, 2012. The Company
funded the settlement on December 6, 2012.
Letters of Credit
The Company provides letters of credit, primarily to various insurance carriers to collateralize obligations for outstanding
claims. As of December 31, 2012, the Company had approximately $12.1 million of unused letters of credit outstanding. These
letters expire on various dates in 2012 and are automatically renewed for an additional year if no cancellation notice is submitted.
14. Preferred Stock and Stockholders' Equity
Preferred Stock
As part of the financing for the Applebee's acquisition, on November 29, 2007, the Company completed two separate private
placements of preferred stock.
Series A Perpetual Preferred Stock
On November 29, 2007, the Company issued and sold 190,000 shares of Series A Perpetual Preferred Stock (the "Series A
Perpetual Preferred Stock") for an aggregate purchase price of $190.0 million in cash. Total issuance costs were approximately
$3.0 million. All of the shares were sold to MSD SBI, L.P., an affiliate of MSD Capital, L.P., pursuant to a purchase agreement
dated as of July 15, 2007, as amended as of November 29, 2007.
In the fourth quarter of 2010, the Company redeemed all 190,000 shares of the Series A Perpetual Preferred Stock for $199.0
million, including a redemption premium of $7.6 million and $1.4 million of dividends accrued through the date of redemption.
In accordance with U.S. GAAP, the redemption premium was included as part of dividends paid on Series A Perpetual Preferred
Stock for the year ended December 31, 2010.
On December 14, 2012, the Company filed a Certificate of Elimination of the Series A Preferred Stock with the Secretary of
State of the State of Delaware to eliminate its Series A Preferred Stock. The Certificate of Elimination, effective upon filing, had
the effect of eliminating from the Corporation’s Restated Certificate of Incorporation, as amended, all matters set forth in the
Certificate of Designations of the Series A Preferred Stock with respect to such series, which was previously filed by the Corporation
with the Secretary of State on November 29, 2007.
Series B Convertible Preferred Stock
On November 29, 2007, the Company issued and sold 35,000 shares of Series B Convertible Preferred Stock for an aggregate
purchase price of $35.0 million in cash. Total issuance costs were approximately $0.8 million. All of the shares were sold to
affiliates of Chilton Investment Company, LLC (collectively, "Chilton") pursuant to a purchase agreement dated as of July 15,
2007. The shares of Series B Convertible Preferred Stock ranked (i) senior to the common stock, and any series of preferred stock
86
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Preferred Stock and Stockholders' Equity (Continued)
specifically designated as junior to the Series B Convertible Preferred Stock, with respect to the payment of dividends and
distributions, in a liquidation, dissolution or winding up, and upon any other distribution of the Company's assets; and (ii) on a
parity with all other series of preferred stock, including the Series A Perpetual Preferred Stock, with respect to the payment of
dividends and distributions, in a liquidation, dissolution or winding up, and upon any other distribution of the Company's assets.
Each share of Series B Convertible Preferred Stock had an initial stated value of $1,000, that increased at the rate of 6.0%
per annum, compounded quarterly, commencing on the issue date of such share of Series B Convertible Preferred Stock to and
including the earlier of (i) the date of liquidation, dissolution or winding up or the redemption of such share, or (ii) the date such
share is converted into the Company's common stock. The stated value of a share as so accreted as of any date is referred to as the
accreted value of the share as of that date. Shares of Series B Convertible Preferred Stock could have been redeemed by the
Company, in whole or in part at the Company's option, on or after the fourth anniversary of the issue date, at a redemption price
equal to the accreted value as of the applicable redemption date, subject to the terms set forth in the Certificate of Designations
for the Series B Convertible Preferred Stock ("the "Series B Certificate of Designations"). The Series B Convertible Preferred
Stock entitled the holders thereof to receive certain dividends and distributions to the extent that any dividends or distributions
paid on the Company's common stock exceeded the annual accretion on the Series B Convertible Preferred Stock. Holders of
Series B Convertible Preferred Stock were entitled to vote on all matters (including the election of directors) submitted to the
holders of the Company's common stock, as a single class with the holders of the Company's common stock, with each share of
Series B Convertible Preferred Stock having one vote per share of the Company's common stock then issuable upon conversion
of such share of Series B Convertible Preferred Stock.
At any time and from time to time, any holder of Series B Convertible Preferred Stock could convert all or any portion of
the Series B Convertible Stock held by such holder into a number of shares of the Company's common stock computed by
multiplying (i) each $1,000 of aggregate accreted value of the shares to be converted by (ii) the conversion rate then in effect
(which initially is 14.44878 shares of common stock per $1,000 of accreted value, but subject to customary anti-dilution
adjustments).
The Company also entered into a registration rights agreement, dated as of November 29, 2007, with Chilton pursuant to
which the Company granted Chilton certain registration rights with respect to the shares of Series B Convertible Preferred Stock
issued to Chilton and the shares of common stock issuable upon conversion.
In January 2011, 100 shares of Series B Convertible Preferred Stock with an accreted value of approximately $120,000
were converted by the holder into 1,737 shares of the Company's common stock. On November 29, 2012, the fifth anniversary of
the issue date, the remaining 34,900 outstanding shares of Series B Convertible Preferred Stock, with an accreted value of
approximately $47.0 million, were automatically converted into 679,168 shares of the Company's common stock.
On December 14, 2012, the Company filed a Certificate of Elimination of the Series B Convertible Preferred Stock with the
Secretary of State of the State of Delaware to eliminate its Series B Convertible Preferred Stock. The Certificate of Elimination,
effective upon filing, had the effect of eliminating from the Corporation’s Restated Certificate of Incorporation, as amended, all
matters set forth in the Certificate of Designations of the Series B Preferred Stock with respect to such series, which was previously
filed by the Corporation with the Secretary of State on November 29, 2007.
Share Repurchase Program
In August 2011, the Board of Directors approved the repurchase of up to $45 million of the Company's common stock.
Under the program, the Company may repurchase shares on an opportunistic basis from time to time in open market transactions
and in privately negotiated transactions based on business, market, applicable legal requirements, and other considerations. The
repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time. During the
year ended December 31, 2012, the Company did not repurchase any shares of its common stock pursuant to the share repurchase
program. As of December 31, 2012, the Company has repurchased 534,101 shares of stock for $21.2 million, an average price of
$39.64 per share, under the share repurchase program.
Dividends
There were no dividends declared or paid on common shares in 2012, 2011 or 2010. Payment of dividends is subject to
limitations under our Credit Agreement. We evaluate dividend payments on common stock within the context of our overall capital
allocation strategy with our Board of Directors on an ongoing basis, giving consideration to our current and forecast earnings,
financial condition, cash requirements, limitations under the Credit Agreement and other factors.
87
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
15. Impairment and Closure Charges
Impairment and closure charges for the years ended December 31, 2012, 2011 and 2010 were as follows:
Lenexa lease termination
Long-lived tangible asset impairment
Other closure charges
Total impairment and closure charges
Lenexa Lease Termination
Year Ended December 31,
2012
2011
(In millions)
2010
$
$
— $
1.9
2.3
4.2
$
23.0
4.9
2.0
29.9
$
$
—
1.5
2.8
4.3
In April 2011, the Company entered into a sublease termination agreement related to the Company’s sublease of the commercial
space occupied by the Applebee’s Restaurant Support Center in Lenexa, Kansas. The Company recognized a charge of $23.0
million for the termination fee and other closing costs.
Long-lived Tangible Asset Impairment
Long-lived tangible asset impairment charges for the year ended December 31, 2012 related to equipment at five IHOP
restaurants that were taken back from the franchisee operator and subsequently refranchised and to a parcel of land previously
intended for future restaurant development. The Company evaluated the causal factors of all impairments of long-lived assets as
they were recorded during 2012 and concluded they were based on factors specific to each asset and not potential indicators of an
impairment of other long-lived assets.
Long-lived tangible asset impairment charges for the year ended December 31, 2011 were primarily related to termination of
the Company's sublease of the commercial space occupied by the Applebee’s Restaurant Support Center. The Company recognized
a $4.5 million impairment charge related to the furniture, fixtures and leasehold improvements at that facility.
For the year ended December 31, 2010, the Company recognized impairments of long-lived tangible assets of $1.5 million.
In 2010, the Company sold 63 company-operated Applebee's restaurants located in Minnesota and Wisconsin. The Company had
fee ownership of the properties on which three of the restaurants were located. The Company's strategy does not contemplate
retaining such properties as a lessor on a long-term basis. The properties were transferred to assets held for sale and an impairment
of $0.7 million was recorded based on the estimated sales price. The Company also placed a single restaurant and the land on
which it is situated up for sale. In accordance with criteria in U.S. GAAP, the Company transferred the fair value of the assets
related to this restaurant, as determined by the estimated sales price, to assets held for sale and an impairment of $0.5 million was
recognized.
Other Closure Charges
Other closure charges for the year ended December 31, 2012 primarily related to the closure of one IHOP restaurant that was
taken back from the franchisee operator and to adjustments to the estimated reserve for previously closed surplus IHOP properties.
Other closure charges for the year ended December 31, 2011 primarily related to adjustments to the estimated reserve for previously
closed surplus IHOP properties. Other closure charges for the year ended December 31, 2010 related primarily to two "IHOP Cafe"
company-operated restaurants (a non-traditional restaurant test format that was evaluated but will no longer be utilized) and to the
closure of an Applebee's company-operated restaurant in China.
16. Stock-Based Incentive Plans
General Description
From time to time, the Company has granted nonqualified stock options, restricted stock awards, cash-settled and stock-settled
restricted stock units and performance units to officers, other employees and non-employee directors of the Company. Currently,
the Company is authorized to grant stock options, stock appreciation rights, restricted stock awards, cash-settled and stock-settled
restricted stock units and performance units to officers, other employees and non-employee directors under the DineEquity, Inc.
2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan was approved by stockholders on May 17, 2011 and permits the
issuance of up to 1,500,000 shares of the Company’s common stock for incentive stock awards. The 2011 Plan will expire in May
2021.
88
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
16. Stock-Based Incentive Plans (Continued)
The IHOP Corp. 2001 Stock Incentive Plan (the "2001 Plan") was adopted in 2001 and amended and restated in 2005 and
2008 to authorize the issuance of up to 4,200,000 shares of common stock. The 2001 Plan has expired but there are restricted stock
awards and stock options issued under the 2001 Plan outstanding as of December 31, 2012.
The Stock Option Plan for Non-Employee Directors (the "Directors Plan") was adopted in 1994 and amended and restated
in 1999 to authorize the issuance of up to 400,000 shares of common stock pursuant to options to non-employee directors. The
Directors Plan has expired but there are stock options issued under the Directors Plan outstanding as of December 31, 2012.
The 2005 Stock Incentive Plan for Non-Employee Directors (the "2005 Plan") was adopted in 2005 to authorize the issuance
of up to 200,000 shares of common stock to non-employee members of the Company's Board of Directors. Awards may be made
in common stock, in options to purchase common stock, or in shares of Restricted Stock, or any combination thereof.
The 2011 Plan, the 2005 Plan, the 2001 Plan and the Directors Plan are collectively referred to as the "Plans."
Stock-Based Compensation Expense
From time to time, the Company has granted stock options and restricted stock to officers, directors and employees of the
Company under the Plans. The stock options generally vest ratably over a three-year period in one-third increments and have a
maturity of ten years from the issuance date. Options vest immediately upon a change in control of the Company, as defined in
the Plans. Option exercise prices equal the closing price on the New York Stock Exchange of the Company's common stock on
the date of grant. Restricted stock and restricted stock units are issued at no cost to the holder and vest over terms determined by
the Compensation Committee of the Company's Board of Directors, generally three years following the date of grant or immediately
upon a change in control of the Company, as defined in the Plans. The Company generally utilizes treasury stock or issues new
shares from its authorized but unissued share pool when vested stock options are exercised, when restricted stock awards are
granted and when restricted stock units settle in stock upon vesting.
The following table summarizes the Company's stock-based compensation expense included as a component of general and
administrative expenses in the consolidated financial statements:
Year Ended December 31,
2012
2011
(In millions)
2010
Total stock-based compensation:
Equity classified awards............................................................................. $
Liability classified awards..........................................................................
Total pre-tax compensation expense................................................................
Book tax benefit .........................................................................................
Total stock-based compensation expense, net of tax ...................................... $
11.4
4.9
16.3
(6.2)
10.1
$
$
9.5
1.1
10.6
(4.2)
6.4
$
$
13.1
2.1
15.2
(6.0)
9.2
As of December 31, 2012, total unrecognized compensation cost related to restricted stock and restricted stock units of $8.3
million and $6.7 million related to stock options is expected to be recognized over a weighted average period of approximately
1.76 years for restricted stock and restricted stock units and 1.69 years for stock options.
89
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
16. Stock-Based Incentive Plans (Continued)
Stock Options - Equity Classified Awards
Stock option activity for the years ended December 31, 2012, 2011 and 2010 is summarized as follows:
Outstanding at December 31, 2009 .....................................
Granted ................................................................................
Exercised .............................................................................
Forfeited ..............................................................................
Expired ................................................................................
Outstanding at December 31, 2010 .....................................
Granted ................................................................................
Exercised .............................................................................
Forfeited ..............................................................................
Expired ................................................................................
Outstanding at December 31, 2011 .....................................
Granted ................................................................................
Exercised .............................................................................
Forfeited ..............................................................................
Expired ................................................................................
Outstanding at December 31, 2012 .....................................
Vested and Expected to Vest at December 31, 2012............
Exercisable at December 31, 2012 ......................................
Number of
Shares under
Option
1,659,100
415,804
(475,705)
(50,222)
(25,267)
1,523,710
233,449
(393,075)
(42,593)
(2,851)
1,318,640
147,674
(455,217)
(39,381)
(13,470)
958,246
924,500
601,522
$
$
$
$
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term (in Years)
Aggregate
Intrinsic
Value
21.30
31.26
16.75
25.84
44.93
24.90
53.04
17.11
27.89
47.08
32.06
51.63
20.91
46.97
38.64
39.67
39.29
35.57
6.55
6.47
5.52
$ 25,355,000
$ 24,791,000
$ 18,383,000
The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $15.0 million,
$14.6 million and $12.0 million, respectively.
Cash received from options exercised under all stock-based payment arrangements for the years ended December 31, 2012,
2011 and 2010 was $9.3 million, $6.7 million and $8.0 million, respectively. The actual tax benefit realized for the tax deduction
from option exercises under the stock-based payment arrangements totaled $6.2 million, $6.0 million and $2.7 million, respectively,
for the years ended December 31, 2012, 2011 and 2010.
Fair Value of Stock Options
The per share fair values of the stock options granted have been estimated as of the date of grant or assumption using the
Black-Scholes option pricing model. The Black-Scholes model considers, among other factors, the expected life of the option and
the expected volatility of the Company's stock price. The Black-Scholes model meets the requirements of U.S. GAAP but the fair
values generated by the model may not be indicative of the actual fair values of the Company's stock-based awards. The following
table summarizes the assumptions used to value options granted in the respective periods:
Risk free interest rate ......................................................................................
Weighted average historical volatility.............................................................
Dividend yield.................................................................................................
Expected years until exercise ..........................................................................
Forfeitures .......................................................................................................
Weighted average fair value of options granted.............................................. $
2012
2011
2010
0.9%
84.5%
—%
4.7
11.0%
33.53
$
1.8%
79.1%
—%
4.6
11.0%
34.31
$
2.2%
80.4%
—%
4.8
11.0%
19.93
90
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
16. Stock-Based Incentive Plans (Continued)
Restricted Stock and Restricted Stock Units - Equity Classified Awards
Activity in equity classified awards of restricted stock and restricted stock units for the years ended December 31, 2012, 2011
and 2010 is as follows:
Outstanding at December 31, 2009 .....................................
Granted ................................................................................
Released...............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2010 .....................................
Granted ................................................................................
Released...............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2011 .....................................
Granted ................................................................................
Released...............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2012 .....................................
Restricted Stock Units - Liability Classified Awards
Shares of
Restricted Stock
650,323
209,505
(159,893)
(33,691)
666,244
164,632
(287,735)
(56,608)
486,533
137,852
(179,465)
(98,357)
346,563
Weighted
Average
Grant-Date Per
Share
Fair Value
$
$
33.09
30.52
48.18
34.16
28.62
53.03
37.82
31.56
31.08
52.23
13.83
44.40
44.74
Restricted
Stock Units
— $
20,000
(2,000)
—
18,000
—
—
—
18,000
19,152
(3,910)
—
33,242
$
Weighted
Average
Grant-Date
Per Share
Fair Value
—
29.32
29.32
—
29.32
—
—
—
29.32
52.23
40.58
—
41.19
The Company has granted cash-settled restricted stock units to members of the Board of Directors.These instruments are
recorded as liabilities at fair value as of the respective period end. Activity in liability classified awards of restricted stock units
for the years ended December 31, 2012, 2011 and 2010 is as follows:
Outstanding at December 31, 2009 ..........................................................................................
Granted .....................................................................................................................................
Released....................................................................................................................................
Outstanding at December 31, 2010 ..........................................................................................
Granted .....................................................................................................................................
Released....................................................................................................................................
Outstanding at December 31, 2011...........................................................................................
Granted .....................................................................................................................................
Released....................................................................................................................................
Outstanding at December 31, 2012 ..........................................................................................
Cash-Settled
Restricted Stock
Units
— $
29,000
(3,000)
26,000
15,957
—
41,957
—
(4,773)
37,184
$
Weighted
Average
Per
Share
Fair Value
—
61.07
33.67
64.23
64.30
—
64.26
—
49.66
66.13
For the years ended December 31, 2012, 2011 and 2010, $1.0 million, $0.5 million and $1.2 million, respectively, was included
as stock-based compensation expense related to these cash-settled restricted stock units. At December 31, 2012 and 2011, liabilities
of $2.4 million and $1.6 million, respectively, were included as other accrued expenses in the consolidated balance sheet.
The Company has granted cash long-term incentive awards to certain employees ("LTIP awards"). Annual LTIP awards vest
over a three-year period and are determined using a multiplier from 0% to 200% of the target award based on the total shareholder
return of DineEquity, Inc. common stock compared to the total shareholder returns of a peer group of companies. Though LTIP
awards are only paid in cash, since the multiplier is based on the price of the Company's common stock, the awards are considered
stock-based compensation in accordance with U.S. GAAP and are classified as liabilities. For the years ended December 31,
2012, 2011 and 2010, $3.8 million, $0.6 million and $0.9 million, respectively, was included in stock-based compensation expense
related to the LTIP awards. At December 31, 2012 and 2011, liabilities of $4.5 million and $1.6 million, respectively, were included
as accrued employee compensation and benefits in the consolidated balance sheet.
91
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. Employee Benefit Plans
401(k) Savings and Investment Plan
Effective January 1, 2009, the Company amended the DineEquity, Inc. 401(k) Plan to (i) include salaried and hourly employees
of Applebee's, and (ii) modify the Company matching formula. As amended, the Company matches 100% of the first three percent
of the employee's eligible compensation deferral and 50% of the next two percent of the employee's eligible compensation deferral.
All contributions under this plan vest immediately. DineEquity common stock is not an investment option for employees in the
401(k) plan, other than shares transferred from a prior employee stock ownership plan. Substantially all of the administrative cost
of the 401(k) plan is borne by the Company. The Company's contribution was $2.1 million, $2.4 million and $3.0 million for the
years ended December 31, 2012, 2011 and 2010, respectively.
18. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2012, 2011 and 2010 was as follows:
Provision (benefit) for income taxes:
Current ............................................................................................................
Federal ........................................................................................................ $
State and foreign.........................................................................................
Deferred
Federal ........................................................................................................
State............................................................................................................
Provision (benefit) for income taxes ............................................................... $
Year Ended December 31,
2012
2011
(In millions)
2010
77.4
3.7
81.1
(12.2)
(1.7)
(13.9)
67.2
$
$
13.2
2.8
16.0
11.4
2.4
13.8
29.8
$
$
6.2
(0.6)
5.6
(12.8)
(2.1)
(14.9)
(9.3)
The provision (benefit) for income taxes differs from the expected federal income tax rates as follows:
2012
2011
2010
Statutory federal income tax rate ....................................................................
State and other taxes, net of federal tax benefit ..............................................
Change in unrecognized tax benefits ..............................................................
Change in valuation allowance .......................................................................
State adjustments including audits and settlements ........................................
Compensation related tax credits, net of deduction offsets.............................
Changes in tax rates and state tax laws ...........................................................
Kansas High Performance Incentive Program credits ....................................
Goodwill intangibles adjustment ....................................................................
Non-deductible preferred stock issuance costs ...............................................
Other................................................................................................................
Effective tax rate .............................................................................................
35.0%
2.8
(0.2)
0.7
0.2
(0.9)
(3.2)
—
—
—
0.1
34.5%
35.0%
3.7
(4.0)
1.7
0.2
(4.9)
(3.9)
0.5
—
—
0.1
28.4%
(35.0)%
(0.4)
(28.1)
(1.5)
(0.6)
(46.0)
—
—
27.0
8.5
(0.8)
(76.9)%
92
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 18. Income Taxes (Continued)
Net deferred tax assets (liabilities) consisted of the following components:
Differences in capitalization and depreciation and amortization of reacquired franchises and
equipment ................................................................................................................................... $
Differences in acquisition financing costs..................................................................................
Employee compensation.............................................................................................................
Deferred gain on sale of assets ...................................................................................................
Book/tax difference in revenue recognition................................................................................
Other ...........................................................................................................................................
Deferred tax assets......................................................................................................................
Valuation allowance....................................................................................................................
Total deferred tax assets after valuation allowance....................................................................
Differences between financial and tax accounting in the recognition of franchise and
equipment sales .......................................................................................................................
Differences in capitalization and depreciation (1)................................................................................
Differences in acquisition financing costs..................................................................................
Book/tax difference in revenue recognition................................................................................
Differences between book and tax basis of property and equipment .........................................
Other ...........................................................................................................................................
Deferred tax liabilities ................................................................................................................
Net deferred tax liabilities .......................................................................................................... $
Net deferred tax asset—current .................................................................................................. $
Valuation allowance—current ....................................................................................................
Net deferred tax asset—current ..................................................................................................
Deferred tax liability—non-current ............................................................................................
Valuation allowance—non-current.............................................................................................
Net deferred tax liability—non-current ......................................................................................
Net deferred tax liabilities .......................................................................................................... $
_____________________________________
(1) Primarily related to the Applebee's acquisition.
2012
2011
(In millions)
$
4.9
1.8
15.2
5.9
22.2
35.4
85.4
(4.1)
81.3
(55.1)
(310.2)
(7.7)
(19.5)
(9.8)
(19.4)
(421.7)
(340.4) $
22.3
$
(0.5)
21.8
(358.6)
(3.6)
(362.2)
(340.4) $
4.9
1.9
14.2
2.0
18.1
35.9
77.0
(2.9)
74.1
(59.4)
(322.2)
(9.3)
(19.8)
(9.8)
(16.8)
(437.3)
(363.2)
21.0
(0.4)
20.6
(381.3)
(2.5)
(383.8)
(363.2)
The Company files federal income tax returns and the Company or one of its subsidiaries files income tax returns in various
state and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state or non-United States tax
examinations by tax authorities for years before 2008. The Internal Revenue Service commenced examination of the Company's
U.S. federal income tax return for the tax years 2008 to 2010 in the first quarter of 2012. The examination is anticipated to be
completed by the first quarter of 2013.
The total gross unrecognized tax benefit as of December 31, 2012 and 2011 was $6.7 million and $8.2 million, respectively,
excluding interest, penalties and related income tax benefits. The decrease of $1.5 million is primarily related to expiration of
statute of limitation with various taxing authorities. The entire $6.7 million will be included in the Company's effective income
tax rate if recognized.
The Company estimates the unrecognized tax benefits may decrease over the upcoming 12 months by an amount up to $3.3
million related to settlements with taxing authorities and the lapse of the statute of limitations. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
93
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 18. Income Taxes (Continued)
Unrecognized tax benefit as of December 31, 2010 .............................................................................................. $
Change as a result of prior year tax positions ........................................................................................................
Decreases relating to settlements with taxing authorities ......................................................................................
Decreases as a result of a lapse of the statute of limitations ..................................................................................
Unrecognized tax benefit as of December 31, 2011...............................................................................................
Change as a result of prior year tax positions ........................................................................................................
Change as a result of current year tax positions.....................................................................................................
Decreases relating to settlements with taxing authorities ......................................................................................
Decreases as a result of a lapse of the statute of limitations ..................................................................................
Unrecognized tax benefit as of December 31, 2012 .............................................................................................. $
(In millions)
12.8
(3.3)
(0.8)
(0.5)
8.2
0.8
0.2
(0.9)
(1.6)
6.7
As of December 31, 2012, the accrued interest and penalties were $1.4 million and $0.2 million, respectively, excluding any
related income tax benefits. As of December 31, 2011, the accrued interest and penalties were $3.0 million and $0.3 million,
respectively, excluding any related income tax benefits. The decrease of $1.6 million of accrued interest is primarily related to the
decrease of unrecognized tax benefits due to settlements with taxing authorities, partially offset by the accrual of interest during
the twelve months ended December 31, 2012. The Company recognizes interest accrued related to unrecognized tax benefits and
penalties as a component of income tax expense which is recognized in the Consolidated Statements of Operations.
The Company has various state net operating loss carryovers representing $5.0 million of state taxes. The net operating loss
carryovers will expire, if unused, during the period from 2013 through 2031.
For the years ended December 31, 2012 and 2011, the Company had a total valuation allowance in the amounts of $4.1 million
and $2.9 million, respectively. The entire $4.1 million in 2012 is related to various state net operating loss carryovers for DineEquity,
Inc. and International House of Pancakes, LLC and Subsidiaries.
19. Net Income (Loss) Per Share
The computation of the Company's basic and diluted net income (loss) per share is as follows:
Numerator for basic and diluted income (loss) per common share:
Net income (loss)
Less: Series A preferred stock dividends
Less: Accretion of Series B preferred stock
Less: Net (income) loss allocated to unvested participating restricted
stock
Net income (loss) available to common stockholders - basic
Effect of unvested participating restricted stock
Effect of dilutive securities:
Convertible Series B preferred stock
Numerator - net income available to common shareholders - diluted
Denominator:
Weighted average outstanding shares of common stock - basic
Effect of dilutive securities:
Stock options
Convertible Series B preferred stock
Weighted average outstanding shares of common stock - diluted
Net income (loss) per common share:
Basic
Diluted
Year Ended December 31,
2012
2011
2010
(In thousands, except per share data)
$
127,674
—
(2,498)
(2,718)
122,458
127
$
75,192
—
(2,573)
(1,886)
70,733
34
2,498
125,083
$
—
70,767
$
17,992
264
621
18,877
17,846
339
—
18,185
(2,788)
(25,927)
(2,432)
1,173
(29,974)
—
—
(29,974)
17,240
—
—
17,240
6.81
6.63
$
$
3.96
3.89
$
$
(1.74)
(1.74)
$
$
$
$
For the years ended December 31, 2011 and 2010, diluted loss per common share is computed using the basic weighted
average number of common shares outstanding during the period, as the 643,000 and 992,600 shares, respectively, from common
stock equivalents would have been antidilutive.
94
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
20. Segment Reporting
Information on segments and a reconciliation to income (loss) before income taxes are as follows:
Revenues
Franchise operations ....................................................................................... $
Company restaurants.......................................................................................
Rental operations.............................................................................................
Financing operations .......................................................................................
Total............................................................................................................ $
Income (loss) before income taxes
Franchise operations ....................................................................................... $
Company restaurants.......................................................................................
Rental operations.............................................................................................
Financing operations .......................................................................................
Corporate.........................................................................................................
Income (loss) before income taxes ............................................................ $
Interest Expense
Company restaurants....................................................................................... $
Rental operations.............................................................................................
Corporate.........................................................................................................
Total............................................................................................................ $
Depreciation and amortization
Franchise operations ....................................................................................... $
Company restaurants.......................................................................................
Rental operations.............................................................................................
Corporate.........................................................................................................
Total............................................................................................................ $
Impairment and closure charges
Company restaurants....................................................................................... $
Corporate.........................................................................................................
Total............................................................................................................ $
Capital Expenditures
Company restaurants....................................................................................... $
Corporate.........................................................................................................
Total
$
Goodwill (all franchise segment) ................................................................... $
Total Assets
Franchise operations ....................................................................................... $
Company restaurants.......................................................................................
Rental operations.............................................................................................
Financing operations .......................................................................................
Corporate.........................................................................................................
Total............................................................................................................ $
Year Ended December 31,
2012
2011
(In millions)
2010
421.4
291.1
122.9
14.5
849.9
311.5
41.8
25.7
12.9
(197.0)
194.9
0.4
17.0
114.3
131.7
9.8
6.9
13.6
9.2
39.5
4.2
—
4.2
9.5
7.5
17.0
697.5
1,523.0
186.2
397.3
125.4
183.5
2,415.4
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
398.5
531.0
126.0
19.7
1,075.2
293.5
72.6
27.8
13.7
(302.6)
105.0
0.5
18.0
132.7
151.2
9.9
16.6
14.0
9.7
50.2
2.4
27.5
29.9
15.5
10.8
26.3
697.5
1,472.3
423.1
407.9
136.4
174.6
2,614.3
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
377.1
815.6
124.5
16.4
1,333.6
273.6
116.2
25.5
14.5
(441.9)
(12.1)
0.8
18.9
171.5
191.2
10.0
27.1
13.9
10.4
61.4
4.3
—
4.3
9.5
9.2
18.7
697.5
1,472.2
513.7
425.8
146.8
298.1
2,856.6
95
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information
Certain of our subsidiaries have guaranteed our obligations under the Credit Facility. The following presents the condensed
consolidating financial information separately for: (i) the Parent Company, the issuer of the guaranteed obligations; (ii) the
Guarantor subsidiaries, on a combined basis, as specified in the Credit Agreement; (iii) the Non-guarantor subsidiaries, on a
combined basis; (iv) Consolidating eliminations and reclassification; and (v) DineEquity, Inc. and Subsidiaries on a consolidated
basis.
Each guarantor subsidiary is 100% owned by the Parent Company at the date of each balance sheet presented. The Term
Loans under the Credit Facility are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary.
Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial
statements.
96
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Balance Sheet
December 31, 2012
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-guarantor
Subsidiaries
Eliminations
and
Reclassification
Consolidated
Assets
Current Assets
Cash and cash equivalents ............................... $
Receivables, net ...............................................
Prepaid expenses and other current assets .......
Deferred income taxes .....................................
Intercompany ...................................................
Total current assets...........................................
Long-term receivables .....................................
Property and equipment, net ............................
Goodwill ..........................................................
Other intangible assets, net ..............................
Other assets, net ...............................................
Investment in subsidiaries................................
Total assets....................................................... $
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt ............... $
Accounts payable .............................................
Accrued employee compensation and benefits
Gift card liability..............................................
Other accrued expenses....................................
Total current liabilities.....................................
Long-term debt.................................................
Financing obligations.......................................
Capital lease obligations ..................................
Deferred income taxes .....................................
Other liabilities.................................................
Total liabilities .................................................
Total stockholders' equity ................................
Total liabilities and stockholders' equity.......... $
9.9
2.8
151.3
(3.2)
(394.9)
(234.1)
—
23.2
—
—
18.4
1,697.6
1,505.1
15.4
1.4
9.4
—
(42.5)
(16.3)
1,202.1
—
—
4.7
5.6
1,196.1
309.0
1,505.1
$
$
$
$
54.0
133.7
64.6
24.1
389.0
665.4
212.3
270.2
697.5
806.1
92.3
—
2,743.8
$
$
— $
29.3
13.0
161.7
223.8
427.8
—
52.0
124.4
357.7
91.9
1,053.8
1,690.0
2,743.8
$
$
— $
0.6
0.1
—
0.8
6.0
7.5
—
0.9
—
—
—
—
8.5
$
— $
0.1
—
—
0.5
0.6
—
—
—
(0.2)
0.7
1.1
7.4
8.5
$
(8.0)
(136.3)
—
(144.3)
—
—
—
—
—
(1,697.6)
(1,841.9) $
(8.0) $
(136.3)
(144.3)
—
(144.3)
(1,697.6)
(1,841.9) $
64.5
128.6
79.5
21.8
—
294.5
212.3
294.4
697.5
806.1
110.7
—
2,415.4
7.4
30.8
22.4
161.7
45.5
267.8
1,202.1
52.0
124.4
362.2
98.2
2,106.6
308.8
2,415.4
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
97
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Balance Sheet
December 31, 2011
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-guarantor
Subsidiaries
Eliminations
and
Reclassification
Consolidated
Assets
Current Assets
Cash and cash equivalents ............................... $
Receivables, net ...............................................
Prepaid expenses and other current assets .......
Deferred income taxes .....................................
Assets held for sale ..........................................
Intercompany ...................................................
Total current assets...........................................
Long-term receivables .....................................
Property and equipment, net ............................
Goodwill ..........................................................
Other intangible assets, net ..............................
Other assets, net ...............................................
Investment in subsidiaries................................
Total assets....................................................... $
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt ............... $
Accounts payable .............................................
Accrued employee compensation and benefits
Gift card liability..............................................
Other accrued expenses....................................
Total current liabilities.....................................
Long-term debt.................................................
Financing obligations.......................................
Capital lease obligations ..................................
Deferred income taxes .....................................
Other liabilities.................................................
Total liabilities .................................................
Total stockholders' equity ................................
Total liabilities and stockholders' equity.......... $
9.9
0.6
85.3
1.5
—
(300.2)
(202.9)
—
24.6
—
—
23.2
1,697.6
1,542.5
13.4
2.8
6.7
—
(61.6)
(38.7)
1,411.4
—
—
8.9
5.4
1,387.0
155.5
1,542.5
$
$
$
$
50.4
121.0
56.6
19.0
7.3
294.5
548.8
226.5
449.5
697.5
822.4
93.5
—
2,838.2
$
$
— $
26.2
19.5
147.0
180.6
373.3
—
162.7
134.4
375.3
102.6
1,148.3
1,689.9
2,838.2
$
0.4
0.1
—
0.1
2.1
5.7
8.4
—
—
—
—
0.1
—
8.5
$
$
— $
—
—
—
0.4
0.4
—
—
—
(0.4)
1.1
1.1
7.4
8.5
$
— $
(6.0)
(71.3)
—
—
—
(77.3)
—
—
—
—
—
(1,697.6)
(1,774.9) $
(6.0) $
—
—
—
(71.3)
(77.3)
—
—
—
—
—
(77.3)
(1,697.6)
(1,774.9) $
60.7
115.7
70.6
20.6
9.4
—
276.9
226.5
474.2
697.5
822.4
116.8
—
2,614.3
7.4
29.0
26.2
147.0
48.1
257.6
1,411.4
162.7
134.4
383.8
109.1
2,459.1
155.2
2,614.3
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
98
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2012
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-guarantor
Subsidiaries
Eliminations and
Reclassification
$
Franchise revenues........................................... $
Restaurant sales................................................
Rental revenues................................................
Financing revenues ..........................................
Total revenue...............................................
Franchise expenses...........................................
Restaurant expenses .........................................
Rental expenses................................................
Financing expenses ..........................................
General and administrative ..............................
Interest expense................................................
Impairment and closure charges ......................
Amortization of intangible assets.....................
Loss on extinguishment of debt .......................
Loss (gain) on disposition of assets .................
Other (income) expense ...................................
Income (loss) before income taxes ..................
Benefit (provision) for income taxes ...............
Net income (loss) ............................................ $
2.6
—
—
—
2.6
2.5
—
—
—
36.3
106.1
—
—
5.6
1.2
(220.7)
71.6
56.0
127.6
$
$
417.7
291.1
122.9
14.5
846.2
107.3
249.3
97.2
1.6
124.9
8.2
3.5
12.3
—
(102.2)
—
344.1
(123.2)
220.9
$
$
1.1
—
—
—
1.1
0.1
—
—
—
2.0
—
0.7
—
—
(1.6)
—
(0.1)
—
(0.1) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
220.7
(220.7)
—
(220.7) $
Consolidated
421.4
291.1
122.9
14.5
849.9
109.9
249.3
97.2
1.6
163.2
114.3
4.2
12.3
5.6
(102.6)
—
194.9
(67.2)
127.7
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
99
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2011
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-guarantor
Subsidiaries
Franchise revenues........................................... $
Restaurant sales................................................
Rental revenues................................................
Financing revenues ..........................................
Total revenue...............................................
Franchise expenses...........................................
Restaurant expenses .........................................
Rental expenses................................................
Financing expenses ..........................................
General and administrative ..............................
Interest expense................................................
Impairment and closure charges ......................
Amortization of intangible assets.....................
Loss on extinguishment of debt .......................
Gain on disposition of assets............................
Other (income) expense ...................................
Income (loss) before income taxes ..................
Benefit (provision) for income taxes ...............
Net income (loss) ............................................ $
2.5
—
—
—
2.5
2.1
—
—
—
28.3
117.2
—
—
11.2
—
(150.6)
(5.7)
61.3
55.6
$
$
395.1
529.7
125.8
19.7
1,070.3
102.8
457.6
98.1
6.0
125.3
15.5
29.5
12.3
—
(43.3)
21.2
245.3
(90.9)
154.4
$
$
1.0
1.3
0.1
—
2.4
0.1
0.8
0.1
—
2.2
—
0.4
—
—
—
(1.7)
0.5
(0.2)
0.3
$
Eliminations and
Reclassification
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
135.1
(135.1)
—
(135.1) $
Consolidated
398.5
531.0
126.0
19.7
1,075.2
105.0
458.4
98.2
6.0
155.8
132.7
29.9
12.3
11.2
(43.3)
4.0
105.0
(29.8)
75.2
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
100
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2010
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-guarantor
Subsidiaries
Franchise revenues........................................... $
Restaurant sales................................................
Rental revenues................................................
Financing revenues ..........................................
Total revenue...............................................
Franchise expenses...........................................
Restaurant expenses .........................................
Rental expenses................................................
Financing expenses ..........................................
General and administrative ..............................
Interest expense................................................
Impairment and closure charges ......................
Amortization of intangible assets.....................
Loss on extinguishment of debt .......................
(Gain) loss on disposition of assets..................
Other (income) expense ...................................
Intercompany dividend ....................................
Income (loss) before taxes ...............................
Benefit (provision) for income taxes ...............
Net income (loss) ............................................ $
— $
—
—
—
—
—
—
—
—
27.4
27.8
—
—
4.4
—
0.3
(409.3)
349.4
22.6
372.0
$
376.8
813.6
124.3
16.4
1,331.1
103.5
698.0
98.9
2.0
130.7
143.8
3.1
12.3
102.6
(13.9)
(75.1)
—
125.2
(17.3)
107.9
$
$
0.7
2.0
0.2
—
2.9
—
1.3
0.1
—
2.2
—
1.2
—
—
0.3
0.1
—
(2.3)
4.0
1.7
$
Eliminations and
Reclassification
$
(0.4) $
—
—
—
(0.4)
—
—
—
—
—
—
—
—
—
—
74.7
409.3
(484.4)
—
(484.4) $
Consolidated
377.1
815.6
124.5
16.4
1,333.6
103.5
699.3
99.0
2.0
160.3
171.5
4.3
12.3
107.0
(13.6)
—
—
(12.1)
9.3
(2.8)
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
101
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2012
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-
guarantor
Subsidiaries
Eliminations and
Reclassification
Consolidated
— $
$
0.4
(4.9)
182.5
—
—
—
(130.1) $
—
—
—
—
(4.9)
—
—
—
(12.0)
12.2
168.9
1.2
Cash flows provided by (used in) operating
activities .......................................................... $
Investing cash flows
Additions to property and equipment ..............
Principal receipts from long-term receivables .
Proceeds from sale of assets ............................
Other ................................................................
Cash flows provided by (used in) investing
activities ..........................................................
Financing cash flows
Revolving credit borrowings............................
Revolving credit repayments ...........................
Payment of debt ...............................................
Payment of debt issuance costs........................
Purchase of DineEquity common stock...........
Restricted cash .................................................
Other ................................................................
Intercompany transfers.....................................
Cash flows provided by (used in) financing
activities ..........................................................
Net change .......................................................
Beginning cash and equivalents.......................
Ending cash and equivalents......................... $
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
50.0
(50.0)
(216.0)
—
—
—
11.8
339.2
—
—
(10.9)
—
—
(0.7)
1.4
(339.0)
—
—
—
—
—
—
—
(0.2)
(349.2)
3.6
50.4
54.0
135.0
—
9.9
9.9
—
—
—
—
—
—
—
—
(0.2)
0.2
0.4
0.6
170.3
—
—
$
$
—
—
—
— $
52.9
(17.0)
12.3
168.9
1.2
165.4
50.0
(50.0)
(226.9)
—
—
(0.7)
13.2
—
(214.5)
3.8
60.7
64.5
102
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2011
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-
guarantor
Subsidiaries
Eliminations and
Reclassification
Consolidated
— $
$
(6.7)
(0.3)
261.4
(139.4) $
—
—
—
—
—
—
—
—
(6.7)
—
—
—
(19.6)
13.1
115.6
(0.7)
Cash flows provided by (used in) operating
activities .......................................................... $
Investing cash flows
Additions to property and equipment ..............
Principal receipts from long-term receivables .
Proceeds from sale of assets ............................
Other ................................................................
Cash flows provided by (used in) investing
activities ..........................................................
Financing cash flows
Revolving credit borrowings............................
Revolving credit repayments ...........................
Payment of debt ...............................................
Payment of debt issuance costs........................
Purchase of DineEquity common stock...........
Restricted cash .................................................
Other ................................................................
Intercompany transfers.....................................
Cash flows provided by (used in) financing
activities ..........................................................
Net change .......................................................
Beginning cash and equivalents.......................
Ending cash and equivalents......................... $
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
40.0
(40.0)
(225.7)
(12.3)
(21.2)
—
6.2
385.6
—
—
(13.4)
—
—
0.5
0.9
(384.7)
—
—
—
—
—
—
—
(0.9)
(396.7)
(26.9)
77.3
50.4
132.6
(13.5)
23.4
9.9
—
—
—
—
—
—
—
—
(0.9)
(1.2)
1.6
0.4
108.4
—
—
$
$
—
—
—
— $
121.7
(26.3)
13.1
115.6
(0.8)
101.7
40.0
(40.0)
(239.1)
(12.3)
(21.2)
0.5
7.1
—
(265.0)
(41.6)
102.3
60.7
103
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2010
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-
guarantor
Subsidiaries
Eliminations and
Reclassification
Consolidated
$
$
21.0
(5.5)
(1.5)
159.8
— $
—
—
—
—
—
—
2.7
—
(8.5)
3.0
—
—
(10.2)
16.5
48.9
1.1
Cash flows provided by (used in) operating
activities .......................................................... $
Investing cash flows
Additions to property and equipment ..............
Principal receipts from long-term receivables .
Proceeds from sale of assets ............................
Other ................................................................
Cash flows provided by (used in) investing
activities
Financing cash flows
Issuance of debt................................................
Payment of debt ...............................................
Payment of debt issuance costs........................
Redemption of Series A preferred stock..........
Dividends .........................................................
Restricted cash .................................................
Other ................................................................
Intercompany transfers.....................................
Cash flows provided by (used in) financing
activities ..........................................................
—
7.9
—
23.4
Net change .......................................................
—
—
Beginning cash and equivalents.......................
Ending cash and equivalents......................... $
— $
23.4
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
—
(1,738.1)
—
—
—
119.1
1.1
1,398.2
1,725.0
(56.0)
(57.6)
(190.0)
(26.1)
—
9.8
(1,397.2)
—
—
—
—
—
—
—
(1.0)
(219.7)
(3.6)
80.9
77.3
—
—
—
—
—
—
—
—
(1.0)
0.2
1.4
1.6
56.3
2.7
—
$
$
179.3
(18.7)
19.4
51.6
1.1
53.5
1,725.0
(1,794.1)
(57.6)
(190.0)
(26.1)
119.1
10.9
—
(212.8)
20.0
82.3
102.3
104
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
22. Selected Quarterly Financial Data (Unaudited)
Revenues(a)
Operating
Margin
Net Income
(Loss) (b)
Net Income
(Loss)
Per Share—
Basic(c)
Net Income
(Loss)
Per Share—
Diluted(c)
(In thousands, except per share amounts)
$
$
245,582
229,391
216,318
158,637
300,200
268,338
264,481
242,179
$
$
108,575
98,254
96,377
88,738
110,769
100,285
100,553
96,022
$
$
31,344
16,938
60,573
18,819
29,699
348
16,525
28,620
$
$
1.69
0.89
3.26
0.98
1.59
(0.02)
0.86
1.55
1.64
0.88
3.14
0.97
1.53
(0.02)
0.85
1.51
2012
1st Quarter ................................................ $
2nd Quarter ...............................................
3rd Quarter................................................
4th Quarter................................................
2011
1st Quarter ................................................ $
2nd Quarter(d) ............................................
3rd Quarter................................................
4th Quarter................................................
________________________________
(a) Revenues have been impacted by the refranchising of 286 Applebee's company-operated restaurants over the past two years
as follows: 17 in the first quarter of 2012, 98 in the third quarter of 2012, 39 in the fourth quarter of 2012, 65 in the first
quarter of 2011, one in the third quarter of 2011 and 66 in the fourth quarter of 2011.
(b) Net income (loss) was impacted by gains on disposition of assets (primarily the refranchising and sale of related restaurant
assets of Applebee's company-operated restaurants) of $16.7 million in the first quarter of 2012, $73.6 million in the third
quarter of 2012, $13.0 million in the fourth quarter of 2012, $23.8 million in the first quarter of 2011 and $22.0 million in the
fourth quarter of 2011.
(c) The quarterly amounts may not add to the full year amount as each quarterly calculation is discrete from the full-year calculation.
(d) The net income and net loss per share were significantly impacted by approximately $21 million of charges related to the
termination of the sublease for the Applebee's Restaurant Support Center in Lenexa, Kansas in the 2nd quarter of 2011.
23. Subsequent Events
On February 4, 2013, the Company entered into Amendment No. 2 ("Amendment No. 2") to the Credit Agreement. Pursuant
to Amendment No. 2, the interest rate margin applicable to LIBOR-based Term Loans was reduced from 3.00% to 2.75%, and the
interest rate floors used to determine the LIBOR and Base Rate reference rates for Term Loans was reduced from 1.25% to 1.00%
for LIBOR-based Term Loans and from 2.25% to 2.00% for Base Rate-denominated Term Loans. The interest rate margin for
Revolving Loans was reduced from 3.50% to 1.75% for Base Rate loans and from 4.50% to 2.75% LIBOR Rate loans. The
commitment fee for the unused portion of the Revolving Facility was reduced from 0.75% to 0.50% and, if the consolidated
leverage ratio is reduced below 4.75:1, from 0.50% to 0.375%.
In addition, Amendment No. 2 establishes the following consolidated leverage ratio thresholds for excess cash flow
prepayments: 50% if the consolidated leverage ratio is 5.75:1 or greater; 25% if the consolidated leverage ratio is less than 5.75:1
and greater than or equal to 5.25:1; and 0% if the consolidated leverage ratio is less than 5.25:1. Pursuant to Amendment No. 2,
the Corporation’s mandatory repayment of 1% per year is now based on the outstanding principal balance of $472 million as of
December 31, 2012, as compared to the previous outstanding balance of $742 million.
Amendment No. 2 revised the definition of excess cash flow to eliminate the deduction for any extraordinary receipts or
disposition proceeds. Finally, Amendment No. 2 revised the definition of certain permitted payments so that the calculation of
allowable restricted payments is performed on a quarterly basis instead of an annual basis that was required prior to Amendment
No. 2. All other material provisions, including maturity and covenants under the Credit Agreement, remain unchanged.
On February 26, 2013, the Company's Board of Directors approved the payment of a cash dividend of $0.75 per share on the
Company's common stock, payable at the close of business on March 29, 2013 to the stockholders of record as of the close of
business on March 15, 2013. The Board of Directors also approved a stock repurchase authorization of up to $100 million of
DineEquity, Inc. common stock, replacing the previously announced $45 million authorization.
105
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of DineEquity, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of DineEquity, Inc. and Subsidiaries as of December 31, 2012
and 2011, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of DineEquity, Inc. and Subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
DineEquity, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2012, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 27, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 27, 2013
106
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such terms are defined in Rule 13a-15(e) and 15d-15(e) promulgated
under the Exchange Act of 1934, as amended, that are designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing
and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls
and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their assessment as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012
based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on that evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2012.
The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report that appears herein.
107
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of DineEquity, Inc. and Subsidiaries
We have audited DineEquity, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). DineEquity, Inc. and Subsidiaries' management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, DineEquity, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets of DineEquity, Inc. and Subsidiaries as of December 31, 2012 and 2011 and the related
consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2012 of DineEquity, Inc. and Subsidiaries and our report dated February 27, 2013 expressed
an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 27, 2013
108
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2012 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item regarding our directors and executive officers is incorporated by reference to our Proxy
Statement for the 2013 Annual Meeting of Shareholders ("2013 Proxy Statement") to be filed with the SEC within 120 days after
the end of our fiscal year ended December 31, 2012.
Item 11. Executive Compensation.
The information required by this Item regarding executive compensation is incorporated by reference to the sections entitled
"Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee
Report" to be set forth in our 2013 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item regarding security ownership and management is incorporated by reference to the
sections entitled "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance
under Equity Compensation Plans" to be set forth in our 2013 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item regarding certain relationships and related transactions is incorporated by reference to
the sections entitled "Certain Relationships and Related Transactions," and "Director Independence" to be set forth in our 2013
Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item regarding principal accountant fees and services is incorporated by reference to the
section entitled "Independent Auditor Fees" to be set forth in our 2013 Proxy Statement.
109
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Consolidated Financial Statements
PART IV
The following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K:
Consolidated Balance Sheets as of December 31, 2012 and 2011.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2012.
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended
December 31, 2012.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2012.
Notes to the Consolidated Financial Statements.
Reports of Independent Registered Public Accounting Firm.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
Exhibits that are not filed herewith have been previously filed with the Securities and Exchange Commission and are
incorporated herein by reference.
3.1 Restated Certificate of Incorporation of DineEquity, Inc. (Exhibit 99.3 to Registrant's Form 8-K dated December
18, 2012 is incorporated herein by reference).
3.2 Amended Bylaws of DineEquity, Inc. (Exhibit 3.2 to Registrant's Form 8-K dated June 2, 2008 is incorporated
herein by reference).
4.1 Indenture dated as of October 19, 2010, by and among DineEquity, Inc., the guarantors party thereto and Wells
Fargo Bank, National Association (Exhibit 4.1 to Registrant's Form 8-K, filed October 21, 2010 is incorporated
herein by reference).
†10.1 Employment Agreement between DineEquity, Inc. and Julia A. Stewart dated November 1, 2008 (Exhibit 10.4
to Registrant's Form 10-K for the year ended December 31, 2008 is incorporated herein by reference).
†10.2 Amended and Restated Employment Agreement between DineEquity, Inc. and Thomas W. Emrey dated April 4,
2012 (Exhibit 10.1 to Registrant's Form 8-K filed on April 5, 2012 is incorporated by reference).
†10.3 Employment Agreement between DineEquity, Inc. and Michael Archer dated November 1, 2008 (Exhibit 10.3 to
Registrant's Form 10-K for the year ended December 31, 2008 is incorporated herein by reference).
†10.4 Employment Offer Letter between DineEquity, Inc. and Bryan Adel dated August 2, 2010 (Exhibit 10.5 to
Registrant's Form 10-K for the year ended December 31, 2010 is incorporated herein by reference).
†10.5 Area Franchise Agreement, effective as of May 5, 1988, by and between IHOP, Inc. and FMS Management
Systems, Inc. (Exhibit 10.8 to Registrant's 2002 Form 10-K is incorporated herein by reference).
†10.6 DineEquity, Inc. 2011 Stock Incentive Plan (Annex A to Registrant's Proxy Statement, filed on April 13, 2011 is
incorporated herein by reference).
.
†10.7 DineEquity Inc. 2011 Stock Incentive Plan Non Qualified Stock Option Agreement (Non-Employee Directors)
(Exhibit 10.9 to Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by
reference).
†10.8 DineEquity Inc. 2011 Stock Incentive Plan Non Qualified Stock Option Agreement (Employees) (Exhibit 10.10
to Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.9 DineEquity Inc. 2011 Stock Incentive Plan Restricted Stock Award Agreement (Non-Employee Directors)
(Exhibit 10.11 to Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by
reference).
†10.10 DineEquity Inc. 2011 Stock Incentive Plan Restricted Stock Award Agreement (Employees) (Exhibit 10.12 to
Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.11 DineEquity Inc. 2011 Stock Incentive Plan Cash-Settled Restricted Stock Unit Award Agreement (Employees)
(Exhibit 10.13 to Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by
reference).
110
†10.12 DineEquity Inc. 2011 Stock Incentive Plan Cash-Settled Restricted Stock Unit Award Agreement (Non-
Employee Directors) (Exhibit 10.14 to Registrant's Form 10-K for the year ended December 31, 2011 is
incorporated herein by reference).
†10.13 DineEquity Inc. 2011 Stock Incentive Plan Stock-Settled Restricted Stock Unit Award Agreement (Employees)
(Exhibit 10.15 to Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by
reference).
†10.14 DineEquity Inc. 2011 Stock Incentive Plan Stock-Settled Restricted Stock Unit Award Agreement (Non-
Employee Directors) (Exhibit 10.16 to Registrant's Form 10-K for the year ended December 31, 2011 is
incorporated herein by reference).
†10.15 DineEquity Inc. 2011 Stock Incentive Plan Stock Appreciation Rights Agreement (Exhibit 10.17 to Registrant's
Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.16 DineEquity Inc. 2011 Stock Incentive Plan Performance Share Award Agreement (50/50) (Exhibit 10.18 to
Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.17 DineEquity Inc. 2011 Stock Incentive Plan Performance Share Award Agreement (Exhibit 10.19 to Registrant's
Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.18 DineEquity Inc. 2011 Stock Incentive Plan Performance Unit Award Agreement (Exhibit 10.20 to Registrant's
Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.19 DineEquity Inc. 2011 Stock Incentive Plan Restricted Stock Award Agreement - Refranchising Employees
(Exhibit 10.21 to Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by
reference).
†10.20 IHOP Corp. 2001 Stock Incentive Plan Non-qualified Stock Option Agreement (Exhibit 10.15 to Registrant's
2003 Form 10-K is incorporated herein by reference).
†10.21 IHOP Corp. 2005 Stock Incentive Plan for Non-Employee Directors (Appendix "A" to Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on May 24, 2005 is incorporated herein by reference).
†10.22 IHOP Corp 2001 Stock Incentive Plan as amended and restated (Appendix "A" to Registrant's Proxy Statement,
filed on April 17, 2008 is incorporated herein by reference).
†10.23 IHOP Corp 2008 Senior Executive Incentive Plan as amended and restated (Appendix "B" to Registrant's Proxy
Statement, filed on April 17, 2008 is incorporated herein by reference).
†10.24 DineEquity, Inc. Amended and Restated Executive Severance and Change in Control Policy (Exhibit 10.26 to
Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.25 Form of DineEquity, Inc. Indemnification Agreement (Exhibit 10.27 to Registrant's Form 10-K for the year
ended December 31, 2011 is incorporated herein by reference).
†10.26 IHOP Corp. Deferred Compensation Plan effective January 1, 2003 (Exhibit 10.16 to Registrant's 2009
Form 10-K is incorporated herein by reference).
†10.27 DineEquity, Inc. 2010 Cash Long Term Incentive Plan (LTIP) for Company Officers (Exhibit 10.29 to
Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.28 DineEquity, Inc. 2011 Cash Long Term Incentive Plan (LTIP) for Company Officers (Exhibit 10.30 to
Registrant's Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
10.29 Credit Agreement dated as of October 8, 2010, by and among DineEquity, Inc., Barclays Bank PLC, as
administrative agent, Raymond James Realty, Inc., as Documentation Agent, Barclays Capital, as Joint Lead
Arranger and Joint Book Manager, and Goldman Sachs Bank USA, as Joint Lead Arranger, Joint Book Manager
and Syndication Agent, and the lenders and other financial institutions party thereto (Exhibit 10.2 to Registrant's
Form 8-K, filed October 21, 2010 is incorporated herein by reference).
10.30 Amendment No. 1 dated February 25, 2011 to the Credit Agreement among the Corporation, as Borrower, each
lender from time to time party thereto, Barclays Bank, PLC, as Administrative Agent, and the other agents
named therein (Exhibit 10.1 to Registrant's Form 8-K, filed February 28, 2011 is incorporated herein by
reference).
10.31 Amendment No. 2 dated February 4, 2013 to the Credit Agreement among the Corporation, as Borrower, each
lender from time to time party thereto, Barclays Bank, PLC, as Administrative Agent, and the other agents
named therein (Exhibit 10.1 to Registrant's Form 8-K, filed February 5, 2013 is incorporated herein by
reference).
10.32 Asset Purchase Agreement, Applebee's Neighborhood Grill & Bar Restaurants located in the Western Michigan
and Detroit Markets, dated July 20, 2012, including amendments and exhibits thereto (Exhibit 10.1 to
Registrant's Form 10-Q, filed July 31, 2012 is incorporated herein by reference).
*12.1 Computation of Consolidated Leverage Ratio and Cash Interest Coverage Ratio for the Trailing Twelve Months
Ended December 31, 2012.
14.0 IHOP Corp. Code of Ethics for Chief Executive and Senior Financial Officers (Exhibit 14.0 to Registrant's 2004
Form 10-K is incorporated herein by reference).
111
*21 Subsidiaries of DineEquity, Inc.
*23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
*31.1 Certification of CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
*31.2 Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
*32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
*32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
___________________________________
*
†
Filed herewith.
A contract, compensatory plan or arrangement in which directors or executive officers are eligible to participate.
112
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 27th day of February 2013.
SIGNATURES
DINEEQUITY, INC.
By:
/s/ JULIA A. STEWART
Julia A. Stewart
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant, and in the capacities indicated, on this 27th day of February 2013.
Name
/s/ JULIA A. STEWART
Julia A. Stewart
/s/ THOMAS W. EMREY
Thomas W. Emrey
/s/ GREGGORY KALVIN
Greggory Kalvin
/s/ RICHARD J. DAHL
Richard J. Dahl
/s/ HOWARD M. BERK
Howard M. Berk
/s/ DANIEL J. BRESTLE
Daniel J. Brestle
/s/ MICHAEL S. GORDON
Michael S. Gordon
/s/ STEPHEN P. JOYCE
Stephen P. Joyce
/s/ LARRY A. KAY
Larry A. Kay
/s/ CAROLINE W. NAHAS
Caroline W. Nahas
/s/ GILBERT T. RAY
Gilbert T. Ray
/s/ PATRICK W. ROSE
Patrick W. Rose
Chairman and Chief Executive Officer (Principal Executive Officer)
Title
Chief Financial Officer (Principal Financial Officer)
Senior Vice President, Corporate Controller (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
113
DINEEQUITY, INC.
Computation of Consolidated Leverage Ratio and Cash Interest Coverage Ratio
for the Trailing Twelve Months Ended December 31, 2012
Exhibit 12.1
Consolidated Leverage Ratio Calculation:
Financial Covenant Debt(1)......................................................................................................... $
Consolidated EBITDA(1) ............................................................................................................
Leverage Ratio ...........................................................................................................................
Consolidated Interest Coverage Ratio Calculation:
Consolidated EBITDA(1) ............................................................................................................ $
Consolidated Cash Interest Charges(1)........................................................................................
Interest Coverage Ratio ..............................................................................................................
1,367,602
300,251
4.6
300,251
120,702
2.5
(1) Definitions of all components used in calculating the above ratios are found in the Credit Agreement, dated
October 8, 2010, filed as Exhibit 10.2 to our Current Report on Form 8-K filed on October 21, 2010.
SUBSIDIARIES OF DINEEQUITY, INC.
As of December 31, 2012
Exhibit 21
Name of Entity
DineEquity, Inc.
International House of Pancakes, LLC
III Industries of Canada, LTD.
IHOP of Canada ULC
IHOP Holdings, LLC
IHOP Franchising, LLC
IHOP Property Leasing, LLC
IHOP Properties, LLC
IHOP Real Estate, LLC
IHOP IP, LLC
IHOP Franchise Company, LLC
IHOP TPGC, LLC
ACM Cards, Inc.
Anne Arundel Apple Holding Corporation
Applebee's Brazil, LLC
Applebee's Canada Corp.
Applebee's International, Inc.
Applebee's Investments, LLC
Applebee's Restaurantes Brasil, LTDA.
Applebee's Restaurantes De Mexico S.de R.L. de C.V.
Applebee's UK, LLC
Applebee's Restaurant Holdings, LLC
Applebee's Restaurants Kansas, LLC
Applebee's Restaurants Mid-Atlantic, LLC
Applebee's Restaurants North, LLC
Applebee's Restaurants Texas, LLC
Applebee's Restaurants Vermont, Inc.
Applebee's Restaurants West, LLC
Applebee's Restaurants, Inc.
Applebee's Services, Inc.
Gourmet Systems of Brazil, LLC
Gourmet Systems of Massachusetts, LLC
Gourmet Systems of New York, Inc.
Gourmet Systems of Tennessee, Inc.
Gourmet Systems USA, LLC
Neighborhood Insurance, Inc.
Shanghai Applebee's Restaurant Management Co. LTD.
Applebee's Foundation, Inc. (dba The Heidi Fund, Inc.)
State or Other
Jurisdiction of
Incorporation or
Organization
DE
DE
Canada
Canada
DE
DE
DE
DE
DE
DE
DE
OH
FL
MD
KS
Canada
DE
KS
Brazil
Mexico
KS
DE
KS
DE
DE
TX
VT
DE
KS
KS
KS
MA
NY
TN
KS
VT
Xuhui District, Puxi, China
KS
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
•
•
•
•
Form S-8 No. 333-71768 pertaining to the IHOP Corp. 2001 Stock Incentive Plan of DineEquity, Inc. and
Subsidiaries;
Form S-8 No. 333-149771 pertaining to the IHOP Corp. 2005 Stock Incentive Plan for Non-Employee Directors;
Form S-8 No. 333-174847 pertaining to the DineEquity, Inc. 2011 Stock Incentive Plan; and
Form S-4/A No. 333-173549 pertaining to the 9.5% Senior Notes due 2018
of our reports dated February 27, 2013, with respect to the consolidated financial statements of DineEquity, Inc. and Subsidiaries
and the effectiveness of internal control over financial reporting of DineEquity, Inc. and Subsidiaries, included in this Annual
Report (Form 10-K) for the year ended December 31, 2012.
/s/ Ernst & Young LLP
Los Angeles, California
February 27, 2013
Exhibit 31.1
Certification Pursuant to
Rule 13a-14(a) of the
Securities Exchange Act of 1934, As Amended
I, Julia A. Stewart, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DineEquity, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2013
/s/ JULIA A. STEWART
Julia A. Stewart
Chairman and Chief Executive Officer
Exhibit 31.2
Certification Pursuant to
Rule 13a-14(a) of the
Securities Exchange Act of 1934, As Amended
I, Thomas W. Emrey, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DineEquity, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2013
/s/ THOMAS W. EMREY
Thomas W. Emrey
Chief Financial Officer (Principal Financial Officer)
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of DineEquity, Inc. (the "Company") for the year ended
December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Julia A.
Stewart, Chairman and Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: February 27, 2013
/s/ JULIA A. STEWART
Julia A. Stewart
Chairman and Chief Executive Officer
________________________________________________________________________________________________________________________
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not,
except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18
of the Securities Exchange Act of 1934, as amended.
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of DineEquity, Inc. (the "Company") for the year ended
December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas W.
Emrey, as Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: February 27, 2013
/s/ THOMAS W. EMREY
Thomas W. Emrey
Chief Financial Officer
(Principal Financial Officer)
________________________________________________________________________________________________________________________
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not,
except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18
of the Securities Exchange Act of 1934, as amended.
Corporate Offices
Investor Information
DineEquity, Inc.
450 North Brand Blvd.
Glendale, CA 91203-2306
866-995-DINE
www.dineequity.com
Stock Transfer Agent
Computershare
P.O. Box 43006
Providence, RI 02940-3006
Toll Free within the U.S.: (866) 282-3708
Foreign Shareholders:
(201) 680-6578
Hearing Impaired:
(800) 952-9245
www.computershare.com/investor
Independent Accountants
Ernst & Young LLP
Los Angeles, CA
DineEquity’s common stock is traded on
the New York Stock Exchange under the
symbol “DIN.” For more information on
DineEquity, you may visit the Investor
Information section of the Company’s
Web site at www.dineequity.com for
current news, investor conference calls and
presentations, and Company filings with the
Securities and Exchange Commission,
among other information. Investor inquiries
may be submitted to DineEquity’s Investor
Relations department via mail addressed to
the Company’s corporate offices, or by
telephone at 866-995-DINE.
Pursuant to Rule 303A.12 of the New York
Stock Exchange Listed Companies Manual,
each listed company CEO must certify to
the NYSE each year that he or she is
not aware of any violation by the company
of NYSE corporate governance listing
standards. Julia Stewart’s annual CEO
certification regarding the NYSE’s corpo-
rate governance listing standards was
submitted to the NYSE on June 11, 2012.
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