We believeinnovation
innovation
in our restaurants
in our culture
in our business model
in our culinary pipeline
in our consumer-facing technology
in our advertising
in our social media
in everything we do
2013 Annual Report
Everyone starts with the same ingredients.
5+ million
252,054
3.7 million
64,010
Facebook Likes
Twitter Followers
Social media growth
We dramatically expanded Applebee’s®
social media presence from 3.7 million to over
5 million Facebook Likes, and from 64,010 to
252,054 Twitter followers by year’s end.
From 2012 to 2013, direct @mentions to
IHOP® (@IHOP) more than doubled—going
from 47K to 141K, and tweets containing the
word IHOP stayed consistent at 4 million.
Industry-leading marketing
Applebee’s Food Network® vignettes were
among the highest scoring spots in Applebee’s
history, and secured one of the top-rated spots
across the casual dining category in 2013.1
1 Source: Advertising benchmarking scores provided by Ace Metrix.
Everyone starts with the same ingredients.
252,054
64,010
Twitter Followers
Record-setting stock performance
DineEquity®’s stock reached an
all-time intraday high of $85.74
on November 25, 2013.
$85.74
per share
Tech to table
100,000 tablets
in 1,800 Applebee’s®
In December 2013, Applebee’s announced
the rollout of 100,000 tabletop tablet devices.
So, what do we
do differently?
Best in breakfast
IHOP®’s newly designed menu
launched in over 1,500 restaurants in
June 2013, and has helped to enhance
sales performance, bolster our lead in
the Family Dining category, and create
a better guest experience.
new menus in
1,500+
IHOP locations
Even more international
In 2013, IHOP restaurants opened for the first
time in Saudi Arabia, Kuwait, and the Philippines.
Additionally, Applebee’s expanded into Egypt and
the Dominican Republic.
13DINE01_AR13_BL1.indd 5
1
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‘‘ At DineEquity® we all contri
Julia Stewart
Chairman and Chief Executive Officer
To our DineEquity Family of Shareholders,
What drives our company forward? I believe it’s our
willingness to innovate and evolve in every aspect of
our business. With two iconic brands that have each
retained the number one position 2 in their respective
categories for six consecutive years, our strategy has
served us well. With over 3,600 restaurants system-wide,
DineEquity is 99% franchised and one of the largest
full-service restaurant companies in the world. Today,
we’re applying innovation to our business and brands
with an eye toward creating an insurmountable lead for
the long term. We’re capitalizing on the strengths of
our brands and looking at fresh new ways to evolve
the guest experience, expand our appeal, and win the
hearts and minds of core and prospective guests. To
accomplish this, w e’re testing new culinary off erings,
continuing to collaborate with franchisees, and inno-
vating our brands at every touch point, with newly
remodeled restaurants, compelling marketing and
advertising, menu refreshes at key times of the year,
a new technology platform at the table, and more.
Innovating to drive growth
Looking ahead, we’re focusing our innovative approach
in key areas and enhancing our ability to evolve in support
of our goals. Internally, we’re optimizing our organizational
structure, and leveraging resources across both brands
2
DineEquity 2013 Annual Report
2 Nation’s Restaurant News, “Top 100,” June 24, 2013 [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.]
3 www.fastcompany.com/most-innovative-companies/2013/industry/food.
13DINE01_AR13_BL1.indd 6
3/31/14 4:46 PM
‘‘ At DineEquity® we all contri bute to innovation—
whether we’re creating
efficiency, or introducing
a new menu item or idea.”
Julia Stewart
whenever possible, to benefit our fully franchised busi-
ness model. We’re also very proud of the culture we
have cultivated, and are working to build even stronger
relationships with our franchisees.
Managing capital to create value
From a financial management perspective, our growth
strategy encompasses maximizing our free cash flow, while
maintaining a disciplined approach to general and admin-
Applebee’s ranked #2 in Fast Company’s
“2013 Most Innovative Companies in Food.”3
istrative (G&A) expenses and
capital spending. Doing so will
allow us to retain our financial
flexibility and return cash to
shareholders. To this end, we
will drive value for our fran-
chisees and shareholders by
leveraging our brands, our
people and our financial capital.
We also believe that refinancing our debt is of great impor-
tance. We continue to thoroughly evaluate our options
and manage our cash flow, so that we can position the
company to successfully refinance when the time is right.
Expanding our presence
Another facet of our long-term growth strategy involves
expanding the Applebee’s and IHOP brands internationally.
We see growth potential for our brands in international
markets, and are investing in the necessary resources to
capitalize in this area. Our research shows that casual
dining and family dining remain underdeveloped categories
in most of the world. With two category-leading brands—
3
3/31/14 4:46 PM
At the same time, we’re strengthening our Applebee’s®
and IHOP® brands and improving operations. One of the
core tenets of our growth plan involves driving traffic to
our restaurants by continually delighting our guests and
exceeding their expectations. In order to accomplish this,
we are always talking to our guests across all dayparts,
ensuring that we are keeping things fresh and relevant
with our culinary offerings and marketing, service plat-
forms, décor and development. It’s all part of driving
traffic growth with current guests and attracting new
ones, which we believe will contribute to positive and
sustainable same-restaurant sales and traffic.
13DINE01_AR13_BL1.indd 7
a distinct point of differentiation for aspiring franchisees
—we are uniquely positioned to take advantage of this
opportunity.
In 2013, we made meaningful progress toward this goal.
We announced the creation of our International Division,
which combined both existing brand teams and added
additional expertise. We are now geared toward driving
growth in key international markets, while creating
synergies for our franchise partners. The new division is
domestic system-wide remodel, which we expect our
franchisees to have nearly completed by year-end 2014.
At the same time, we are conducting consumer research
for the next IHOP remodel. We completed the focus
groups and franchisee study of the new remodel design,
and will enter the test phases in 2014.
Realizing efficiencies through synergy
At the operational level, the independent purchasing
cooperative which we formed with domestic franchisees
In late 2013, the first IHOP Express®
opened— at the busiest passenger
airport in the world.
of Applebee’s and IHOP in
2009, Centralized Supply
Chain Services, LLC (CSCS),
has been a consistent driver
of innovation for DineEquity.
CSCS® continues to serve
as a point of competitive
differentiation for franchisees
and guests. CSCS enables our
franchisees to procure items
at a lower cost, allowing
them to pass on the savings
to guests and create value. In 2013, CSCS helped our
franchisees minimize their costs by approximately $51
million combined. During the last 5 years, CSCS has gener-
ated total net savings and cost avoidances for Applebee’s
and IHOP of roughly $171 million.
Free cash flow 4
(in millions)
2011 $88
2012 $305
2013 $120
supported by the addition of team members who bring
international franchising experience to our organization.
International development at IHOP® exceeded our expec-
tations, with franchisees opening 12 new restaurants, for
the best year ever. For the first time, IHOP restaurants are
located in Saudi Arabia, Kuwait and the Philippines, and
Applebee’s® has expanded into Egypt and the Dominican
Republic. We are extremely pleased to add successful,
high-growth oriented franchisees to our system. Franchisees
may choose from many different franchise options, and
we believe that their decision to partner with DineEquity®
speaks to the immense value of our system.
When it comes to development, we’re also innovating by
working to expand in non-traditional locations, such as
airports. In 2013, the first IHOP Express airport location
opened at Hartsfield Jackson Atlanta International Airport.
We look forward to bringing the Applebee’s and IHOP
experience to guests in more non-traditional locations.
Creating excitement with remodels
Comprehensive restaurant remodels are another way that
we and our franchisees keep our brands fresh. Through-
out 2013, we’ve made great strides with the Applebee’s
4
DineEquity 2013 Annual Report
13DINE01_AR13_BL1.indd 8
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Our Shared Services platform is another competitive
advantage for DineEquity, and we continued to evolve
it further this year. We use this operational platform to
strategically leverage the resources and expertise of our
scalable, centralized support structure, freeing up the
Applebee’s and IHOP teams to focus on the key factors
that drive their brands. Last year, we added Centers
of Excellence to our Shared Services model, to help
Applebee’s and IHOP achieve synergies across the
organization by sharing best practices and common
approaches to the many challenges and opportunities
that the brands face. Today, I’m happy to report that
we’ve raised resource and idea sharing to a whole new
level across our organization.
Achieving new milestones in stock performance
In 2013, our stock performance achieved new milestones:
after reaching an all-time intraday high of $85.74 on
November 25, 2013, our stock attained an all-time interday
high of $84.58 on December 26, 2013. Total debt has
been reduced by over $1 billion since the acquisition
of Applebee’s® in 2007. Our free cash flow generating
business model enabled us to initiate a meaningful return
of capital to shareholders in 2013. Additionally, since 2007,
our prudent cost management has helped us to reduce
G&A expenses by more than 25%. During this time ,
free cash flow increased by 12% to $120.1 million in 2013.
Since the first full year following the acquisition, capital
expenditures declined by 78% to $7.0 million in 2013.
Evolving together
As I look across our business, I can see the many ways that
our team members and franchisees drive our innovation
and evolution. At DineEquity,® each of us can contribute in a
meaningful way to our company’s continued leadership and
success. And we do—by reducing costs, creating efficiency,
introducing fresh menu items, rolling out new campaigns,
or simply putting something in place that didn’t exist
yesterday. I’m extremely proud of how far we’ve come and
look forward to sharing our progress in the years ahead.
I would like to express my sincere thanks to my executive
team, our Board of Directors, team members, franchisees,
the purchasing cooperative, vendor partners, and to you,
our shareholders, for your continued support.
Julia A. Stewart
Chairman and Chief Executive Officer
DineEquity, Inc.
Capital expenditures
(in millions)
General & administrative expenses
(in millions)
2011 $26.3 6
2012 $17.0
2013 $7.0
2011 $155.8
2012 $163.27
2013 $143.6
4 Free cash flow for a given period is defined as cash provided by operating activities, plus receipts from notes and equipment contracts receivables, less principal payments on capital lease and
financing obligations, the mandatory 1% of Term Loan principal balance repayment, and capital expenditures. See non-U.S. GAAP financial measure reconciliation of cash provided by operating
activities to free cash flow in the Company’s 2013 Form 10-K filing.
5 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.
6 Capital expenditures increased from $18.7 million in 2010 due primarily to the remodeling of company-operated restaurants and increases in information technology infrastructure expenditures.
7 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.
5
13DINE01_AR13_BL1.indd 9
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6 DineEquity 2013 Annual ReportTogether we innovate.13DINE01_AR13_BL1.indd 103/31/14 4:46 PM At DineEquity,® innovation is a cornerstone of our culture. It inspires us to evolve our business and brands every day, in ways both large and small. Whether we’re launching new strategies for advertising and marketing, designing new ways for consumers to access our brands, creating new culinary offerings, achieving new synergies, or expanding our international footprint, we’re always looking for innovative ways to build upon our leadership position and create sustainable value.7Together we innovate.13DINE01_AR13_BL1.indd 113/31/14 4:46 PM with guests like never before.
Connecting
At DineEquity,® 2013 was the year that we fine-tuned our
social media and digital marketing platforms to understand
and engage with our guests on a much more personal level.
Staying in touch on social media
We’ve been building on this momentum by launching social
media contests, single-day promotions and compelling
games—and our efforts are paying off in measurable ways.
Over 122,000 guests have signed up for
My IHOP; Pancake Revolution® reached over
3 million members; and IHOP.com received
over 10,800,000 visits by year-end 2013.
At Applebee’s® and IHOP,® we’ve significantly evolved our
social media strategy in order to achieve a deeper level
of two-way interaction in the social media space. We
started by leveraging one-to-one channels to get to know
our guests’ behaviors, preferences and motivations. We
are now drawing upon this knowledge to craft memorable,
personalized interactions that will help build long-term
8
DineEquity 2013 Annual Report
13DINE01_AR13_BL1.indd 12
3/31/14 4:46 PM
with guests like never before.
Connecting
Applebees.com had over 37 million visits; email
club members increased by about 65% over 2012;
and Veteran’s Day was the highest single website
traffic day of the year, with 422,528 visits.
loyalty around the Applebee’s® brand—whether it’s jumping
into dialogue with consumers as a friend might, or simply
getting a pulse for what’s relevant to our fans. Ultimately,
this level of engagement allows us to truly understand the
needs and desires of current and potential guests, and
tailor online promotions accordingly.
Are our strategies paying off? You bet. Applebee’s is now
consistently one of the top 10 brands in social media on a
weekly basis. Also in 2013, Facebook Likes for Applebee’s
went from approximately 3.7 million to 5.1 million, followers
on Twitter increased from 64,010 to 252,054, and YouTube
views went from 171,088 to 767,723. At IHOP,® we began
the year with a strong presence on Facebook, Twitter and
YouTube, and ended the year with a total of eight platforms,
generating 3.4 million fans and followers.
Bringing new technology to the table
One of our most recent developments was launching
an initiative to introduce 100,000 tabletop tablets at
more than 1,800 Applebee’s restaurants in the United
States. Guests will now be able to pay at the table,
add additional drinks, desserts or appetizers, as well as
play games. Enhanced functionality will be added to
the tablets in the future. This introduction of consumer-
facing technology is part of our long-term strategy
to enhance and evolve the guest experience.
13DINE01_AR13_BL2.indd 13
9
4/1/14 2:48 PM
with adver
Earning points
Strategicpartnerships.Boldermessaging.Newrewards
programsinpilotmarkets.Thesearejustsomeoftheways
inwhichwe’rebuildingexcitementandloyaltyforour
brandsatDineEquity.®
Applebee’s®partnershipwithESPN®couldn’t
havebeenbettertimed—2013rankedas
themost-viewedseasoninESPN’s8years
ofpresentingMondayNightFootball.8
Dialing up the energy with marketing and advertising
What’snewinadvertisingandmarketing?We’recontinuing
torefineourstrategiesinordertocapturetheattention
ofnewconsumers,whiledeepeningourrelationshipwith
existingguests.AtIHOP,®thismeansevolvingourmedia
strategytomaximizeourimpactinkeydecision-making
timeperiods,diversifyinghowwereachnewguests,and
10
DineEquity 2013 Annual Report
8Source:Nielson
9Source:AdvertisingbenchmarkingscoresprovidedbyAceMetrix
13DINE01_AR13_BL2.indd 14
4/1/14 2:48 PM
with adver tising, marketing and more.
Earning points
maintaining a strong on-air presence, anchored by a tagline
that leverages our heritage: “Everything you love about
breakfast.SM” We’re also infusing our testimonial creative with
a bolder approach. Moving forward, we remain laser focused
on driving positive and sustainable same-restaurant sales
and traffic with compelling messaging.
Applebee’s® Food Network® vignettes were among the
highest scoring spots in Applebee’s history, and secured
one of the t op-rated spots across the casual dining
category in 2013.9 At Applebee’s, we’re using strategic
partnerships with Food Network and ESPN® to create a
buzz. We worked with Food Network to create a series
of 60-second vignette spots. Each spot offered a sneak
peek perspective of the fresh preparation and flavorful
ingredients that Applebee’s chefs combine to create new
dishes. We aired these spots across integrated, multi-
platform channels, including F ood Network Television,
foodnetwork.com and YouTube.
Guests love watching sports at Applebee’s
Our partnership with ESPN, the leader in sports pr o-
gramming, is designed to make that experience even
better. With the Applebee’s “Monday Night Countdown”
sponsorship, we’re further establishing Applebee’s as the
premier destination for watching football games on
Monday nights—one of the highest-rated properties
in television. We brought this experience into our
restaurants with the “ESPN Fan Zone,” then highlighted
it in a co-branded commercial spot that reaches not
only Applebee’s guests, but also the broad range of
demographic segments that regularly tune in to watch
football, as well as other sports.
Testing loyalty programs at both brands
In 2013, we also offered loyal guests and fans a new way to
get more out of their experiences at Applebee’s and IHOP®
with the rollout of pilot rewards programs. We launched the
initial pilot for the IHOP RewardsSM program across several
states. Thus far, results have exceeded expectations, with
total average membership per restaurant surpassing our
goals, and loyalty members spending more on average per
check than non-members. IHOP visits have also increased
among Rewards members. In July 2013, we introduced the
Applebee’s PerksSM pilot program in several locations around
Kansas City. By year-end 2013, we reached our goal of
50,000 members enrolled in the program. In addition, guest
visits in the test markets increased incrementally over the
number of typical guest visits during the same time period,
due to the program.
13DINE01_AR13_BL2.indd 15
11
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Keeping it
freshin the kitchen and on the menu.
How do we entice guests to return to Applebee’s and
IHOP® restaurants again and again? In 2013, we made
progress toward our goal of increased traffic by providing
guests with value, menu innovation, and unique, nutritious
product offerings.
Introducing guests to new favorites
At Applebee’s, national media promotion of the new
“Lunch Combos” program helped highlight our focus on
Applebee’s® new Kids’ Menu features 10 new
‘‘Kids LiveWell-Approved Meals’’—more than
any other national casual dining r estaurant.
lunch. “Lunch Combos” allow guests to choose any two
in a variety of new sandwiches, soups, salads and lunch
entrees. Applebee’s also kicked off the new “Take Two”
value promotion with offerings like the new Blackened
Sirloin with Garlicky Green Beans and the popular
Seasonal Berry & Spinach Salad, which added up to a
craveable dinner combination. As always, Applebee’s
remains committed to offering flavorful dishes like Honey
Pepper Chicken and Shrimp as part of our perennially
popular “Two for $20” category.
12
DineEquity 2013 Annual Report
10 Source: Comparable same-restaurant sales data as reported by Black Box Intelligence.
13DINE01_AR13_BL2.indd 16
4/1/14 2:48 PM
in the kitchen, and on the menu.
We advanced our commitment to healthy dining, enhancing
the “Unbelievably Great Tasting & Under 550 Calories™”
and Weight Watchers®-endorsed platforms by adding and
promoting new products like the Roma Pepper Steak and
Savory Cedar Salmon. We also launched an all-new Kids’
Menu that features a broad variety of entrees and side
items targeting both younger and older kid segments.
At IHOP,® we brought our theme, “Breakfast Anytime” to life
with several delectable new offerings—including Griddle Melt
Breakfast Sandwiches and Brioche French Toast. Griddle
Melts are new, differentiated, hand-crafted, made-to-order
breakfast sandwiches unique to IHOP, featuring artisan sour-
dough bread and fluffy omelets in three varieties: Spinach,
Roasted Red Pepper & Cheese; Bacon & White Cheddar;
and Ham & Egg. Brioche French Toast features thick, rich,
eggy brioche bread dipped in IHOP signature vanilla batter,
then grilled to perfection, in distinctive flavor combinations
such as Peaches & Cream, Berry Berry and a classic New
Orleans-inspired Bananas Foster. Both launches were
supported with promotional campaigns and have helped
give guests compelling reasons to visit IHOP, in order to try
distinctive new favorites for breakfast at any time of the day.
Streamlining and simplifying the menu
What’s better than breakfast at IHOP? Breakfast with
IHOP’s newly redesigned menu. In June 2013, we launched
a new menu across all of our domestic restaurants. Prior
to the launch, we conducted extensive development
and testing to ensure that the new menu offered easier
navigation and ordering; expanded guests’ perceptions of
the menu’s breadth; and helped introduce guests to new
choices. The new menu incorporates a fresh, more visual
approach with pictures for all entrees, and expresses the
brand’s voice and personality with fun comments from
a guest’s point of view integrated throughout. IHOP will
continue to print three versions of the menu throughout
the year, as we introduce new items and further refine
our offerings. How’s it working so far? After introducing
the newly redesigned menu in June 20 13, IHOP has
outperformed the family dining segment in positiv e,
comparable same-restaurant sales.10
13DINE01_AR13_BL2.indd 17
13
4/1/14 5:10 PM
We’re
always look ing
for creative ways to give back.
At DineEquity,® making a difference in our communities is
part of our DNA. Every year, DineEquity team members
and franchisees raise millions of dollars for worthy causes
in the communities we serve.
Six years ago, we began offering veterans and active duty
military a free meal at Applebee’s® on Veterans Day. Today,
In 2013, we collectively raised over
$23 million f or our communities
and charities.
many other brands inside and outside our competitive
set are doing the same. We are proud to have started
a movement that ultimately benefits our veterans, but
also saw this as a challenge—how can we do even more,
to ensure that veterans and active duty military make
Applebee’s their first choice on this special day? In 2013,
14
DineEquity 2013 Annual Report
13DINE01_AR13_BL1.indd 18
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We’re
for creative ways to give back.
always look ing
we injected fresh momentum into our Veterans Day
celebration by choosing music star Gavin DeGraw as
our celebrity ambassador. We then held a free concert for
the veterans and active duty military in Lindenhurst, NY,
as a reward for collecting the most thank yous online.
We’ll continue to keep Veterans Day and our Thank You
Movement going strong, so that we can generate thank
yous every year for all of our veterans and active duty
military, the real heroes in our neighborhoods.
In the past eight years, IHOP® has raised over $13 million
and given away more than 14 million pancakes, through
our franchisees’ participation in National Pancake Day.
Every year on National Pancake Day, IHOP restaurants
offer guests a free short stack of our famous buttermilk
pancakes, and invite guests to make a voluntary donation
to Children’s Miracle Network Hospitals and other local
charities. Guests can also purchase Miracle Balloons to help
IHOP meet its fundraising goal. Proceeds from this event
help provide life-saving care, equipment and programs
at Children’s Miracle Network member hospitals. IHOP
dialogue on Twitter spiked around National Pancake Day
in both 2012 and 2013, further proof that people talk
about—and care about—this event. What started with
National Pancake Day and Veterans Day has evolved into
a nationwide movement that extends throughout the year.
And we’re always on the lookout for ways to do more.
Our award-winning franchisees in their own words
Alex’s Lemonade Stand Foundation is more than just
a charity to us—it is part of our culture ... [Winning the
“Heart of Apple”] Award is reinforcement that we are
doing everything in our power to honor and uphold
Alex’s memory.”
— Jeff Warden, President & CEO of The Rose Group,
a leading Applebee’s® franchisee who has won the
“Heart of Apple” Award three times
Being presented the Inaugural “Heart of IHOP” Award
reinforces our belief that ... being in the service of the
needs of our communities builds stronger character
for our people, a stronger set of core values for our
organization, and a stronger position for the iconic
IHOP brand in our communities!”
— Robert Tomlinson, President, Peak Restaurant
Partners, a leading IHOP franchisee
13DINE01_AR13_BL1.indd 19
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3/31/14 4:46 PM
Management Team (from left)
Bryan R. Adel
Senior Vice President, Legal,
General Counsel and Secretary
Daniel del Olmo
President, International
John B. Jakubek
Senior Vice President,
Human Resources
Board of Directors
Julia A. Stewart
Chairman and Chief Executive Officer
Interim President,
IHOP Business Unit
Thomas W. Emrey
Chief Financial Officer
Scott Remy
Senior Vice President,
Communications and
Public Affairs
Steven R. Layt
President, Applebee’s
Business Unit
Julia A. Stewart
Chairman and Chief Executive
Officer, DineEquity, Inc.
Michael S. Gordon*
Former Vice Chairman,
First Q Capital LLC
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
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
Douglas M. Pasquale
Former Chairman, President
and Chief Executive Officer
of 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.
16
DineEquity 2013 Annual Report
*Retiring from the Board of Directors at our May 28, 2014 Annual Meeting of Stockholders
13DINE01_AR13_BL1.indd 20
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form
10-K
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, 2013
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, 2013:
$1,126.8 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 21, 2014
Common Stock, $.01 par value
19,045,042
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on Wednesday, May 28, 2014 (the “2014 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, 2013
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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Item 1. Business
PART I
DineEquity, Inc., together with its subsidiaries (referred to as the “Company,” “we,” “our” and “us,”), owns, franchises and
operates two restaurant concepts: Applebee's Neighborhood Grill & Bar® (“Applebee's®”), in the bar and grill segment within
the casual dining category of the restaurant industry, and 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 by us. As of December 31, 2013, 99% of our 3,631 restaurants across both
brands were franchised. 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 owning a significant number of company-operated restaurants. We use our 33 core company-operated restaurants
primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.
We generate revenue from four reporting segments, comprised of:
•
Franchise operations - primarily royalties, fees and other income from 1,988 Applebee’s franchised restaurants
and 1,607 IHOP franchised and area licensed restaurants;
• Rental operations - primarily rental income derived from lease or sublease agreements covering 723 IHOP
franchised restaurants and one Applebee’s franchised restaurant;
• Company restaurant operations - retail sales from 23 Applebee’s company-operated restaurants and 13 IHOP
•
company-operated restaurants; and
Financing operations - primarily interest income from approximately $120 million of receivables for equipment
leases and franchise fee notes generally associated with IHOP franchised restaurants developed before 2003.
Most of our revenue is derived from domestic operations within these four reporting segments, with approximately 88%
of our total 2013 revenues being generated from our franchise and rental operations. Revenue derived from all foreign country
operations comprised less than 3% of total consolidated revenue for the year ended December 31, 2013. At December 31, 2013,
there were no long-lived assets located in foreign countries. See Note 17, Segment Reporting, of the Notes to the Consolidated
Financial Statements included in this report for further segment information.
This report should be read in conjunction with the cautionary statements under “Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cautionary Statement Regarding Forward-Looking Statements.”
Our Key Strategies
Our business strategies are based on the following key elements:
• Optimize organization capability;
• Drive profitable organic growth; and
• Reduce costs for both ourselves and our franchisees.
We have a differentiated approach to brand management that centers on the strategic combination of marketing, menu,
operations and restaurant remodel initiatives that we believe creates a unique and relevant connection with our customers.
Additionally, our shared services operating platform allows our senior management to focus on key factors that drive the
business while leveraging the resources and expertise of our scalable, centralized support structure. We believe this closely
integrated approach strengthens brand performance and enables growth.
Our History
The first IHOP restaurant opened in 1958 in Toluca Lake, California. Since that time, the Company and its predecessors
have engaged in the development, franchising and operation of IHOP restaurants. Prior to 2003, new IHOP restaurants were
generally developed by us, and we were involved in all aspects of the construction and financing of the restaurants. 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, we 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. We refer to this method of operation as our “Previous IHOP Business Model,” which accounts for most of the
activity in our rental and financing segments.
3
For most IHOP restaurants opened after 2003, the franchisee is primarily responsible for the development and financing of
the restaurant. In general, we no longer provide any financing with respect to the franchise fee, restaurant site or equipment.
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. We
refer to this method of operation as our “Current IHOP Business Model.”
The first restaurant in what became the Applebee’s chain opened in 1980 in Decatur, Georgia. In November 2007, we
completed the acquisition of Applebee's International, Inc., which comprised 1,455 franchised restaurants and 510 company-
operated restaurants at the time of the acquisition. Over the next five years, we refranchised nearly 480 of the Applebee's
company-operated restaurants and realized our goal of becoming 99% franchised in each brand in October 2012.
Restaurant Concepts
Applebee's
We franchise, own and operate Applebee’s restaurants in the bar and grill segment within the casual dining category of the
restaurant industry. Each Applebee's restaurant is designed as an attractive, friendly establishment featuring high quality,
moderately-priced food, alcoholic and non-alcoholic beverage items, table service and a comfortable neighborhood
atmosphere. Applebee's restaurants offer a diverse menu of 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. Over the past several years we have distinguished the Applebee’s brand with several industry firsts. Our signature
“2 for $20” menu, a value proposition first introduced in 2009, continues to resonate with our guests and has been imitated by
many of our competitors. 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 customers new reasons to come to Applebee's every day.
As of December 31, 2013, 61 franchise groups operated 1,988 Applebee’s franchise restaurants while we operated 23
restaurants in the Kansas City, Missouri area. These restaurants were located in 49 states within the United States, in one
United States territory and in 15 countries outside of the United States. Applebee's was the largest casual dining concept in the
United States in terms of 2012 system-wide sales(1).
IHOP
We franchise, own and operate restaurants in the family dining category of the restaurant industry under the names IHOP
and International House of Pancakes. IHOP restaurants feature full table service and high quality, moderately priced food and
beverage offerings in an attractive and comfortable family atmosphere. Although the restaurants are best known for their
award-winning pancakes, omelets and other breakfast specialties, IHOP restaurants also offer a variety of lunch, dinner and
snack items. IHOP restaurants are open throughout the day and evening hours. Over 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. In June 2013, we launched a newly designed IHOP menu with three primary objectives: (i) simplify the ordering process
with a new layout; (ii) reduce the overall number of menu items over time to lessen complexity; and (iii) introduce new menu
offerings and categories.
As of December 31, 2013, 348 franchise groups operated 1,607 IHOP franchise restaurants, while we operated 10
restaurants in the Cincinnati, Ohio area. The IHOP restaurants were located in all 50 states within the United States, in the
District of Columbia, in two United States territories and in eight countries outside of the United States. IHOP was the largest
family dining concept in the United States in terms of 2012 system-wide sales(1).
In addition, from time to time we may also operate, on a temporary basis until refranchised, IHOP restaurants that we re-
acquire for a variety of reasons from IHOP franchisees. There were three such restaurants included as company-operated
restaurants as of December 31, 2013.
See Item 2, Properties, for the geographic location of all Applebee’s and IHOP restaurants.
_____________________________________________________________________
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 24, 2013.
4
Franchising
Franchisee Relationships
We highly value good franchisor/franchisee relations and strive to maintain positive working relationships with our
franchisees. For several years, IHOP and Applebee’s franchisees have operated their own representative advisory groups. These
groups provide a forum for franchisees to share demonstrated best practices, offer counsel and review successful strategies,
while working side-by-side with management of the Applebee's and IHOP brands. Applebee’s sponsors its Franchise Business
Council (“FBC”), which consists 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, while the other franchisee representatives are elected
by our franchisees. IHOP sponsors its Franchise Leadership Council (“FLC”), an elected and appointed body of IHOP
franchisees formed to advise and assist senior management with respect to a broad range of matters relating to the operation of
IHOP restaurants.
We have expanded the ways in which our management collaborates with the FLC and FBC by establishing several cross-
brand committees. FBC committees focus on franchise marketing, information technology, operations and back-of-the-
restaurant innovation, while FLC committees focus on marketing, menu, information technology and innovation.
Franchise Agreements and Fees
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 within 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 gross sales. We have agreements with most of our franchisees for
Applebee's restaurants opened before January 1, 2000, which provide for royalty rates of 4%. 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.
Under the Current IHOP Business Model, a potential franchisee first 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.
The revenues we receive from a typical franchise development arrangement under the Current IHOP Business Model
include (a) 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 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 principal terms of the franchise agreements entered into under the Previous IHOP Business Model and the Current
IHOP 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, lease or sublease rents for the restaurant property and building, and
interest income from any franchise fee notes and equipment leases.
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.
5
Advertising Fees
We currently require domestic franchisees of Applebee's restaurants to contribute 3.25% of their gross sales to a national
advertising fund and to spend at least 0.5% 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. For the year ended December 31, 2013, approximately 4.75% of Applebee's company restaurant sales was
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.
IHOP franchisees and company-operated restaurants allocate a percentage of their sales to local advertising cooperatives
and a national advertising fund. The IHOP 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 is 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.
The local IHOP 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.
Beginning in 2005, and every year thereafter, we 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.
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, because we have less contractual control over Applebee's
advertising expenditures, Applebee’s national advertising fund activity is considered to be an agency relationship and therefore
is not recognized as franchise revenue and expense.
IHOP Area License Agreements
We have entered into two long-term area license agreements for IHOP restaurants covering the state of Florida and certain
counties in the state of Georgia, and the province of British Columbia, Canada. The area license agreements provide the
licensees with the right to develop and franchise new IHOP restaurants in their respective territories and provide for royalties
ranging from 1.0% to 2.0% of gross sales and advertising fees ranging from 0.25% to approximately 2.0% of gross sales. We
also derive revenues from the sale of proprietary products to these area licensees and, in certain instances, to their sub-
franchisees. Revenues from our area licensees are included in franchise operations revenues for segment reporting purposes.
As of December 31, 2013, the area licensee for the state of Florida and certain counties in Georgia operated or sub-
franchised a total of 154 IHOP restaurants. The area licensee for the province of British Columbia, Canada operated or sub-
franchised a total of 14 IHOP restaurants. The area license for British Columbia expires in 2026. The area license for Florida
and Georgia expires in 2102.
Other Franchise-related Revenues and Fees
Approximately 85% of franchise segment revenue for the year ended December 31, 2013 consisted of Applebee's and
IHOP royalties and IHOP advertising revenue. Most of the remaining 15% consisted of sales of proprietary products (primarily
IHOP pancake and waffle dry-mixes), franchise termination, transfer and extension fees, software maintenance and support
fees and licensing fees from third-party retail sales of IHOP-branded products. Depending on circumstances, early termination
of a franchise agreement may result in our being entitled to termination fees; however, not all franchise restaurant closures
necessarily result in our receipt of termination fees.
International Franchising
We continue to pursue international franchising of the Applebee's and the IHOP concepts. 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 our restaurants. We work closely with our
international franchisees to develop and implement the Applebee's and IHOP systems outside the United States, recognizing
commercial, cultural and dietary diversity. Differences in tastes and cultural norms and standards require that we be flexible
and pragmatic regarding many elements of the Applebee's and IHOP systems, including menu, restaurant design, restaurant
operations, training, marketing, purchasing and financing.
6
The success of further international expansion will depend on, among other things, local acceptance of the Applebee's and
IHOP concepts 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.
Domestic and International Franchise Restaurant Development
Each franchisee is responsible for selecting the site for each new restaurant. 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 may make available to franchisees demographic and other studies. 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.
As of December 31, 2013, we had 84 development agreements with 30 Applebee’s 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. Applebee's development agreements generally provide for a
series of two-year development commitments after the initial development period. The Applebee’s development agreements in
place call for the opening of a combined total of 105 domestic restaurants and 16 international restaurants in 2014 and 2015.
As of December 31, 2013, we had signed commitments and options from IHOP franchisees to build 263 IHOP restaurants
over the next 16 years, comprised of four restaurants under single restaurant or non-traditional development agreements, 146
restaurants under domestic multi-restaurant development agreements and 81 restaurants under international development
agreements. The signed agreements include options to build an additional 32 restaurants over the next 13 years.
During 2014, we expect our franchisees to open a total of between 40 to 50 new IHOP restaurants and a total of between
40 to 50 new Applebee’s restaurants, primarily in the domestic market.
The actual number of openings may differ from both our expectations and development 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 economic conditions and franchisee noncompliance with development agreements. The timing of
new restaurant openings also may be affected by various factors including weather-related and other construction delays,
difficulties in obtaining timely regulatory approvals and the impact of currency fluctuations on our international franchisees.
Franchise Operations
We continuously monitor franchise restaurant operations. Company and third-party representatives make both scheduled
and unannounced inspections of franchised 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. Due to cultural and regulatory differences, we
may have different requirements for restaurants opened outside of the United States. We also monitor the financial health of our
franchisees through business and financial reviews.
Composition of Franchise Systems
As of December 31, 2013, there were 36 Applebee’s franchisees that owned a total of 1,838 domestic Applebee's franchise
restaurants. The number of domestic restaurants held by an individual franchisee ranged from one restaurant to 448 restaurants.
As of December 31, 2013, there were 25 franchisees that owned a total of 150 international Applebee's franchise restaurants.
The number of international restaurants held by an individual franchisee ranged from one restaurant to 21 restaurants. Our five
largest Applebee’s franchisees own 47% of the total 1,988 Applebee's franchise restaurants.
As of December 31, 2013, there were 333 franchisees that owned a total of 1,551 domestic IHOP franchise restaurants,
including 153 franchisees that each own one franchise restaurant. The largest individual IHOP franchisee owned 154 domestic
restaurants. As of December 31, 2013, there were 14 franchisees and one area licensee that owned a total of 56 international
IHOP franchise restaurants. The number of international restaurants held by an individual franchisee ranged from one
restaurant to 14 restaurants. Our five largest IHOP franchisees own 24% of the total 1,607 IHOP franchise restaurants.
Company-Operated Restaurants
As of December 31, 2013, we operated 23 Applebee's restaurants located in the Kansas City, Missouri market area and 10
IHOP restaurants located in the Cincinnati, Ohio market area. We operate these restaurants primarily to test new remodel
programs, operating procedures, products, technology, cooking platforms and service models and accordingly, we do not
anticipate these restaurants will generate a significant amount of profit or loss in any given period. Additionally, from time to
time, we have reacquired IHOP restaurants from IHOP franchisees for a variety of reasons. In most cases we have been able to
7
quickly refranchise these restaurants to new franchisees. Where that is not the case, we typically operate the reacquired
restaurants until they can be refranchised. These temporarily reacquired restaurants may require investments in remodeling and
rehabilitation before they can be refranchised. As a result, our reacquired restaurants may incur operating losses for some
period of time. At December 31, 2013, we operated three such reacquired IHOP restaurants.
Supply Chain
In February 2009, Centralized Supply Chain Services, LLC (“CSCS” or the “Co-op”), an independent cooperative entity,
was formed by us and franchisees of Applebee's and IHOP domestic restaurants who have chosen to join the Co-op. CSCS has
been appointed 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 operator of 36 company restaurants) 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. As of December 31, 2013, 100% of Applebee's franchise restaurants and
99% of IHOP franchise restaurants were members of CSCS.
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. We do not control CSCS but do have
contractual rights associated with supplier certification, quality assurance and protection of our intellectual property. The
operations of CSCS are funded by a separately stated administrative fee added to one or more products purchased by operators.
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 our quality and safety standards.
Industry Overview and Competition
Applebee's and IHOP are among the numerous restaurant chains and independent restaurants competing in the 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 customers. These segments include, among others, fast food or
quick service restaurants (“QSR”), fast-casual dining, family dining, casual dining and fine dining. Casual dining restaurants
offer full table service and typically have bars or serve liquor, wine and beer, while 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.
Applebee's competes in the casual dining segment against national and multi-state restaurant chains such as Chili's, T.G.I.
Friday's, Olive Garden, Red Lobster and Buffalo Wild Wings, among others, as well as fast-casual restaurant chains. In
addition, there are many independent restaurants across the country in the casual dining segment. Amongst our competitors,
Applebee's is the largest casual dining concept in the United States in terms of 2012 system-wide sales(1).
IHOP competes in the family dining segment against national and multi-state restaurant chains such as Denny's, Cracker
Barrel Old Country Store and Bob Evans Restaurants. IHOP also faces competition from QSR restaurant chains and fast-casual
restaurant chains that serve breakfast. In addition, there are many independent restaurants and diners across the country in the
family dining segment. Amongst our competitors, IHOP is the largest family dining concept in the United States in terms of
2012 system-wide sales(1).
The restaurant industry 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 commercial real estate is also very competitive. We and our franchisees compete with other
restaurant chains and retail businesses for suitable sites for the development of new restaurants. We also compete against other
franchisors both within and outside the restaurant industry for new franchise developers. For further information regarding
competition, see Item 1A, Risk Factors.
___________________________________________________________________
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 24, 2013.
8
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®,” “Applebee's Neighborhood Grill &
Bar®” and variations of each. In addition, we own trademarks and service marks used in the IHOP system, including “IHOP®,”
“International House of Pancakes®” and variations of each.
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. Depending upon the jurisdiction, trademarks and service
marks generally are valid as long as they are used and/or registered. We generally intend to renew our trademarks and service
marks as they 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.
Information Technology
We utilize programmed point of sale systems, kitchen data management, and back-of-the house systems for accounting and
inventory management in our company restaurants. In addition, we are developing several consumer-facing technology
initiatives focused on improving our customers' experience. Sales and product mix information is transmitted to our restaurant
support centers on a daily basis and this information supports our operations and marketing initiatives. We mitigate the
potential impact from operational interruption of our information technology systems through a disaster recovery plan that is
updated on a regular basis. We believe that technology is and will continue to be a key component of our long-term plans and
are committed to providing system stability and targeted innovation. Our use of technology, particularly in terms of managing
electronic payments and confidential information, also represents security and operational risks that we must manage and may
result in additional costs incurred.
We accept credit cards, third party gift cards, and branded gift cards as payment in our restaurants. We submit our systems
to regular audit and review, as required by Payment Card Industry Standards, including periodic scanning of our networks to
check for vulnerability. In addition, we participate in annual audits of our financial and human resources systems to verify that
measures are in place to protect our employees' personally identifiable information. As a franchisor, we are not responsible for
ensuring that our franchisees maintain compliance; however, we regularly encourage them to take similar steps to maintain
compliance and to mitigate risk. For further information regarding Information Technology, see Item 1A, Risk Factors.
Research and Development
We do not engage in any material amount of research and development activity from a financial perspective. We do engage
in ongoing culinary development and testing, in addition to consumer research into customers’ preferences and opinions as well
as overall industry trends; however, these activities are generally not considered research and development as determined under
United States generally accepted accounting principles (“U.S. GAAP”).
Seasonality
We do not consider our operations to be seasonal to any material degree. We do experience a slight increase in the first quarter
due to redemptions of gift cards sold during the December holiday season. Over the past five years, 26% of our annual system-
wide sales (retail sales reported to us by our franchisees plus sales at our company-operated restaurants) occurred in the first
quarter. Sales at restaurants owned by franchisees are not attributable to the Company.
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 and some of these laws 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
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"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. We are also subject to new laws and regulations, which vary from
jurisdiction to jurisdiction, relating to nutritional content and menu labeling.
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 a requirement that certain
large employers offer coverage to their employees or pay a financial penalty. We expect that our health insurance coverage
expenses, and the health insurance coverage expenses of our franchisees, 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. In addition to the United States Food and Drug Administration’s proposed menu
labeling requirements for restaurants, a 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.
Initiatives in the area of nutrition disclosure or advertising, such as 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. For further information regarding governmental regulation, see Item 1A, Risk
Factors.
Environmental Matters
We are subject to federal and state environmental regulations, but historically these have not had a material effect on our
operations. 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. For further information regarding environmental matters, see
Item 1A, Risk Factors.
Employees
At December 31, 2013, we had approximately 2,530 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. Our franchisees are independent
business owners, so their employees are not included in our employee count.
Corporate Information
We were incorporated under the laws of the State of Delaware in 1976 with the name IHOP Corp. In November 2007, we
completed the acquisition of Applebee’s, which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, we
changed our name to DineEquity, Inc. 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. Our common
stock is listed on the New York Stock Exchange (“NYSE”) and trades under the ticker symbol “DIN.”
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
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the respective fiscal year. There were 52 weeks in our 2013, 2012 and 2011 fiscal years, which ended on December 29, 2013,
December 30, 2012, and January 1, 2012, respectively.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and
amendments to those reports filed with or furnished to United States Securities and Exchange Commission (the “SEC”)
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through our
website as soon as reasonably practicable after electronically filing such material with the SEC. 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 at 1-800-SEC-0330. The above references to our website and the SEC’s website do not constitute incorporation by
reference of the information contained on those websites and should not be considered part of this document.
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 decreases in customer traffic or average value per transaction due to these or other reasons
could:
•
•
•
reduce gross sales at franchise restaurants, resulting in lower royalty and other payments from franchisees,
reduce the profitability of franchise restaurants, potentially impacting the ability of franchisees to make royalty
payments when they are due and to develop new restaurants as may be required in their respective development
agreements, and
negatively impact the financial performance of our company-operated restaurants.
Our level of indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations
under our debt. As of December 31, 2013, 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, 2013. Our level of indebtedness
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 pay dividends to our stockholders, repurchase shares of our common stock, 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;
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.
•
•
•
•
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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 beyond our control.
Declines in our financial performance could result in 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, 2013, our total stockholders' equity was $315.2 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 event 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 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
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management and staff, and our franchisees 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 franchise payments received from our franchisees and the revenues generated by our company-owned restaurants.
Our business strategy may not achieve 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, quality assurance, information technology, 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 one franchise system will be suitable or will achieve results similar to the application of
such business strategy to the other franchise system. The actual benefit from the refranchising of the Applebee's company-
operated restaurants is uncertain and may be less than anticipated. In addition, our operational improvement, purchasing and
other strategic 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. We derive a substantial portion of our
revenues in the form of royalties based on a percentage of the net sales of our franchised restaurants. The sales and profitability
of these 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 or man-made 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, or 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 and may not produce the results we expect.
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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, the financial
difficulties, including bankruptcy, of our suppliers 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 payments we receive from our franchisees or
our pancake and waffle dry mix distributors or the profits generated by our company-operated restaurants. 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 below 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 franchise payments we receive
from franchisees and the revenues generated by our company-operated restaurants.
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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 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 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 franchisees and our
company-operated restaurants 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 ability of our franchisees to make payments to us and the profits
generated by our company-operated restaurants. 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
15
believe we have taken appropriate measures to protect our intellectual property, there can be no assurance that these protections
will be adequate.
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 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 Patient
Protection and Affordable Care Act and regulations issued related thereto 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
16
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.
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 franchised restaurants 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 ability or sufficient access to financial
resources necessary to open and operate 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 on 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.
17
Concentration of Applebee's franchised restaurants in a limited number of franchisees subjects us to greater credit
risk. As of December 31, 2013, Applebee's franchisees operated 1,988 Applebee's restaurants in the United States, comprising
99% of the total Applebee's restaurants in the United States. Of those restaurants, the ten largest Applebee's franchisees owned
1,255 restaurants, representing 63% of all franchised Applebee's restaurants in the United States. The largest Applebee's
franchisee owned 448 restaurants, representing 23% 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 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 1,439 IHOP restaurants subject to franchise agreements as of
December 31, 2013, 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 and 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.
18
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 to us.
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
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 from us 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 to us 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 our 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 our 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 sanctions or actions could reduce restaurant revenues and corresponding franchise
payments to us.
19
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 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. However,
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 disrupt our operations and 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 or man-made 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 our
retail products, our brand value could suffer which could have an adverse effect on our business.
20
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.
21
Item 2. Properties.
The table below shows the location and ownership type of Applebee's and IHOP restaurants as of December 31, 2013:
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
27
11
117
25
7
12
—
108
68
—
12
47
66
27
24
37
18
12
26
28
86
58
21
45
8
19
14
14
57
18
113
58
12
93
23
21
77
8
40
6
42
101
16
3
73
42
17
44
5
1,838
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10
—
—
—
—
—
—
—
—
13
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
30
2
27
11
117
25
7
12
—
108
68
—
12
47
66
27
34
37
18
12
26
28
86
58
21
58
8
19
14
14
57
18
113
58
12
93
23
21
77
8
40
6
42
101
16
3
73
42
17
44
5
1,861
22
21
4
40
15
229
31
7
7
2
—
76
6
8
52
23
9
21
7
30
1
38
20
21
12
11
27
5
5
24
4
40
20
57
51
2
22
28
7
17
3
29
5
36
188
19
1
60
32
7
14
3
1,397
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
1
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
13
—
—
—
—
—
—
—
—
—
150 *
4 *
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
154
21
4
40
15
229
31
7
7
2
150
80
6
8
53
23
9
22
8
30
1
38
20
21
12
11
27
5
5
24
4
40
20
57
51
2
31
28
7
17
3
29
5
36
188
19
1
60
32
7
15
3
1,564
International
Brazil
Canada
Chile
Costa Rica
Dominican Republic
Egypt
Guatemala
Honduras
Jordan
Kuwait
Lebanon
Mexico
Philippines
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
18
4
3
1
1
3
5
1
5
1
65
—
4
6
15
—
—
5
150
1,988
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
13
18
4
3
1
1
3
5
1
5
1
65
—
4
6
15
—
—
5
150
2,011
—
7
—
—
1
—
2
—
—
2
—
20
3
2
—
1
—
1
3
42
1,439
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13
—
14 *
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14
168
—
21
—
—
1
—
2
—
—
2
—
20
3
2
—
1
—
1
3
56
1,620
* of these restaurants 62 in Florida, 4 in Georgia and 12 in Canada have been sub-licensed by the area licensee
As of December 31, 2013, we operated 23 Applebee's restaurants and 13 IHOP restaurants. Our intention is to continue to
operate the 23 Applebee's restaurants in the Kansas City, Missouri market and 10 IHOP restaurants in the Cincinnati, Ohio
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 18 sites. We are temporarily operating the remaining
three IHOP company-operated restaurants until they are refranchised.
Of the 1,439 IHOP restaurants operated by franchisees, 61 were located on sites owned by us, 662 were located on sites
leased by us from third parties and 716 were located on sites owned or leased by franchisees. All of the IHOP restaurants
operated by area licensees and 1,987 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 substantially all 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.
23
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.
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 2013 and 2012.
Quarter
First...................................................................................... $
Second ................................................................................. $
Third .................................................................................... $
Fourth .................................................................................. $
Fiscal Year 2013
Prices
Fiscal Year 2012
Prices
High
Low
High
Low
78.39
74.96
72.49
85.74
$
$
$
$
65.44
66.39
64.44
65.96
$
$
$
$
54.74
53.90
57.40
68.47
$
$
$
$
40.28
41.63
41.49
55.51
Holders
The number of stockholders of record and beneficial owners of our common stock as of February 7, 2014 was estimated to
be 7,500.
Dividends
We did not pay dividends on our common stock during the year ended December 31, 2012. During the year ended
December 31, 2013, we paid dividends on our common stock as follows:
Year ended December 31, 2013
Declaration date
Payment date
First quarter............................................................
Second quarter .......................................................
Third quarter ..........................................................
Fourth quarter.........................................................
Total .......................................................................
February 26, 2013
May 14, 2013
August 2, 2013
October 3, 2013
March 29, 2013
June 28, 2013
September 27, 2013
December 27, 2013
______________________________________________________
(1) Includes dividend equivalents paid on restricted stock units
Dividend per
share
$
$
0.75
0.75
0.75
0.75
3.00
Total(1)
(In millions)
14.6
$
14.4
14.3
14.3
57.6
$
On February 25, 2014, our Board of Directors approved payment of a cash dividend of $0.75 per share of common stock,
payable at the close of business on March 28, 2014 to the stockholders of record as of the close of business on March 14, 2014.
Under our Credit Agreement and the Indenture under which our Senior Notes were issued, we are limited as to the total
amount of 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, 2013, the limitation on
future restricted payments was approximately $89 million under the Credit Agreement and approximately $112 million under
the Indenture.
24
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2013, 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.......................................................................
775,059
$
—
775,059
$
42.09
—
42.09
1,192,180
—
1,192,180
The number of securities remaining available for future issuance represents shares under our 2011 Stock Incentive Plan.
Please refer to Note 13, 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 and the Indenture under which our Senior Notes were issued, we are limited as to the total
amount of restricted payments, including repurchases of common stock, that may be made (see “Management's Discussion and
Analysis of Financial Condition and Results of Operations - Restricted Payments”). At December 31, 2013, the limitation on
future restricted payments was approximately $89 million under the Credit Agreement and approximately $112 million under
the Indenture.
Purchases of Equity Securities by the Company
Period
September 30, 2013 – October 27, 2013(a).........
October 28, 2013 – November 24, 2013(a).........
November 25, 2013 – December 29, 2013
Total ...................................................................
Total number of
shares
purchased
553
930
60,318
61,801
Average price
paid per
share
$69.50
$82.14
$83.47
$83.32
Total number of
shares purchased as
part of publicly
announced plans or
programs (b)
—
—
60,318
60,318
Approximate dollar
value of
shares that may yet be
purchased under the
plans or programs (b)
$75,300,000
$75,300,000
$70,300,000
$70,300,000
(a) These amounts represent shares owned and tendered by employees to satisfy tax withholding obligations on the vesting of restricted stock
awards.
(b) 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 authorization. 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.
25
Stock Performance Graph
The graph below shows a comparison of the cumulative total stockholder 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, 2013. The graph and table assume $100 invested at the close of trading on the last day of
trading in 2008 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 Stockholder Return
DineEquity, Inc., Standard & Poor's 500 And Value Line Restaurant Index
(Performance Results Through December 31, 2013)
DineEquity, Inc. ........................................ $
Standard & Poor's 500 ..............................
Restaurant Index .......................................
100.00
$
210.12
$
427.16
$
365.14
$
579.58
$
753.28
100.00
100.00
126.46
128.10
145.51
178.27
148.58
235.12
172.35
247.64
228.18
328.57
2008
2009
2010
2011
2012
2013
26
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, 2013, 2012, 2011, 2010 and 2009 are derived from our audited
consolidated financial statements.
2013
Fiscal Year Ended December 31,
2010
2011
2012
(In millions, except per share amounts and restaurant data)
2009
Segment Revenues
Franchise and restaurant revenues (a) .................................................................. $
Rental income.......................................................................................................
Financing revenues...............................................................................................
Total revenues.................................................................................................
Segment Expenses
Franchise and restaurant expenses (a) ..................................................................
Rental expenses ....................................................................................................
Financing expenses...............................................................................................
Total segment expenses..................................................................................
Gross segment profit ............................................................................................
General and administrative expenses ...................................................................
Interest expense ....................................................................................................
Closure and impairment charges ..........................................................................
Loss (gain) on extinguishment of debt and temporary equity..............................
Gain on disposition of assets (a)...........................................................................
Other expense (b) .................................................................................................
Income (loss) before income taxes .............................................................................
Income tax (provision) benefit ...................................................................................
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 and paid per common share................................................... $
Balance Sheet Data (end of year):
502.6
124.8
13.1
640.5
173.3
97.3
0.2
270.8
369.7
143.6
100.3
1.8
0.1
(0.2)
13.6
110.6
(38.6)
72.0
—
—
(1.2)
70.8
3.75
3.70
18.9
19.1
3.00
Cash and cash equivalents.................................................................................... $
Restricted cash—short-term and long-term (c) ....................................................
Property and equipment, net (a) ...........................................................................
Total assets............................................................................................................
Long-term debt, less current maturities................................................................
Capital lease obligations, less current maturities .................................................
Financing obligations, less current maturities......................................................
Stockholders' equity .............................................................................................
106.0
0.7
274.3
2,404.6
1,203.5
111.7
48.8
315.2
Other Financial Data:
$
$
$
$
$
$
712.5
122.9
14.5
849.9
359.2
97.2
1.6
458.0
391.9
163.2
114.3
4.2
5.6
(102.6)
12.3
194.9
(67.2)
127.7
—
(2.5)
(2.7)
122.5
6.81
6.63
18.0
18.9
—
64.5
1.9
294.4
2,415.4
1,202.1
124.4
52.0
308.8
$
929.5
126.0
19.7
1,075.2
$ 1,192.7
124.5
16.4
1,333.6
$ 1,263.0
133.9
17.9
1,414.8
563.4
98.2
6.0
667.6
407.6
155.8
132.7
29.9
11.2
(43.3)
16.3
105.0
(29.8)
75.2
—
(2.6)
(1.9)
70.7
3.96
3.89
17.8
18.2
—
60.7
1.2
474.2
2,614.3
1,411.4
134.4
162.7
155.2
$
$
$
$
$
802.8
99.0
2.0
903.8
429.8
160.3
171.5
4.3
107.0
(13.5)
12.3
(12.1)
9.3
(2.8)
(25.9)
(2.5)
1.2
(30.0)
(1.74)
(1.74)
17.2
17.2
$
$
$
— $
868.7
100.2
0.4
969.3
445.5
157.7
186.3
105.6
(45.7)
(7.3)
12.3
36.6
(5.2)
31.4
(19.5)
(2.3)
(0.4)
9.2
0.55
0.55
16.9
16.9
—
102.3
1.6
612.2
2,856.6
1,631.5
144.0
237.8
83.6
$
82.3
120.9
771.4
3,100.9
1,637.2
152.8
309.4
69.9
$
$
$
$
$
Cash flows provided by operating activities ........................................................ $
Capital expenditures .............................................................................................
127.8
7.0
$
52.9
17.0
$
121.7
26.3
$
179.3
18.7
$
157.8
15.4
Domestic system-wide same-restaurant sales percentage change:
Applebee's ............................................................................................................
IHOP.....................................................................................................................
(0.3)%
2.4 %
1.2 %
(1.6)%
2.0 %
(2.0)%
0.3%
0.0%
(4.5)%
(0.8)%
Total restaurants (end of year):
Applebee's ............................................................................................................
IHOP.....................................................................................................................
Total
2,011
1,620
3,631
2,034
1,581
3,615
2,019
1,550
3,569
2,010
1,504
3,514
2,008
1,456
3,464
_________________________________________________________________________
(a) We refranchised 376 Applebee's company-operated restaurants between 2009 and 2012.
(b) Includes $12.3 in amortization of intangible assets in each year as well as $1.3 and $4.0 of debt modification costs in 2013 and 2011, respectively.
(c) Cash restrictions related to securitized debt were eliminated by a refinancing of long-term debt in 2010.
27
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 within 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 us.
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 eight
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.
2013 Highlights
2013 marked our first full year of operation with both of our brands 99% franchised. 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 owning a significant number of
company-operated restaurants.
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 also approved a stock repurchase
authorization of up to $100 million of our common stock. Pursuant to this strategy, we returned cash of $87.1 million to our
stockholders in 2013 in the form of:
•
Four quarterly dividends, each $0.75 per share of our common stock, declared and paid totaling $57.4 million, and
• Repurchases of over 412,000 shares of our common stock totaling $29.7 million, with authorization remaining to
repurchase an additional $70.3 million.
28
Other highlights of our fiscal 2013 performance include:
•
Increased IHOP's domestic systemwide same-restaurant sales by 2.4% during 2013, the first full year of growth in
domestic systemwide same-restaurant sales since fiscal 2008 and the highest yearly increase since 2006;
• Generated cash from operating activities of greater than $100 million for the fourth time in the last five years;
• Opened 58 new restaurants worldwide by IHOP franchisees and area licensees and 26 new restaurants by Applebee's
franchisees;
• Expanded our international footprint with restaurant openings by IHOP franchisees in the Philippines, Kuwait and the
Kingdom of Saudi Arabia and by an Applebee's franchisee in Egypt and the Dominican Republic;
• Remodeled over 500 restaurants system-wide during 2013. Applebee's and its franchisees remodeled 289 restaurants
during 2013, while IHOP and its franchisees remodeled 215 restaurants. Over the past three years, approximately 70%
of Applebee's restaurants and 40% of IHOP restaurants have been remodeled; and
• Named to Fast Company’s annual list of Most Innovative Companies, ranking number two in the category of “The
World’s Most Innovative Companies in Food.”
Key Performance Indicators
In evaluating the performance of each dining concept, we consider the key performance indicators to be net franchise
restaurant development and the percentage change in domestic system-wide same-restaurant sales. Since we are a 99%
franchised company, expanding the number of franchise restaurants is an important driver of revenue growth. We currently do
not plan to open any new Applebee's or IHOP company-operated restaurants. Revenue from our rental and financing
operations, legacies from the Previous IHOP Business Model we operated under prior to 2003, is subject to progressive decline
over time as interest-earning balances are repaid. Therefore, growth in both the number of franchise restaurants and sales at
those restaurants will drive franchise revenues in the form of higher royalty revenues, additional franchise fees and, in the case
of IHOP restaurants, sales of proprietary pancake and waffle dry mix.
An overview of our 2013 performance in these metrics is as follows:
Applebee's
IHOP
Percentage (decrease) increase in domestic system-wide same-restaurant sales ..............................
Net franchise restaurant development(1) ....................................................................................................................
(0.3)%
(23)
2.4%
38
_____________________________________________________
(1) Franchise and area license openings, net of closings
IHOP's increase of 2.4% in domestic system-wide restaurant sales for the year ended December 31, 2013 resulted from a
higher average customer check partially offset by a decrease in customer traffic. The increase reflects sequential improvement
throughout 2013, with a decrease of 0.5% in the first quarter of 2013 followed by increases of 1.9%, 3.6% and 4.5% in the
second, third and fourth quarters, respectively. The increase in the fourth quarter was the largest since the first quarter of 2006.
Applebee's decrease of 0.3% in domestic system-wide restaurant sales for the year ended December 31, 2013 resulted from a
decrease in customer traffic partially offset by an increase in average customer check. The decrease was the first annual decline
in domestic system-wide restaurant sales for Applebee's since 2009. With the decrease in 2013, Applebee's cumulative increase
over the past four years is 3.2%.
Applebee's net restaurant development for the year ended December 31, 2013 was adversely impacted by restaurant
closures during 2013. Applebee's franchisees opened 26 new franchise restaurants in 2013 but closed 49 restaurants. The largest
single group of closures took place in the second quarter of 2013, when an Applebee's franchisee that owned and operated 33
restaurants located in Illinois filed for bankruptcy protection. As a result of those proceedings, 15 of the restaurants were sold in
June 2013 to an affiliate of an existing franchisee and operated without interruption during the transition of ownership. The
remaining 18 restaurants were closed. However, we did receive termination fees of $3.8 million related to the closure of the 18
restaurants. We have entered into a development agreement with the new franchisee to open additional restaurants in Illinois in
the future.
IHOP franchisees and area licensees opened 58 new franchise restaurants in 2013, with net restaurant development of 38
restaurants. The 2013 openings included three restaurants in the Philippines, the first IHOP franchise restaurants in the Asia
Pacific region. Over the past five years, IHOP net restaurant development totaled 217, an annual growth average of 43
restaurants per year.
29
In evaluating the performance of the consolidated enterprise, we consider the key performance indicators to be
consolidated cash flows from operating activities and consolidated free cash flow (cash from operations, plus receipts from
notes, equipment contracts and other long-term receivables, minus capital expenditures, principal payments on capital leases
and financing obligations and the mandatory annual repayment of 1% of the principal balance of our Term Loans).
Consolidated cash flows from operating activities and consolidated free cash flow for the years ended December 31, 2013
and 2012 were as follows:
Year ended December 31,
2013
2012
(In millions)
Consolidated cash flows from operating activities ................................................................. $
Consolidated free cash flow .................................................................................................... $
127.8
120.1
$
$
52.9
29.9
The primary reasons for the increase in cash flows from operating activities were lower income tax payments, lower general
and administrative expenses and lower interest costs for the year ended December 31, 2013 compared to the same period of 2012,
partially offset by lower segment profit that resulted from the refranchising of Applebee's company-operated restaurants.
Additional information on each of these metrics is presented under the captions “Restaurant Data,” “Company Restaurant
Operations” and “Liquidity and Capital Resources” that follow.
Key Overall Strategies
DineEquity's Key Strategies
With the completion of our refranchising initiative, we are continuing with our efforts to drive stockholder 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.
Our approach to brand management centers on a strategic combination of marketing, menu, operations and remodel
initiatives that creates a distinctive and relevant connection with our customers. Additionally, our shared services operating
platform allows our senior management 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 strengthen brand performance and enable growth.
Applebee's Key Strategies
We continue to revitalize the Applebee's brand. Applebee's domestic system-wide same restaurant sales have increased in
three of the past four years, with a cumulative increase of 3.2% over that time. We plan to grow 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 franchisee margins and restaurant level economics.
Drive Profitable Sales and Traffic
• Continued focus on meeting the consumer's need for value throughout 2013, with such promotions as the return of
our successful “Sizzling Entrées” starting at $9.99 nationwide, the return 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
Chicken and Shrimp Tequila Tango, Marsala Shrimp Sirloin and highly popular new Brew Pub Pretzels & Beer
Cheese Dip;
•
Increased our focus on lunch through improved lunch menu items supported by lunch-specific messaging on national
television. We introduced a new Lunch Combos platform in May that allows guests to choose any two of a variety of
new sandwiches, soups, salads, and lunch entrées;
30
• 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 2013 with
Roma Pepper Chicken and Napa Chicken and Portabellos. Since its launch in 2011, our “Under 550” calorie menu
combined with our Weight Watchers menu has established us as a category leader in providing healthy dining options
to our guests;
• Broadened our commitment to healthy dining by introducing a new Kids Menu featuring 10 new Kids Live Well-
approved meals. The new menu, which has received very positive guest feedback, offers a variety of new entrées and
sides that are both healthy and kid-approved. This allows parents to concentrate on engaging with their family
knowing their growing kids can get a fun, healthy meal at Applebee’s; 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 2013, over 70% of the restaurants in the domestic system have been revitalized.
Along with our historical focus on food innovation, the completion of our refranchising transition in 2012 has allowed
Applebee’s to place additional focus on development and implementation of innovative technology solutions. We realize that
customers' tastes are constantly changing and as a brand, Applebee’s continues to learn and grow with our customers, evolving
into a brand of the future.
Improve Franchisee Margins and Restaurant Level Economics
We have continued to build upon process and system improvements deployed in prior years by ongoing improvement
efforts in operating metrics for our franchise partners. Our franchisees continue 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.
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.
With our transition to a 99% franchised system, restaurant operating margin at the remaining 23 Applebee's company-
operated restaurants is not significant 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 Applebee's system.
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.
31
Re-energize and Grow the IHOP Brand
To re-energize and grow the IHOP brand, we have continued our efforts to drive new and existing consumers to our
restaurants by: 1) continuously strengthening our advertising message; 2) maximizing our media effectiveness across both
traditional and new media outlets; and 3) transforming the IHOP menu to reflect evolving consumer tastes.
To ensure our advertisements resonate with consumers, we have continued to employ “Everything You Love About
Breakfast” as our tagline and theme, leveraging our substantial brand equity in breakfast. We have further refined our message
by incorporating in our advertising consumer testimonials that show a wide range of ages and demographics enjoying our
freshly made items. These testimonials have been effective in reinforcing the welcoming environment at our restaurants.
While national advertising remains core to our strategy, we recognize that media consumption is evolving and we must
reach consumers through a range of media channels to drive traffic to our restaurants. Gaining the attention of consumers in a
highly competitive and diverse media market requires that we constantly update where and how we reach consumers. We
continue to successfully build and increase consumer engagement with the IHOP brand in digital and social media, recognizing
the importance of these channels to a significant segment of the population.
We continuously evolve our menu to deliver appealing items to our wide range of consumers presented in an easy-to-use
style that is consistent with our brand message. Our new Brioche French Toast is a recent example that was met with high
consumer interest. In addition, we recently launched the latest menu revision with a new layout that is easier to read and
navigate. The new layout allows customers to more quickly identify their favorite choices, increasing guest satisfaction.
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 customer acceptance of menu items
and the success of promotions and limited time offers.
Improve Operations Performance
We constantly strive to improve every aspect of our 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 continue to evolve how we interpret
and implement changes to address feedback from our guests. We deploy a range of feedback mechanisms including national
consumer tracking studies about our brand, a guest feedback tool, our “Voice of the Guest” program, as well as operational
evaluations conducted by our own employees and operational assessments conducted by a third party service provider. Our field
based operations team is trained to work with franchisees to use this data to enhance their restaurant operations. We believe this
wide range of data enables us to clearly identify areas of opportunity. While results from our efforts have been positive, we
recognize that operations excellence is a continually evolving process.
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 543 restaurants since the inception of the
Current Business Model and our franchisees have a pipeline of 263 additional new restaurants committed, optioned or pending.
The existing franchisee base accounts for most of these future development obligations. In 2013, an IHOP franchisee opened the
first three IHOP restaurants in the Philippines, continuing to demonstrate the interest in the IHOP brand outside of North
America. We continue to explore opportunities to grow in existing and new international markets.
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 also may take steps to exercise our contractual rights within the franchise agreement in the event of
noncompliance.
To positively impact the costs of IHOP franchisees, management works closely with CSCS, an independent cooperative entity,
formed by us and franchisees of Applebee's and IHOP domestic restaurants. We recognize the importance of managing the costs
of food and non-food items and believe the successful relationship among IHOP, its franchisees and CSCS presents an important
differentiator.
However, 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.
32
Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons of Reported or
Future Results
Same-restaurant Sales Trends
Applebee’s domestic system-wide same-restaurant sales decreased 0.7% for the three months ended December 31, 2013
from the same period in 2012. For the full year ended December 31, 2013, Applebee’s domestic system-wide same-restaurant
sales decreased 0.3%, due to a decline in customer traffic partially offset by an increase in average customer check. The
decrease was the first annual decline in domestic system-wide restaurant sales for Applebee's since 2009.
IHOP’s domestic system-wide same-restaurant sales increased 4.5% for the three months ended December 31, 2013,
IHOP's largest quarterly increase since the first quarter of 2006. For the full year ended December 31, 2013, IHOP's domestic
system-wide same-restaurant sales increased 2.4% due to an increase in average customer check that was substantially larger
than a decrease in customer traffic. We believe the increase in average customer check was due in part to the new IHOP menu
launched in June 2013 which influenced customers’ purchasing patterns and resulted in a favorable shift in product mix.
Additionally, we believe the average customer check declined in 2012 because of strong consumer interest in promotional
menu items, resulting in a lower base for comparison.
33
Same-restaurant Traffic
Both of our brands have generally experienced a decline in customer traffic in recent years including the year ended
December 31, 2013. Based on data from Black Box Intelligence, a restaurant sales reporting firm, customer traffic declined in
2013 for the restaurant industry overall, as well as for the casual dining and family dining segments of the restaurant industry.
In the short term, a decline in customer traffic may be offset by an increase in average customer check resulting from an
increase in menu prices, a favorable change in product sales mix, or a combination thereof. A sustained decline in same-
restaurant customer traffic that cannot be offset by an increase in average customer check could have an adverse effect on our
business, results of operations and financial condition. We continue to evaluate and assess opportunities to drive same-
restaurant sales and traffic
Franchisee Matters
We consistently monitor individual franchisee health. However, from time to time, some of our franchisees may experience
financial difficulties, including bankruptcy, that may or may not relate to the financial performance of their franchised IHOP or
Applebee's restaurants.
In February 2013, an IHOP franchisee and its affiliated entities which owned and operated 19 restaurants located in the
states of Illinois, Wisconsin and Missouri filed for bankruptcy protection. As a result of an order issued by the bankruptcy
court, two of the 19 restaurants were returned to us in the third quarter of 2013. A non-cash charge of $0.5 million was recorded
in the Consolidated Statement of Comprehensive Income against deferred rental revenue associated with the leases for those
two restaurants. During the third quarter of 2013, we received favorable rulings from the bankruptcy court which, if upheld,
would allow the transfer of the remaining 17 restaurants to another franchisee. These rulings have been appealed by the current
franchisee and are presently subject to a continued stay order, pursuant to which the current franchisee is operating these
restaurants only on a day-to-day basis and is continuing to make payments to us pursuant to the terms of the original franchise
agreements. Accordingly, we are unable to determine the ultimate outcome of the bankruptcy proceedings at this time.
In an unrelated matter, in April 2013, an Applebee's franchisee which owned and operated 33 restaurants located in Illinois
filed for bankruptcy protection. Pursuant to the bidding procedures approved by the bankruptcy court, 15 of the restaurants
were sold in June 2013 to an affiliate of an existing franchisee and operated without interruption during the transition of
ownership. The remaining 18 restaurants were closed in June 2013. We received approximately $3.8 million in termination
payments and other fees in connection with the closure of these restaurants. We also have entered into a development
agreement with the franchisee that acquired the 15 restaurants to open additional restaurants in Illinois in the future.
34
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 periods in
the prior two years. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company.
However, we believe that presentation of this information is useful in analyzing our revenues because franchisees and area
licensees pay us royalties and advertising fees that are generally based on a percentage of their sales, and, where applicable,
rental payments under leases that partially may be based on a percentage of their sales. Management also uses this information
to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations.
Year Ended December 31,
2013
2012
2011
Applebee's Restaurant Data
Effective Restaurants:(a)
Franchise ....................................................................................................
Company ....................................................................................................
Total.......................................................................................................
1,996
23
2,019
1,894
123
2,017
System-wide:(b)
Domestic sales percentage change(c) ..........................................................
Domestic same-restaurant sales percentage change(d)................................
Franchise:(b)(e)
Domestic sales percentage change(c) ..........................................................
Domestic same-restaurant sales percentage change(d)................................
Domestic average weekly unit sales (in thousands)................................... $
0.3 %
(0.3)%
5.7 %
(0.3)%
46.5
$
1.7 %
1.2 %
8.1 %
1.3 %
46.6
$
1,770
240
2,010
2.6 %
2.0 %
11.3 %
2.0 %
46.4
Year Ended December 31,
2013
2012
2011
IHOP Restaurant Data
Effective Restaurants:(a)
Franchise ....................................................................................................
Area license ................................................................................................
Company ....................................................................................................
Total
System-wide:(b)
1,414
167
12
1,593
1,379
165
15
1,559
Sales percentage change(c) ..........................................................................
Domestic same-restaurant sales percentage change(d)................................
4.8%
2.4%
1.6 %
(1.6)%
Franchise:(b)
Sales percentage change(c) ..........................................................................
Domestic same-restaurant sales percentage change(d)................................
Average weekly unit sales (in thousands) .................................................. $
4.8%
2.4%
34.7
$
1.3 %
(1.6)%
34.0
$
Area License:(b)
1,343
163
11
1,517
1.9 %
(2.0)%
1.7 %
(2.0)%
34.4
IHOP sales percentage change(c) ................................................................
6.3%
2.7 %
2.9 %
35
_________________________________
(a) “Effective Restaurants” are the weighted average number of restaurants open in a given fiscal period, adjusted to account
for restaurants open for only a portion of the period. Information is presented for all Effective Restaurants in the
Applebee’s and IHOP systems, which includes restaurants owned by the Company as well as those owned by franchisees
and area licensees.
(b) “System-wide sales” are retail sales at Applebee’s restaurants operated by franchisees and IHOP restaurants operated by
franchisees and area licensees, as reported to the Company, in addition to retail sales at company-operated restaurants.
Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. Unaudited
reported sales for Applebee's domestic franchise restaurants, IHOP franchise restaurants and IHOP area license restaurants
for the years ended December 31, 2013, 2012 and 2011 were as follows:
Reported sales (unaudited)
Applebee's franchise restaurant sales..............................................
IHOP franchise restaurant sales ......................................................
IHOP area license restaurant sales ..................................................
Year Ended December 31,
2013
$4,474.7
$2,553.9
$249.5
2012
(In millions)
$4,234.9
$2,437.2
$234.7
2011
$3,916.4
$2,405.3
$228.6
(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 period,
compared to the same weeks in the prior year, for domestic 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 domestic restaurants open throughout both fiscal periods being compared may be different from period to
period. Domestic same-restaurant sales percentage change does not include data on IHOP area license restaurants.
(e) 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.
36
The following tables summarize Applebee's and IHOP restaurant development and franchising activity.
Applebee's Restaurant Development Activity
Total restaurants, beginning of year............................................................................
New franchise openings ...................................................................................
Franchise closures ............................................................................................
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 (reductions) additions...............................................
Year Ended December 31,
2012
2011
2013
2,034
26
(49)
2,011
1,988
23
2,011
2,019
34
(19)
2,034
2,011
23
2,034
2,010
24
(15)
2,019
1,842
177
2,019
(1.1)%
0.7%
0.4%
20
6
—
26
(44)
(5)
(49)
(23)
20
14
154
188
(6)
(13)
(19)
169
15
9
132
156
(6)
(9)
(15)
141
IHOP Restaurant Development Activity
Total restaurants, beginning of year............................................................................
1,581
1,550
1,504
New openings:
Franchise ..........................................................................................................
Area license......................................................................................................
Total new openings.....................................................................................
Closings:
Franchise ..........................................................................................................
Area license......................................................................................................
Company ..........................................................................................................
Total closings..............................................................................................
Total restaurants, end of year......................................................................................
Summary—end of year:
Franchise................................................................................................................
Area license ...........................................................................................................
Company................................................................................................................
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 ................................................................................................
Area license...........................................................................................................
Total franchise closings ..............................................................................
Reacquired by the Company.......................................................................................
Net franchise restaurant additions.....................................................................
54
4
58
(17)
(2)
—
(19)
1,620
1,439
168
13
1,620
47
1
48
(14)
(2)
(1)
(17)
1,581
1,404
165
12
1,581
52
6
58
(8)
(4)
—
(12)
1,550
1,369
166
15
1,550
2.5%
2.0%
3.1%
42
11
5
1
59
(17)
(2)
(19)
(2)
38
39
8
1
9
57
(15)
(2)
(17)
(7)
33
45
7
6
3
61
(8)
(4)
(12)
(7)
42
37
Comparison of the fiscal years ended December 31, 2013 and 2012
SUMMARY
Year ended December 31,
2013
2012
Favorable
(Unfavorable) Variance
%(1)
$
(In millions, except percentages)
$
849.9
$
Revenue .................................................................................
Segment profit .......................................................................
Segment profit as % of revenue.............................................
General & administrative expenses .......................................
Interest expense .....................................................................
Gain on disposition of assets .................................................
Income tax provision .............................................................
Effective tax rate....................................................................
Net income.............................................................................
$
640.5
369.7
57.7%
143.6
100.3
(0.2)
38.6
391.9
46.1%
163.2
114.3
(102.6)
67.2
34.9%
34.5%
$
72.0
$
127.7
$
(209.4)
(22.2)
—
19.6
14.1
(102.4)
28.7
—
(55.6)
(24.6)%
(5.7)%
11.6 %
12.0 %
12.3 %
(99.8)%
42.6 %
(0.4)%
(43.6)%
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
The completion of our transition to a 99% franchised company in October 2012 had a significant impact on the comparison
of our results of operations for the year ended December 31, 2013 with the same period of the prior year. The most significant
impact was the decline in revenues and segment profit from the Applebee's company-operated restaurants that were
refranchised, partially offset by increased royalty revenues and franchise fees from the refranchised restaurants. While the total
amount of segment profit declined, segment profit as a percentage of total revenue improved because royalty revenues and
franchise fees produce a higher gross margin than do revenues from company-operated restaurants.
A significant portion of the decline in general and administrative (“G&A”) expenses for the year ended December 31, 2013
was due to the elimination and realignment of administrative functions associated with company-operated restaurants, as well
as to the full-year effect of our staff reduction initiative implemented in the latter half of 2012. Additionally, G&A expenses for
the year ended December 31, 2012 included a $9.1 million charge related to settlement of litigation that commenced prior to
our acquisition of Applebee's. Interest expense declined, in large part, due to repayment of debt with proceeds from the sale of
assets of company-operated restaurants that were refranchised.
REVENUE
Year ended December 31,
2013
2012
Favorable
(Unfavorable) Variance
%(1)
$
Franchise................................................................................
Company................................................................................
Rental.....................................................................................
Financing ...............................................................................
Total revenue .........................................................................
$
$
439.2
63.4
124.8
13.1
640.5
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
$
421.4
291.1
(In millions, except percentages)
17.8
$
(227.7)
1.9
(1.4)
(209.4)
122.9
849.9
14.5
$
$
4.2 %
(78.2)%
1.6 %
(9.5)%
(24.6)%
The decrease in total revenue was primarily due to the refranchising of Applebee's company-operated restaurants in 2012,
partially offset by higher franchise royalty revenues resulting from the increase in the number of Applebee’s and IHOP
franchise restaurants. Additionally, in 2013 we received a total of $7.8 million in termination, transfer and extension fees
related to Applebee's restaurants compared to a total of $4.4 million in such fees in 2012.
38
SEGMENT PROFIT (LOSS)
Franchise operations.........................................................
Company restaurant operations ........................................
Rental operations..............................................................
Financing operations ........................................................
Total..................................................................................
Year ended December 31,
2013
2012
Favorable
(Unfavorable) Variance
%(1)
$
311.5
(In millions, except percentages)
18.0
$
(42.0)
1.8
25.7
41.8
$
$
329.5
(0.2)
27.5
12.9
$
369.7
$
391.9
$
12.9
0.0
(22.2)
5.8 %
(100.4)%
6.9 %
— %
(5.7)%
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
The decline in segment profit for the year ended December 31, 2013 compared to the prior year was primarily due to the
impact of the refranchising of Applebee’s company-operated restaurants, completed in 2012, on the company restaurant
segment. This was partially offset by an increase in the number of Applebee’s and IHOP franchise restaurants, a $3.4 million
increase in termination, transfer and extension fees related to Applebee's restaurants and a 2.4% increase in IHOP domestic
same-restaurant sales. Nearly 90% of our segment profit now comes from our franchise operations. We operate our company
restaurants primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service
models and, accordingly, we do not anticipate these restaurants will generate a significant amount of segment profit or loss in
the foreseeable future.
Franchise Operations
Year ended December 31,
Favorable
(Unfavorable) Variance
%(2)
2013
(In millions, except percentages and number of restaurants)
2012
$
Effective Franchise Restaurants:(1)
Applebee’s............................................................................
IHOP ....................................................................................
Franchise Revenues:
Applebee’s.......................................................................
IHOP................................................................................
IHOP advertising.............................................................
Total franchise revenues ......................................................
Franchise Expenses:
Applebee’s.......................................................................
IHOP................................................................................
IHOP advertising.............................................................
Total franchise expenses ......................................................
Franchise Segment Profit:
$
$
1,996
1,581
199.2
160.5
79.5
439.2
5.7
24.5
79.5
109.7
$
1,894
1,544
185.9
159.1
76.4
421.4
5.5
28.0
76.4
109.9
Applebee’s.......................................................................
IHOP................................................................................
Total franchise segment profit .............................................
Segment profit as % of revenue (2)
$
193.5
136.0
329.5
75.0%
$
180.4
131.1
311.5
73.9%
$
102
37
13.3
1.4
3.1
17.8
(0.2)
3.5
(3.1)
0.2
13.1
4.9
18.0
5.4 %
2.4 %
7.2 %
0.8 %
3.9 %
4.2 %
(4.1)%
12.5 %
(3.9)%
0.2 %
7.3 %
3.7 %
5.8 %
__________________________________________________________________________________________________
(1) Effective Franchise Restaurants are the weighted average number of franchise restaurants open in a given fiscal period, adjusted to account for franchise
restaurants open for only a portion of the period.
(2) Percentages calculated on actual amounts, not rounded amounts presented above.
The increase in Applebee’s franchise revenue was attributable to higher royalty revenue resulting from a 5.4% increase in
the number of Effective Franchise Restaurants and to termination fees associated with the closure of certain Applebee's
franchise restaurants. These favorable changes were partially offset by a decrease in fees associated with franchisee-to-
franchisee sales of Applebee's franchise restaurants and 0.3% decrease in Applebee's domestic same-restaurant sales.
39
Applebee's Effective Franchise Restaurants increased by 102 due to the full-year effect in 2013 of refranchising 154
Applebee’s company-operated restaurants during 2012 (17 in the first quarter, 98 in the third quarter and 39 in the fourth
quarter), partially offset by a net decrease of 23 restaurants during 2013. Approximately $9.2 million of the revenue increase
was attributable to the refranchised restaurants. Termination fees increased $5.4 million in 2013 compared to the prior year,
primarily due to the closure of 18 Applebee's restaurants as discussed under "Significant Known Events, Trends or
Uncertainties Impacting or Expected to Impact Comparisons of Reported or Future Results - Franchisee Matters" above.
Transfer and extension fees associated with franchisee-to-franchisee sales of Applebee's franchise restaurants decreased $2.0
million in 2013 compared to the prior year, due to a decrease in the amount of transfer activity.
In 2013 we received a total of $7.8 million in termination, transfer and extension fees related to Applebee's restaurants
compared to a total of $4.4 million in such fees in 2012. Termination, transfer and extension fees, by nature, are unpredictable
and variable in any given year; we do not consider the 2013 variances in these fees compared to the prior year to be indicative
of any trend. Further, we do not anticipate the total of such fees that may be received in 2014 will be of the same magnitude as
those received in either 2013 or 2012.
The increase in IHOP franchise revenue (other than advertising) was primarily attributable to a 2.4% increase in the
number of Effective Franchise Restaurants due to development as well as to an increase of 2.4% in IHOP domestic franchise
same-restaurant sales. IHOP added a net total of 38 franchise and area license restaurants during 2013 due to development.
These favorable changes were partially offset by a $2.9 million decrease in sales of pancake and waffle dry mix.
The decrease in IHOP franchise expenses (other than advertising) was primarily due to lower purchase volumes of pancake
and waffle dry mix, partially offset by a $0.9 million increase in bad debt expense. The increase in bad debt expense in 2013
was primarily due to a $0.5 million recovery in 2012 of a receivable previously written off that reduced the comparative 2012
expense.
IHOP’s total franchise expenses are substantially higher than Applebee’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, due to our having less contractual control over Applebee’s advertising
expenditures, that activity is considered to be an agency relationship and therefore is not recognized as franchise revenue and
expense. The increases in IHOP advertising revenue and expense in 2013 compared to the prior year were due to the increases
in Effective Franchise Restaurants and the increases in domestic franchise same-restaurant sales that also impacted IHOP
franchise revenue as noted above.
The increase in franchise segment profit for the year ended December 31, 2013 compared to the prior year was primarily
due to an increase in Applebee's Effective Franchise Restaurants because of the refranchising in 2012 of company-operated
restaurants, a net increase in franchise termination, transfer and extension fees, an increase in IHOP's Effective Franchise
Restaurants due to new restaurant development and an increase of 2.4% in IHOP domestic franchise same-restaurant sales.
Company Restaurant Operations
Year ended December 31,
Favorable
(Unfavorable) Variance
%(2)
2013
(In millions, except percentages and number of restaurants)
2012
$
Effective Company Restaurants:(1)
Applebee’s.............................................................................
IHOP......................................................................................
23
12
123
15
Company restaurant sales ......................................................
Company restaurant expenses ...............................................
Company restaurant segment profit.......................................
Segment profit as % of revenue (2)
$
$
$
$
63.4
63.6
(0.2)
(0.2)%
$
$
291.1
249.3
41.8
14.4%
(100)
(3)
(227.7)
185.7
(42.0)
(81.3)%
(20.0)%
(78.2)%
74.5 %
(100.4)%
_____________________________________________________
(1) Effective Company Restaurants are the weighted average number of company restaurants open in a given fiscal period, adjusted to account for company
restaurants open for only a portion of the period.
(2) Percentages calculated on actual amounts, not rounded amounts presented above.
As of December 31, 2013, company restaurant operations comprised 23 Applebee’s company-operated restaurants and 10
IHOP company-operated restaurants. We operate these restaurants primarily to test new remodel programs, operating
procedures, products, technology, cooking platforms and service models. Additionally, from time to time we may also operate
40
restaurants reacquired from IHOP franchisees on a temporary basis until those restaurants are refranchised. There were three
such temporarily operated IHOP restaurants at December 31, 2013. Applebee's Effective Company Restaurants for the year
ended December 31, 2012 include the 154 restaurants refranchised as noted under “Franchise Operations” above for the period
of time they were operated as company restaurants.
Company restaurant sales and expenses for the year ended December 31, 2013 decreased $224.0 million and $184.2
million, respectively, because of the refranchising of 154 Applebee's company-operated restaurants in 2012.
Rental Operations
Year ended December 31,
2013
2012
Favorable
(Unfavorable) Variance
%(1)
$
Rental revenues .....................................................................
Rental expenses .....................................................................
Rental operations segment profit...........................................
Segment profit as % of revenue (1)
$
$
124.8
97.3
27.5
22.0%
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
(In millions, except percentages)
1.9
$
(0.1)
1.8
$
$
$
122.9
97.2
25.7
20.9%
1.6 %
(0.1)%
6.9 %
Rental operations relate primarily to IHOP franchise restaurants that were developed under the Previous IHOP Business
Model described under Item 1. - Business. Rental income includes revenue from operating leases and interest income from
direct financing leases. Rental expenses are costs of prime operating leases and interest expense on prime capital leases on
certain franchise restaurants.
Rental revenue for the year ended December 31, 2013 increased due to a $3.0 million increase in contractual and
contingent rent, partially offset by a $0.7 million decline in interest income as direct financing leases are repaid and a $0.7
million increase in the write-off of deferred lease revenue associated with franchise restaurants whose lease agreements were
prematurely terminated. Rental expenses for the year ended December 31, 2013 increased slightly as a $1.3 million increase in
contractual and contingent prime rent costs were substantially offset by a decrease in interest on capital lease obligations. The
increase in rental segment profit for the year ended December 31, 2013 was primarily due to the increase in contractual and
contingent rent and the net favorable change in interest revenue and expense, partially offset by the increase in write-offs of
deferred lease revenue associated with franchise restaurants whose lease agreements were prematurely terminated.
Financing Operations
Year ended December 31,
2013
2012
Favorable
(Unfavorable) Variance
%(1)
$
Financing revenues................................................................
Financing expenses................................................................
Financing operations segment profit .....................................
Segment profit as % of revenue (1)
$
$
13.1
0.2
12.9
98.1%
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
$
(In millions, except percentages)
$
$
14.5
1.6
12.9
88.8%
$
(1.4)
1.4
0.0
(9.5)%
84.9 %
— %
Financing operations relate primarily to IHOP franchise restaurants that were developed under the Previous IHOP Business
Model described under Item 1. - Business. Financing operations revenue primarily consists of interest income from the
financing of franchise fees and equipment leases, as well as sales of equipment associated with IHOP restaurants reacquired by
us. Financing expenses are primarily the cost of restaurant equipment sold associated with reacquired IHOP restaurants.
The decrease in financing revenue for the year ended December 31, 2013 was due to a $1.0 million decrease in interest
revenue resulting from the progressive decline in note balances due to repayments and less sales activity related to IHOP
restaurants reacquired from franchisees. The decrease in financing expenses for the year ended December 31, 2013 was due to
less sales activity related to IHOP restaurants reacquired from franchisees. Sales of equipment associated with reacquired IHOP
restaurants are, by nature, unpredictable and variable in any given year.
41
OTHER EXPENSE AND INCOME ITEMS
Year ended December 31,
2013
2012
Favorable
(Unfavorable) Variance
$
%
$
General and administrative expenses ....................................
Interest expense .....................................................................
Amortization of intangible assets ..........................................
Closure and impairment charges ...........................................
Loss on extinguishment of debt.............................................
Debt modification costs.........................................................
Gain on disposition of assets .................................................
Provision for income taxes ....................................................
143.6
100.3
12.3
1.8
0.1
1.3
(0.2)
38.6
General and Administrative Expenses
$
(In millions, except percentages)
19.6
$
14.1
0.0
2.4
5.5
(1.3)
(102.4)
28.7
163.2
114.3
12.3
4.2
5.6
—
(102.6)
67.2
12.0 %
12.3 %
0.1 %
57.0 %
99.0 %
n.m.
(99.8)%
42.6 %
The $19.6 million decrease in G&A expenses for the year ended December 31, 2013 compared to the same period of the
prior year was primarily due to compensation costs that were lower by approximately $11.6 million and to a $9.1 million
charge recorded in 2012 related to settlement of litigation that commenced prior to our acquisition of Applebee's. These
favorable variances were partially offset by a $1.2 million increase in consumer research costs.
The decline in compensation costs was primarily due to: (i) lower salaries and benefits resulting from the refranchising of
Applebee's company-operated restaurants and from the full-year effect of restructuring initiatives announced in the third quarter
of 2012; (ii) lower stock-based compensation costs and (iii) lower severance costs, partially offset by higher bonus expenses
and higher expenses for outsourced services.
Interest Expense
Interest expense for the year ended December 31, 2013 decreased by $14.1 million compared to the same period of the
prior year primarily due to a reduction of outstanding debt balances. Average interest-bearing debt outstanding (our Term
Loans, Senior Notes and financing obligations) during the year ended December 31, 2013 was approximately $200 million
lower than the same period of the prior year. Additionally, the 50-basis-point-decline in the variable interest rate on our Term
Loans from 4.25% to 3.75% as a result of a debt modification in February 2013 (see “Liquidity and Capital Resources - Credit
Agreement Amendments”) contributed to the decrease in interest expense.
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, the annual amount of amortization expense will begin to decline in 2015
as intangible assets with shorter lives become fully amortized.
Closure and Impairment Charges
Closure and impairment charges for the years ended December 31, 2013 and 2012 were as follows:
Year Ended
December 31,
2013
2012
(In millions)
Closure charges..................................................................................................................
Long-lived tangible asset impairment................................................................................
Total closure and impairment charges...............................................................................
$
$
1.0
0.8
1.8
$
$
2.3
1.9
4.2
On a regular 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
42
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.
Closure charges for the year ended December 31, 2013 primarily related to adjustments to the estimated reserve for closed
IHOP and Applebee's restaurants. Long-lived tangible asset impairment charges for the year ended December 31, 2013 related
to three Applebee's company-operated restaurants in the Kansas City, Missouri area. We evaluated the causal factors of all
impairments of long-lived assets as they were recorded during 2013 and concluded they were based on factors specific to each
asset and not potential indicators of an impairment of other long-lived assets.
Closure charges for the year ended December 31, 2012 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 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.
See “Critical Accounting Policies and Estimates - Goodwill and Intangibles” for a description of our policy with respect to
the review for impairments of goodwill and indefinite life intangible assets. In carrying out that policy, we noted no indicators
of impairment on an interim basis and no impairments as the result of performing our annual test for impairment during the
fiscal years ended 2013 and 2012.
Loss on Extinguishment of Debt
Instrument Retired/Repaid(1)
Term Loans...................................................................................................
Loss on extinguishment of debt, 2013 .........................................................
Term Loans...................................................................................................
Senior Notes .................................................................................................
Loss on extinguishment of debt, 2012 .........................................................
Face Amount
Retired/Repaid
Cash Paid
Loss(2)
$
$
$
$
(In millions)
$
$
4.8
4.8
4.8
4.8
210.5
5.0
215.5
$
$
210.5
5.5
216.0
$
$
$
$
0.1
0.1
4.9
0.7
5.6
_____________________________________________________
(1) For a description of the respective instruments, refer to Note 7 of the Notes to Consolidated Financial Statements.
(2) Including proportional write-off of the discount and deferred financing costs related to the debt retired.
The loss on extinguishment of debt for the year ended December 31, 2013, decreased compared to the prior year because
of a decrease in the face amount of debt retired. There were no premiums paid to extinguish debt for the year ended December
31, 2013. We paid a total premium of $0.5 million to repurchase Senior Notes during the year ended December 31, 2012.
Debt Modification Costs
On February 4, 2013, we entered into Amendment No. 2 (“Amendment No. 2”) to the Credit Agreement dated October 8,
2010. The key provisions of Amendment No. 2 are discussed under “Liquidity and Capital Resources - February 2013
Amendment to Credit Agreement.” Fees paid to third parties of $1.3 million in connection with Amendment No. 2 were
included as “Debt modification costs” in the Consolidated Statement of Comprehensive Income for the year ended December
31, 2013.
Gain on Disposition of Assets
There were no individually significant dispositions of assets during the year ended December 31, 2013. During the year
ended December 31, 2012, we completed 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.
43
With the completion in October 2012 of our strategy to refranchise the substantial majority of Applebee's company-
operated restaurants, we do not expect significant gains or losses on dispositions of assets for the foreseeable future.
Income Tax Provision
We recorded a tax provision of $38.6 million in 2013 as compared to a tax provision of $67.2 million in 2012. The change
was primarily due to the decrease in our pretax book income. The 2013 effective tax rate of 34.9% applied to pretax book
income was lower than the statutory Federal tax rate of 35% primarily related to the release of valuation allowances for various
state net operating loss carryovers.
As of each reporting date, management considers new evidence, both positive and negative, that could impact its estimate
with regards to future realization of deferred tax assets. As of December 31, 2013, because we implemented a tax planning
strategy that was prudent and feasible in the current year, management determined that sufficient positive evidence existed as of
December 31, 2013, to conclude that it was more likely than not that additional deferred taxes of $3.0 million were realizable,
and therefore, reduced the valuation allowance.
Comparison of the fiscal years ended December 31, 2012 and 2011
SUMMARY
Year ended December 31,
2012
2011
Favorable
(Unfavorable) Variance
%(1)
$
Revenue .................................................................................
Segment profit .......................................................................
Segment profit as % of revenue.............................................
General & administrative expenses .......................................
Interest expense .....................................................................
Impairment and closure charges............................................
Gain on disposition of assets .................................................
Income tax provision .............................................................
Effective tax rate....................................................................
Net income.............................................................................
$
849.9
391.9
46.1%
163.2
114.3
4.2
(102.6)
67.2
(In millions, except percentages)
(225.3)
$
1,075.2
$
407.6
37.9%
155.8
132.7
29.9
(43.3)
29.8
(15.7)
—
(7.4)
18.4
25.7
59.3
(37.4)
(6.1)%
(24.6)%
(3.9)%
21.6 %
(4.7)%
13.8 %
85.9 %
(137.2)%
(125.6)%
(21.5)%
69.8 %
34.5%
28.4%
$
127.7
$
75.2
$
52.5
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
Our 2012 financial results compared to 2011 were significantly impacted by:
• 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;
• Lower impairment and closure charges due to non-recurring costs of $27.5 million related to the 2011 termination of
the sublease of Applebee's Restaurant Support Center;
• Lower interest expense due to the ongoing early retirement of debt with both proceeds from the asset dispositions and
excess cash flow;
• 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; and
• An increased effective tax rate. The 2011 effective tax rate was lower than the statutory Federal tax rate of 35%
primarily due to tax credits, changes in tax rates and the release of liabilities for unrecognized tax benefits. The tax
benefits are primarily FICA tip and other compensation-related credits associated with Applebee's company-operated
restaurants. As company-operated restaurants are refranchised the amount of these credits declines.
44
REVENUE
Year ended December 31,
2012
2011
Favorable
(Unfavorable) Variance
%(1)
$
Franchise................................................................................
Company................................................................................
Rental.....................................................................................
Financing ...............................................................................
Total revenue .........................................................................
$
$
421.4
291.1
122.9
14.5
849.9
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
$
398.5
531.0
(In millions, except percentages)
22.9
$
(239.9)
(3.1)
(5.2)
(225.3)
1,075.2
126.0
19.7
$
$
5.8 %
(45.2)%
(2.5)%
(26.5)%
(24.6)%
Revenues decreased 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 (LOSS)
Year ended December 31,
2012
2011
Favorable
(Unfavorable) Variance
%(1)
$
Franchise operations.........................................................
Company restaurant operations ........................................
Rental operations..............................................................
Financing operations ........................................................
Total..................................................................................
$
311.5
41.8
25.7
12.9
$
391.9
_____________________________________________________
(1) Percentages calculated on actual amounts, not rounded amounts presented above
$
72.6
293.5
(In millions, except percentages)
18.0
$
(30.8)
(2.1)
(0.8)
(15.7)
407.6
13.7
27.8
$
$
6.1 %
(42.3)%
(7.6)%
(6.4)%
(3.9)%
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.
45
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
46
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 $240.0 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. 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
47
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
88.8%
$
$
19.7
6.0
13.7
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 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
48
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.
49
Loss on Extinguishment of Debt
Instrument Retired/Repaid(1)
Face Amount
Retired/Repaid
Cash Paid
Loss(2)
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
(In millions)
$
_____________________________________________________
(1) For a description of the respective instruments, refer to Note 7 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.
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
50
(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. There was a commitment fee for the unused portion of the
Revolving Facility of 0.75%. LIBOR rates did not exceed the interest rate floor under the Credit Agreement; accordingly, the
interest rate on our LIBOR-based Term Loan borrowings under the Credit Agreement was 6.00% until February 2011.
Credit Agreement Amendments
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. 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. 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. LIBOR rates did not
exceed the revised interest rate floor under Amendment No. 1; accordingly, the interest rate on our LIBOR-based Term Loan
borrowings under Amendment No. 1 was 4.25% until February 2013.
In February, 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 loans under the Revolving Facility
(“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 interest rate floors for Revolving Loans were eliminated. The commitment fee for the unused portion of the
Revolving Facility was reduced from 0.75% to 0.50% and, if our consolidated leverage ratio is lower than 4.75:1, from 0.50%
to 0.375%. Through December 31, 2013, LIBOR rates have not exceeded the interest rate floor set by Amendment No. 2;
accordingly, the interest rate on our LIBOR-based Term Loans borrowings under Amendment No. 2 was 3.75%.
Taking into account fees and expenses associated with the Credit Agreement and subsequent amendments thereto that are
amortized as additional non-cash interest expense over the seven-year life of the Credit Agreement, the weighted average
effective interest rate for the Credit Facility as of December 31, 2013 was 5.0%.
In addition, Amendment No. 2 established the following consolidated leverage ratio thresholds for excess cash flow (as
defined in the Credit Agreement) (“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 were 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, in February 2013, we borrowed $472.0 million under the Term Facility, retiring the
same amount of then-outstanding borrowings under Amendment No. 1.
Mandatory Repayments
Term Loans under Amendment No. 2 are subject to the following prepayment requirements:
• Mandatory prepayments equal to 0.25% of the aggregate principal amount of the Term Loan borrowing ($472.0 million
borrowed concurrent with Amendment No. 2) must be made on a quarterly basis (1.0% for a fiscal year); and
• 50% of Excess Cash Flow 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. There were
no mandatory repayments of Term Loans from Excess Cash Flow required in 2013.
We may voluntarily prepay loans under both the Term Facility and the Revolving Facility without premium or penalty.
Revolving Loans
During the year ended December 31, 2013, we did not borrow from our Revolving Facility. 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
51
Facility. Our available borrowing capacity under the Revolving Facility is reduced by outstanding letters of credit, which
totaled $10.9 million at December 31, 2013.
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 2013.
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 on and repurchases of our common stock. The limitation on restricted
payments under the Credit Agreement is recalculated quarterly. 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
quarter in which the consolidated leverage ratio is greater than 5.75:1; (iii) 75% of Excess Cash Flow for each fiscal quarter if
the consolidated leverage ratio is less than 5.75:1 and greater than or equal to 5.25:1; (iv) 100% of Excess Cash Flow for each
fiscal quarter in which the consolidated leverage ratio is less than 5.25:1; and (v) proceeds from the exercise of options to
purchase our common stock, less any amounts paid as dividends or to repurchase our common stock. As of December 31,
2013, the permitted amount of future restricted payments under the Credit Agreement was approximately $89 million.
The Indenture under which our Senior Notes were issued also contains a limitation on restricted payments that is
recalculated on an annual basis. Such restricted payments are limited to a cumulative amount comprised of (i) 50% of
consolidated net income (as defined in the Indenture), plus (ii) proceeds from exercise of stock options, less (iii) restricted
payments made. The permitted amount of future restricted payments under the Indenture, calculated as of December 31, 2013,
was approximately $112 million.
We made restricted payments of $87.1 million during the year ended December 31, 2013, comprised of cash dividends on
our common stock of $57.4 million and repurchases of common stock of $29.7 million.
Debt Covenants
Pursuant to our Credit Agreement, we are required to comply with a maximum consolidated leverage ratio and a minimum
consolidated cash interest coverage ratio. Our current maximum consolidated leverage ratio of total debt (net of unrestricted
cash not to exceed $75 million) to adjusted EBITDA is 7.0:1. Our current minimum ratio of adjusted EBITDA to consolidated
cash interest is 1.75:1. Compliance with each of these ratios is required quarterly, calculated on a trailing four-quarter basis.
The ratio thresholds become more rigorous over time. The maximum consolidated leverage ratio, which began at 7.5:1,
declines 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 began at 1.5:1, increased to 1.75:1 beginning with the first quarter of 2013 and will increase to 2.0:1
beginning with the first quarter of 2016 and will remain at that level until the Credit Agreement expires in October 2017. There
are no financial maintenance covenants associated with our Senior Notes.
For the trailing twelve months ended December 31, 2013, our consolidated leverage ratio was 4.8:1 and our consolidated
cash interest coverage ratio was 2.5:1. Our adjusted EBITDA for the twelve months ended December 31, 2013 exceeded the
amount necessary to remain in compliance with these ratios by 45% and 43%, respectively.
Our Senior Notes, Term Loans and Revolving Loans 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 adjusted EBITDA used in calculating the covenant 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 adjusted EBITDA
used for covenant compliance purposes is as follows:
52
Trailing Twelve Months Ended December 31, 2013
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..................................................................................................................................
Adjusted EBITDA ................................................................................................................................................ $
110,617
116,453
58
35,355
9,364
1,812
3,652
(223)
277,088
(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.
Potential Refinancing of Indebtedness
Our Credit Agreement expires in October 2017 and our Senior Notes are due in October 2018. We continually review all
available options to efficiently manage our debt portfolio in light of, among other things, prevailing interest rates, the current
and forecast economic climate and our overall business strategy. We may seek to refinance some or all of our indebtedness
prior to the expiration or repayment dates. In the event the Senior Notes are repaid prior to October 2018, we may be liable for
certain make-whole payments. These make-whole payments, should they be required, will be determined in accordance with
the terms of the Indenture under which the Senior Notes were issued. We estimate the make-whole payment was approximately
$92.1 million at December 31, 2013. The make-whole payment will decline progressively from that amount to $36.1 million as
of October 30, 2014. The make-whole payment will then decline in two step-downs, first to $18.1 million on October 30, 2015
and to zero on October 30, 2016. The progressive decline between December 2013 and October 2014 will be relatively linear,
although the actual calculation includes a number of unpredictable variables, including prevailing interest rates at the specific
point in time a make-whole payment, should one be required, is calculated.
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 2014. We have not entered into
hedging agreements to mitigate the effect of changes in variable interest rates charged on borrowings under the Credit
Agreement.
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 ..................................... $
127.8
7.0
(93.3)
41.5
$
$
52.9
165.4
(214.5)
3.8
$
$
121.7
101.7
(265.0)
(41.6)
2013
2012
(In millions)
2011
Operating Activities
Cash provided by operating activities is primarily driven by revenues earned and collected from our franchisees, profit
from our rental operations and financing operations and, in years prior to 2013, operating earnings from company-operated
restaurants. 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
53
fluctuations in same-restaurant sales as some operating leases include a provision for contingent rent based on retail sales and
by 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 increased $74.9 million for the year ended December 31, 2013 compared to the prior
year. For the year ended December 31, 2013, our net income plus the non-cash reconciling items shown in our statements of
cash flows (primarily depreciation, gains on asset sales, deferred taxes and stock-based compensation) increased by $41.8
million compared to 2012. The primary reasons for the increase were lower income tax payments, lower G&A and lower
interest costs for the year ended December 31, 2013 compared to the same period of 2012, partially offset by the lower segment
profit that resulted from the refranchising of Applebee's company-operated restaurants. Cash payments for income taxes
decreased $40.7 million primarily due to significantly lower gains on asset dispositions, partially offset by lower income tax
credits, primarily FICA tip and other compensation-related tax credits, that decreased due to the refranchising of Applebee's
company-operated restaurants. Cash payments for interest decreased $17.1 million compared to 2012 primarily due to lower
average debt balances during 2013 compared to 2012.
There also was a favorable change in net working capital. Net changes in working capital provided cash of $25.1 million
for the year ended December 31, 2013 compared to $8.0 million of cash used during the year ended December 31, 2012, a
favorable change of $33.1 million. Approximately half of the increase was due to differences in the timing of rent payments
around the varying fiscal year ends.
Investing Activities
Net cash provided by investing activities in 2013 was primarily attributable to $14.0 million of principal receipts from
notes, equipment contracts and other long-term receivables, partially offset by $7.0 million of capital expenditures. Capital
expenditures decreased from $17.0 million in 2012 due primarily to a decline in the number of company-operated restaurants.
We expect capital expenditures to be approximately $10 million in fiscal 2014, approximately half of which is related to
information technology projects.
The following table represents the principal receipts on various long-term receivables due from our franchisees as of
December 31, 2013:
2014
2015
Principal Receipts Due By Period
2016
2018
Thereafter
Total
2017
(In millions)
13.5
$
10.1
0.1
23.7
$
8.8
11.1
0.1
20.0
$
$
70.0
43.6
0.0
113.6
$
$
115.1
88.6
2.1
205.8
Equipment leases(1) ........................ $
Direct financing leases(2).................
Franchise notes and other(3) ..............
Total.................................................. $
7.1
7.0
0.8
14.9
$
$
7.7
8.0
0.7
16.4
$
$
8.0
8.8
0.4
17.2
$
$
________________________________________________
(1) Equipment lease receivables extend through the year 2029.
(2) Direct financing lease receivables extend through the year 2027.
(3) Franchise note receivables extend through the year 2020.
Financing Activities
Financing activities used net cash of $93.3 million during 2013. Cash used in financing activities primarily consisted of
cash dividends on common stock totaling $57.4 million, repurchases of our common stock totaling $29.7 million, repayments
of capital lease, financing obligations and long-term debt of $14.8 million, and a payment of $1.3 million for costs associated
with Amendment No. 2. Cash provided by financing activities primarily consisted of a net cash inflow of $8.6 million related to
equity awards and a decrease in marketing fund restricted cash of $1.2 million.
During 2013, we did not utilize 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 (collectively, “long-term receivables”), less additions to property and equipment,
principal payments on capital lease and financing obligations and the mandatory annual repayment of 1% of the principal
54
balance of our Term Loans. We believe this information is helpful to investors to determine our cash available for general
corporate purposes and for the return of cash to shareholders pursuant to 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:
Cash flows provided by operating activities................................................... $
Principal receipts from long-term receivables................................................
Additions to property and equipment .............................................................
Principal payments on capital lease and financing obligations ......................
Mandatory 1% repayment of principal balance of Term Loans .....................
Free cash flow................................................................................................ $
2013
$
Year Ended December 31,
2012
(In millions)
52.9
12.2
(17.0)
(10.8)
(7.4)
29.9
127.8
14.0
(7.0)
(10.0)
(4.7)
120.1
$
$
$
2011
121.7
13.1
(26.3)
(13.4)
(7.4)
87.7
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 $120.1 million during the year ended December 31, 2013 compared to $29.9 million in the same
period in 2012, an increase of $90.1 million. This increase was primarily due to the increase in cash provided by operating
activities discussed above, as well as a decrease in capital expenditures.
At December 31, 2013, our cash and cash equivalents totaled $106.0 million, including approximately $53.2 million of
cash held for gift card programs and advertising funds.
Dividends
As discussed in “Restricted Payments” above, payment of dividends is subject to limitations under both our Credit
Agreement and Senior Notes. 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, the limitations on restricted payments and other factors.
We did not pay dividends on our common stock during our fiscal years 2009 through 2012. During the year ended December 31,
2013, we declared and paid dividends on our common stock as follows:
Year ended December 31, 2013
Declaration date
Payment date
First quarter........................................................... February 26, 2013
Second quarter ......................................................
May 14, 2013
Third quarter .........................................................
Fourth quarter .......................................................
Total......................................................................
August 2, 2013 September 27, 2013
October 3, 2013 December 27, 2013
March 29, 2013
$
June 28, 2013
Dividend per
share
Total(1)
(In millions)
0.75
0.75
0.75
0.75
3.00
$
$
14.6
14.4
14.3
14.3
57.6
$
_______________________________________________________________
(1)
Includes dividend equivalents paid on unvested restricted stock units
On February 25, 2014, our Board of Directors approved payment of a cash dividend of $0.75 per share of common stock,
payable at the close of business on March 28, 2014 to the stockholders of record as of the close of business on March 14, 2014.
55
Share Repurchases
As discussed in “Restricted Payments” above, repurchases of common stock are subject to limitations under both our
Credit Agreement and Senior Notes. 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, the limitations on restricted payments and other factors.
On February 26, 2013, our Board of Directors approved a stock repurchase authorization of up to $100 million of our
common stock. During the year ended December 31, 2013, we purchased 412,022 shares of our common stock for a total of
$29.7 million, an average price of $72.06 per share. We may repurchase up to an additional $70.3 million of our common stock
under the outstanding Board 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, 2013, 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, 2013:
Contractual Obligations
1 Year
2 - 3 Years
4 - 5 Years
More than
5 Years
Total
Payments Due By Period
Debt(1).......................................................................... $
Operating leases ..........................................................
Capital leases(1)............................................................
Financing obligations(1)...............................................
Purchase commitments ...............................................
Unrecognized income tax benefits(2) ...........................
Total minimum payments............................................
Less interest.................................................................
Total............................................................................. $
94.5
76.7
24.3
5.7
90.9
0.2
292.3
(108.1)
184.2
$
$
(In millions)
1,360.2
$
138.1
41.6
11.3
—
—
1,551.2
(171.9)
1,379.3
$
189.0
156.7
50.0
11.9
—
—
407.6
(212.4)
195.2
$
— $
392.2
76.3
92.3
—
2.5
563.3
(64.0)
499.3
$
Commitments
Expiration By Period
1 Year
2 - 3 Years
4 - 5 Years
More than
5 Years
Lease guarantees(3) ...................................................... $
Letters of credit(4) ........................................................
Food purchases(5).........................................................
Total............................................................................. $
20.6
10.9
8.5
40.0
$
$
(In millions)
36.8
$
—
—
36.8
$
$
$
39.6
—
—
39.6
320.8
—
—
320.8
(1) Includes interest calculated on balances as of December 31, 2013 using interest rates in effect as of December 31, 2013.
(2) While up to $0.2 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 2014 through 2048. See Note 10 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 by
CSCS for the purpose of supplying limited time promotions.
56
1,643.7
763.7
192.2
121.2
90.9
2.7
2,814.4
(556.4)
2,258.0
Total
417.8
10.9
8.5
437.2
$
$
$
Critical Accounting Policies and Estimates
Our significant accounting policies are comprehensively described in Note 2 of Notes to the Consolidated Financial
Statements. We believe the accounting policies discussed below are particularly important to the understanding of our
consolidated financial statements and require us to make significant judgments in the preparation of those consolidated
financial statements. In exercising those judgments, we make estimates and assumptions that affect the carrying values of assets
and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting
periods covered by the financial statements. We base our estimates and assumptions on current facts, historical experience and
various other factors that we believe to be reasonable under the circumstances. Accounting assumptions and estimates are
inherently uncertain and actual results may differ materially from our estimates. Changes in estimates and judgments could
significantly affect our results of operations, financial condition and cash flow in the future.
Revenue Recognition
We 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
when the assessment of the likelihood of redemption of the gift card becomes remote. This assessment is based upon
Applebee's and IHOP's individual historical experience with gift card redemptions in their own program.
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 perform a quantitative impairment test of the goodwill of the Applebee's franchise unit and the tradename of the
Applebee's company and franchise units as of October 31 of each year. The goodwill of the IHOP franchise unit is assessed
qualitatively 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.
57
In the process of our annual quantitative test 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 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.
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. For sites owned by or leased by us from third parties, we, in turn, sublease to our franchisees. At the inception
of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or 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. We record rent from the possession date through restaurant open date as expense. Once a
restaurant opens for business, we record straight-line rent over the lease term plus contingent rent to the extent it exceeded 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 its leases as either operating
or capital. 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 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”) that are
accrued each period as the liabilities are incurred, in addition to the straight-line rent expense noted above.
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
58
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 or receivable 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 if applicable), and record the difference between the minimum rent paid or received and the straight-line rent as a
lease obligation or receivable, respectively. Certain leases contain provisions that require additional rental payments or receipts
based upon restaurant sales volume ("contingent rent"). Contingent rentals are accrued each period as the liabilities are incurred
or receivables are earned, in addition to the straight-line rent expense or revenue, respectively, 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.
FASB ASC Topic 740-10 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.
59
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 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. The adoption of ASU 2011-08 did not have a material impact on our
consolidated financial statements.
New Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The
amendments in ASU 2013-04 require an entity to measure obligations resulting from joint and several liability arrangements as
the amount the entity agreed to pay on the basis of the arrangement among its co-obligors plus the amount an entity expects to
pay on behalf of co-obligors. ASU 2013-04 also requires an entity to disclose the nature, amount and other information about
each obligation or group of similar obligations. The adoption of ASU 2013-04 as of January 1, 2014, is not anticipated to have
a material impact on our consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11
provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax
asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. ASU 2013-11
may be applied on a retrospective basis, and early adoption is permitted. The adoption of ASU 2013-11 as of January 1, 2014,
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, 2013, we had $467.2 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, 2013. A decrease in interest rates from
60
December 31, 2013 rates would have no impact on interest expense as the current interest rate is below 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, 2013, our long-term investments are comprised primarily of certificates of deposit, 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 2013, 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 $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.
The Company and owners of Applebee's and IHOP franchise restaurants are members of CSCS, a Co-op that manages
procurement activities for the Applebee's and IHOP restaurants that belong to the Co-op. We believe the larger scale created by
combining the supply chain requirements of both brands under one organization can provide cost savings and efficiency in the
purchasing function. As of December 31, 2013, 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 Applebee's and IHOP systems as a whole. None of these food product guarantees is a derivative instrument. At
December 31, 2013, our outstanding guarantees for food product purchases were $8.5 million.
61
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm............................................................................................
Consolidated Balance Sheets as of December 31, 2013 and 2012 ..................................................................................
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,
2013 ..........................................................................................................................................................................
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2013
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2013...............
Notes to the Consolidated Financial Statements..............................................................................................................
Page
Reference
63
64
65
66
67
68
62
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, 2013
and 2012, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December 31, 2013, 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, 2013, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework) and our report dated February 26, 2014 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 26, 2014
63
DineEquity, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
Current assets:
Assets
Cash and cash equivalents ..................................................................................................... $
Receivables, net .....................................................................................................................
Prepaid gift cards ...................................................................................................................
Prepaid income taxes .............................................................................................................
Deferred income taxes ...........................................................................................................
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 ...................................................................................................................
Gift card liability....................................................................................................................
Accrued employee compensation and benefits......................................................................
Accrued interest payable........................................................................................................
Current maturities of capital lease and financing obligations................................................
Other accrued expenses..........................................................................................................
Total current liabilities ......................................................................................................
Long-term debt, less current maturities ......................................................................................
Capital lease obligations, less current maturities........................................................................
Financing obligations, less current maturities ............................................................................
Deferred income taxes ................................................................................................................
Other liabilities ...........................................................................................................................
Total liabilities...................................................................................................................
Commitments and contingencies
Stockholders' equity:
December 31,
2013
2012
$
$
$
106,011
144,137
49,223
4,708
23,853
3,650
331,582
197,153
274,295
697,470
794,057
110,085
2,404,642
4,720
40,050
171,955
24,956
13,575
12,247
16,770
284,273
1,203,517
111,707
48,843
341,578
99,545
2,089,463
64,537
128,610
50,242
16,080
21,772
13,214
294,455
212,269
294,375
697,470
806,093
110,738
2,415,400
7,420
30,751
161,689
22,435
13,236
10,878
21,351
267,760
1,202,063
124,375
52,049
362,171
98,177
2,106,595
Common stock, $0.01 par value; shares: 40,000,000 authorized; 2013 - 25,299,315 issued,
19,040,890 outstanding; 2012 - 25,362,946 issued, 19,197,899 outstanding ........................
Additional paid-in-capital .......................................................................................................
Retained earnings ....................................................................................................................
Accumulated other comprehensive loss..................................................................................
Treasury stock, at cost; shares: 2013 - 6,258,425; 2012 - 6,165,047......................................
Total stockholders' equity.................................................................................................
Total liabilities and stockholders' equity .......................................................................... $
253
274,202
336,578
(164)
(295,690)
315,179
2,404,642
$
254
264,342
322,045
(152)
(277,684)
308,805
2,415,400
See the accompanying notes to the consolidated financial statements.
64
DineEquity, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands, except per share amounts)
Year Ended December 31,
2013
2012
2011
Segment Revenues:
Franchise and restaurant revenues................................................................ $
Rental revenues ............................................................................................
Financing revenues.......................................................................................
Total segment revenues.....................................................................................
Segment Expenses:
Franchise and restaurant expenses ...............................................................
Rental expenses ............................................................................................
Financing expenses ......................................................................................
Total segment expenses.....................................................................................
Gross segment profit .......................................................................................
General and administrative expenses ................................................................
Interest expense.................................................................................................
Amortization of intangible assets......................................................................
Closure and impairment charges.......................................................................
Loss on extinguishment of debt ........................................................................
Debt modification costs ....................................................................................
Gain on disposition of assets.............................................................................
Income before income taxes .............................................................................
Income tax provision.........................................................................................
Net income .......................................................................................................
Other comprehensive income (loss), net of tax:
Adjustment to unrealized loss on available-for-sale investments .................
Foreign currency translation adjustment .......................................................
Total comprehensive income.......................................................................... $
Net income available to common stockholders:
Net income ........................................................................................................ $
Less: Net income allocated to unvested participating restricted stock .............
Less: Accretion of Series B preferred stock......................................................
Net income available to common stockholders ................................................ $
Net income available to common stockholders per share:
Basic .............................................................................................................. $
Diluted ........................................................................................................... $
Weighted average shares outstanding:
Basic ..............................................................................................................
Diluted ...........................................................................................................
502,586
$
712,580
$
124,769
13,112
640,467
173,232
97,298
245
270,775
369,692
143,586
100,264
12,282
1,812
58
1,296
(223)
110,617
(38,580)
72,037
—
(12)
72,025
72,037
(1,200)
—
70,837
3.75
3.70
18,871
19,141
$
$
$
$
$
122,859
14,489
849,928
359,196
97,165
1,623
457,984
391,944
163,215
114,338
12,293
4,218
5,554
—
(102,597)
194,923
(67,249)
127,674
140
2
127,816
127,674
(2,718)
(2,498)
122,458
6.81
6.63
17,992
18,877
$
$
$
$
$
Dividends declared per common share ......................................................... $
Dividends paid per common share ................................................................ $
3.00
3.00
$
$
— $
— $
See the accompanying notes to the consolidated financial statements.
929,523
125,960
19,715
1,075,198
563,449
98,147
5,973
667,569
407,629
155,822
132,707
12,300
29,865
11,159
4,031
(43,253)
104,998
(29,806)
75,192
—
(12)
75,180
75,192
(1,886)
(2,573)
70,733
3.96
3.89
17,846
18,185
—
—
65
C
o
n
v
e
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.
DineEquity, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income .................................................................................................. $
Adjustments to reconcile net income to cash flows provided by operating
activities:
Depreciation and amortization ...............................................................
Non-cash interest expense ......................................................................
Loss on extinguishment of debt .............................................................
Closure and impairment 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.........................................
Repayment of long-term debt (including premiums) .............................
Principal payments on capital lease and financing obligations..............
Payment of debt modification/issuance costs.........................................
Dividends paid on common stock ..........................................................
Repurchase of DineEquity common stock .............................................
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,
2012
2011
2013
72,037
$
127,674
$
75,192
35,355
6,246
58
2,195
(22,674)
9,364
3,690
(2,858)
(223)
(492)
(15,226)
6,143
9,334
8,532
2,521
10,266
3,547
127,815
(7,037)
—
13,982
58
7,003
—
—
(4,800)
(9,968)
(1,296)
(57,445)
(29,698)
(3,324)
9,080
2,858
1,249
(93,344)
41,474
64,537
106,011
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
123,926
91,354
$
$
$
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)
(13,391)
(12,295)
—
(21,170)
(5,080)
6,725
5,443
466
(264,983)
(41,618)
102,309
60,691
148,982
24,139
$
$
$
Supplemental disclosures
Interest paid ............................................................................................ $
Income taxes paid................................................................................... $
106,784
50,702
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® (“IHOP®”) restaurant opened in 1958 in Toluca Lake, California. Shortly
thereafter, the Company's predecessor began developing and franchising additional restaurants. The Company was incorporated
as IHOP Corp. under the laws of the State of Delaware in 1976. In November 2007, the Company acquired Applebee's
International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the
Company was changed to DineEquity, Inc. (“DineEquity”). The Company owns, franchises and operates two restaurant
concepts: Applebee's Neighborhood Grill and Bar® (“Applebee's®”), in the bar and grill segment within the casual dining
category of the restaurant industry, and IHOP in the family dining category of the restaurant industry.
As of December 31, 2013, there was a total of 1,620 IHOP restaurants, of which 1,439 were subject to franchise
agreements, 168 were subject to area license agreements and 13 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 eight countries outside of
the United States. As of December 31, 2013, there were a total of 2,011 Applebee's restaurants, of which 1,988 were subject to
franchise agreements and 23 were company-operated restaurants. Applebee's restaurants were located in 49 states of the United
States, one United States territory and 15 countries outside of the United States.
References herein to Applebee's and IHOP restaurants are to these restaurant concepts, whether operated by franchisees,
area licensees or the Company. Retail sales at restaurants that are owned by franchisees and area licensees are not attributable
to the Company.
2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of 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
2013, 2012 and 2011 fiscal years presented herein ended December 29, 2013, December 30, 2012 and January 1, 2012,
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 and accounts receivable are potentially subject to concentration of credit risk. Cash
and cash equivalents are placed with financial institutions that management believes are creditworthy. The Company does not
believe that it is exposed to any significant credit risk on cash 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, 2013, there were 15 franchisees that owned 57 or more restaurants each
(11 Applebee's franchisees and four IHOP franchisees). These franchisees operated 1,659 Applebee's and IHOP restaurants in
68
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
the United States, which comprised 49% of the total Applebee's and IHOP franchise and area license restaurants in the United
States. Receivables from these franchisees totaled $59.9 million at December 31, 2013.
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. Cash held
related to IHOP advertising funds and the Company's gift card programs are classified as unrestricted cash as there are no legal
restrictions on the use of these funds. Total cash balances related to the IHOP advertising funds and the Company's gift card
programs were $53.2 million and $41.7 million as of December 31, 2013 and 2012, respectively.
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, 2013 and 2012 totaled $0.7 million and $1.9 million,
respectively. These balances were included as other current assets in the consolidated balance sheet.
Other Restricted Assets
At December 31, 2013 and 2012, restricted assets related to a captive insurance subsidiary totaled $1.9 million and $2.0
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 are 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 an auction rate security 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. Properties under capital leases are stated at the
present value of the minimum lease payments. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or remaining useful lives. Leasehold improvements and properties under 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......................
25 - 40 years
Leaseholds and improvements ................... Shorter of primary lease term or between three to 40 years
Equipment and fixtures .............................. Two to 10 years
Properties under capital leases ................... Primary lease term or remaining primary lease term
Depreciable Life
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 a 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 12, Closure and
Impairment 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. The Company's
identifiable intangible assets are comprised primarily of the Applebee's tradename and Applebee's franchise agreements.
Identifiable intangible assets with finite lives (franchise agreements, recipes and menus) are amortized over the period of
estimated benefit using the straight-line method and estimated useful lives. Goodwill and intangible assets considered to have
an indefinite life (primarily the Applebee's tradename) are not subject to amortization. The determination of indefinite life is
subject to reassessment if changes in facts and circumstances indicate the period of benefit has become finite.
Goodwill has been allocated to three reporting units, the 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 performs a quantitative test for impairment of the goodwill of the Applebee's franchise unit and the
tradename of the Applebee's company and franchise units as of October 31 of each year. The goodwill of the IHOP franchise
unit is assessed qualitatively 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 annual quantitative test 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 flow model include future trends in sales, operating expenses, overhead expenses, capital expenditures and
changes in working capital, along with an appropriate discount rate based on the Company's estimated cost of equity capital
and after-tax cost of debt. 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 2013, 2012 or 2011.
Revenue Recognition
The Company's revenues are recorded in four categories: franchise operations, company restaurant operations, rental
operations and financing operations.
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 primarily of interest income from the financing of franchise
fees and equipment leases, as well as sales of equipment associated with refranchised IHOP restaurants.
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 been earned, which occurs at the
franchisees' point of sale. 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 only on redemptions at company-operated restaurants. The Company recognizes gift card
breakage income on gift cards issued when the assessment of the likelihood of redemption of the gift card becomes remote.
This assessment is based upon Applebee's and IHOP's historical experience with gift card redemptions for their respective gift
card program. The Company recorded gift card breakage revenue of $0.2 million, $1.3 million and $2.1 million for the years
ended December 31, 2013, 2012 and 2011, respectively. The progressive decline is due to the decrease in the number of
Applebee's company-operated restaurants.
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 franchisee's or area licensee's ability to pay outstanding balances. The primary indicator of credit
quality is delinquency, which is considered to be a receivable balance greater than 90 days past due. The Company continually
reviews the allowance for 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 is the lessor or sub-lessor of the properties on which 723 IHOP restaurants and one Applebee's restaurant
are located. The restaurants are subleased to 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. 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, respectively. Rental expense and
rental income for these operating leases are recognized on the straight-line basis over the original terms of the leases. Any
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. There was $91.4 million and $89.7
71
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
million, respectively, of deferred rent receivable included in other assets and $76.8 million and $76.6 million, respectively, of
deferred rent payable included in other liabilities at December 31, 2013 and 2012.
The rental payments or receipts on those property leases that meet the capital lease criteria result in the recognition of
interest expense or interest income and a reduction of capital lease obligation or financing lease receivable, respectively.
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. Due to different
contractual terms in Applebee's marketing agreements, 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, 2013, 2012 and 2011 were $79.5 million, $76.4 million and
$75.5 million, respectively.
Advertising expense reflected in the consolidated statements of comprehensive income 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, 2013, 2012 and 2011 was $2.9 million,
$13.1 million and $23.3 million, respectively. The progressive decline is due to the decrease in the number of Applebee's
company-operated restaurants.
Fair Value Measurements
The Company determines the fair market values of its financial assets and liabilities, as well as non-financial assets and
liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy established in
U.S. GAAP. As necessary, the Company measures its financial assets and liabilities using inputs from the following three levels
of the fair value hierarchy:
• Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
• Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active
markets for similar assets or liabilities.
• Level 3 inputs are unobservable and reflect the Company's own assumptions.
72
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be
measured at fair value on either a recurring or non-recurring basis. None of the Company's non-financial assets or non-financial
liabilities is required to be measured at fair value on a recurring basis. 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.
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:
December 31, 2013
December 31, 2012
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(In millions)
Long-term debt, less current maturities............................... $
1,203.5
$
1,306.2
$
1,202.1
$
1,334.2
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. Cash-settled awards are classified as liabilities with the liability and
compensation expense related to cash-settled awards adjusted to fair value at each balance sheet date.
Net Income (Loss) Per Share
Net income (loss) 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) 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, during fiscal years in which
Series B Preferred Stock was outstanding, assumed conversion of Series B Preferred Stock using the if-converted method.
73
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Other Comprehensive Income (Loss)
For the years ended December 31, 2013, 2012 and 2011, the income tax benefit or provision allocated to items of other
comprehensive income was not significant.
Treasury Stock
The Company may from time to time utilize treasury stock when vested stock options are exercised, when restricted stock
awards are granted and when restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is
determined using the first-in, first-out method.
Business Segments
The Company identifies its reporting segments based on the organizational units used by management to monitor
performance and make operating decisions. These 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, 2013, the franchise operations segment consisted of 1,988 restaurants operated by Applebee's
franchisees in the United States, one United States territory and 15 countries outside of the United States and 1,607 restaurants
operated by IHOP franchisees and area licensees in the United States, two United States territories and eight 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, due to
different contractual terms in Applebee's marketing agreements, 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, 2013, the company restaurant operations segment consisted of 23 Applebee's company-operated
restaurants, 10 IHOP company-operated restaurants and three IHOP restaurants reacquired from franchisees and operated by
the Company 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 of 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 one property that was retained after refranchising a company-operated restaurant.
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. Financing expenses are the cost
of restaurant equipment.
Recently Adopted Accounting Standards
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2012-02, Intangibles - Goodwill and Other: Testing Indefinite Lived Intangibles for Impairment (“ASU 2012-02”). ASU
2012-02 allows an entity the option to first assess qualitative factors in determining 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
74
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
assessment, that it is more likely than not that the asset is impaired. The adoption of ASU 2012-02 as of January 1, 2013 did not
have any impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income (“ASU 2013-02”). The amendments in ASU 2013-02 do not change the current requirements for
reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out
of accumulated other comprehensive income in their entirety, by component, on the face of the statement of operations or in the
notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other
disclosures that provide additional detail. The adoption of ASU 2013-02 as of January 1, 2013 did not have any impact on the
Company's consolidated financial statements or disclosures because the Company had no material amount of reclassifications.
New Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The
amendments in ASU 2013-04 require an entity to measure obligations resulting from joint and several liability arrangements as
the amount the entity agreed to pay on the basis of the arrangement among its co-obligors plus the amount an entity expects to
pay on behalf of co-obligors. ASU 2013-04 also requires an entity to disclose the nature, amount and other information about
each obligation or group of similar obligations. The Company will adopt ASU 2013-04 effective January 1, 2014, and does not
anticipate the adoption will have a material impact on its consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11
provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax
asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. ASU 2013-11
may be applied on a retrospective basis, and early adoption is permitted. The Company will adopt ASU 2013-11 effective
January 1, 2014, and does not anticipate the adoption will have a material impact on its 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 ...................................................................................................................
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 ................................................................................................................ $
2013
2012
$
(In millions)
59.3
68.3
1.2
115.1
88.6
1.7
10.6
344.8
(3.5)
341.3
(144.1)
197.2
$
67.4
44.6
2.2
122.4
95.1
2.7
9.2
343.6
(2.7)
340.9
(128.6)
212.3
Accounts receivable primarily includes receivables due from franchisees and distributors. Gift card receivables consist
primarily of amounts due from third-party vendors. Interest is not charged on gift 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 the leasing or subleasing of the site. Equipment lease contracts are
due in equal weekly installments, primarily bear interest averaging 9.8% per annum at December 31, 2013 and 2012 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 6.6% and 6.8% per annum at December 31, 2013 and 2012, 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, 2013 and 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, 2010............................................................................................................................... $
Provision............................................................................................................................................................
Charge-offs ........................................................................................................................................................
Recoveries .........................................................................................................................................................
Balance at December 31, 2011...............................................................................................................................
Provision............................................................................................................................................................
Charge-offs ........................................................................................................................................................
Recoveries .........................................................................................................................................................
Balance at December 31, 2012...............................................................................................................................
Provision............................................................................................................................................................
Charge-offs ........................................................................................................................................................
Balance at December 31, 2013............................................................................................................................... $
(In millions)
6.2
0.4
(3.1)
0.1
3.6
0.5
(1.9)
0.5
2.7
1.5
(0.7)
3.5
As of December 31, 2013 and 2012, approximately $0.3 million and $0.5 million, respectively, of the allowance for
doubtful accounts related to financing receivables.
76
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
4. Property and Equipment
Property and equipment by category is as follows:
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 ....................................................................................................... $
2013
2012
$
(In millions)
63.9
60.1
274.9
81.8
3.6
60.0
544.3
(270.0)
274.3
$
65.4
60.1
279.8
74.9
4.7
60.8
545.7
(251.3)
294.4
The Company recorded depreciation expense on property and equipment of $23.1 million, $27.9 million and $37.7 million
for the years ended December 31, 2013, 2012 and 2011, respectively.
Accumulated depreciation and amortization includes accumulated amortization for properties under capital lease in the
amount of $34.7 million and $32.5 million at December 31, 2013 and 2012, respectively.
5. 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, 2013 and 2012, 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 2013 and 2012, 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 for
impairment of goodwill of the Applebee's franchise reporting unit in the fourth quarter of 2013 and 2012. In the first step of
each year's impairment test, the estimated fair value of the Applebee's franchising unit exceeded the carrying values and the
Company concluded there was no impairment of goodwill. The Company performed a qualitative assessment of the goodwill of
the IHOP franchise reporting unit and concluded there was no impairment of goodwill.
77
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
6. Other Intangible Assets
As of December 31, 2013 and 2012, 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, 2010 ...... $
Amortization expense .................
Impairment..................................
Refranchising..............................
Other ...........................................
Balance, December 31, 2011 ......
Amortization expense .................
Refranchising..............................
Other ...........................................
Balance, December 31, 2012 ......
Amortization expense .................
Other ...........................................
Balance, December 31, 2013 ...... $
652.4
—
—
—
—
652.4
—
—
—
652.4
—
—
652.4
$
$
$
2.6
—
—
(1.1)
—
1.5
—
(1.5)
—
—
—
—
— $
(In millions)
169.3
$
(10.0)
—
$
—
159.3
(10.0)
(0.3)
—
149.0
(10.0)
—
139.0
$
$
0.3
—
—
—
0.2
0.5
—
(0.1)
0.4
—
0.3
0.7
8.9
(2.3)
—
—
—
6.6
(2.3)
—
—
4.3
(2.3)
—
2.0
$
$
$
2.4
(0.6)
—
0.3
2.1
(0.2)
(1.9)
—
—
—
—
— $
835.9
(12.9)
—
(0.8)
0.2
822.4
(12.5)
(3.8)
—
806.1
(12.3)
0.3
794.1
Annual amortization expense for the next five fiscal years is estimated to be approximately $10.4 million per year. The
weighted average life of the intangible assets subject to amortization was 19.0 years at December 31, 2013 and 2012.
Gross and net carrying amounts of intangible assets subject to amortization at December 31, 2013 and 2012 are as follows:
December 31, 2013
December 31, 2012
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
$
$
(61.0) $
(13.7)
(0.3)
(75.0) $
139.0
2.0
—
141.0
$
$
200.0
15.7
0.3
216.0
$
$
(51.0) $
(11.4)
(0.3)
(62.7) $
149.0
4.3
—
153.3
7. Long-Term Debt
Long-term debt consists of the following components:
Senior Secured Credit Facility, due October 2017, at a variable interest rate of 3.75% and
4.25% as of December 31, 2013 and 2012, respectively............................................................ $
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
2013
2012
(In millions)
467.2
760.8
(19.8)
1,208.2
(4.7)
1,203.5
$
$
472.0
760.8
(23.3)
1,209.5
(7.4)
1,202.1
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”) that consisted 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
78
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
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 “Amendments to Credit Agreement”.
Interest Rate
Loans made under the Term Facility (“Term Loans”) and the Revolving Facility (“Revolving Loans”) bore 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 were subject to upfront fees of 1.00% of the principal amount
thereof. See “Amendments to Credit Agreement”.
Amendments 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.
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 Comprehensive Income for the year ended December 31, 2011.
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 established 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 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.
Fees of $1.3 million paid to third parties in connection with Amendment No. 2 were included as “Debt modification costs”
in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2013.
79
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
7. 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,
retiring the amount then outstanding of the original $900.0 million borrowed under the Credit Agreement. Concurrent with
Amendment No. 2, on February 4, 2013, the Company borrowed $472.0 million under the Term Facility (the “New Term
Loan”), retiring the amount then outstanding of the amount borrowed under Amendment No. 1. There was $467.2 million of
the New Term Loan outstanding at December 31, 2013.
The Company did not utilize the Revolving Facility during 2013. As of December 31, 2013, there were no amounts
outstanding under the Revolving Facility; however, available borrowing capacity under the Revolving Facility was reduced by
$10.9 million of letters of credit outstanding as of December 31, 2013 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 Prepayments
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); and
• 50% of excess cash flow (as defined in the Credit Agreement or amendments thereto) 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.
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. The Company was in compliance with all financial covenants at December 31, 2013.
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, 2013 was 5.0%.
80
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
7. 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, 2013 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. The make-whole payment was approximately $92.1 million at December 31, 2013. The
make-whole payment will decline progressively to $36.1 million as of October 30, 2014 and remain at that amount until
October 30, 2015. The make-whole payment then will decline in two step-downs, first to $18.1 million on October 30, 2015
and to zero on October 30, 2016.
In addition, prior to October 30, 2013, the Company could 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.
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 on 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 quarter in which the consolidated leverage ratio is greater than 5.75:1; (iii) 75% of Excess
81
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
7. Long-Term Debt (Continued)
Cash Flow for each fiscal quarter if the consolidated leverage ratio is less than 5.75:1 and greater than or equal to 5.25:1; (iv)
100% of Excess Cash Flow for each fiscal quarter in which the consolidated leverage ratio is less than 5.25:1; and (v) proceeds
from the exercise of options to purchase our common stock, less any amounts paid as dividends or to repurchase our common
stock. As of December 31, 2013 our permitted amount of future restricted payments under the Credit Agreement was
approximately $89 million.
The Indenture under which our Senior Notes were issued also contains a limitation on restricted payments that is calculated
on an annual basis. Such restricted payments are limited to a cumulative amount comprised of (i) 50% of consolidated net
income (as defined in the Indenture), plus (ii) proceeds from exercise of stock options, less (iii) restricted payments made. The
permitted amount of future restricted payments under the Indenture, calculated as of December 31, 2013, was approximately
$112 million.
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, 2013, 2012 and
2011 was $2.7 million, $2.6 million and $2.7 million, respectively. Additionally, $2.3 million and $3.1 million, respectively, of
deferred issuance costs were written off in connection with debt retirement for the years ended December 31, 2012 and 2011
and is reflected in the loss on extinguishment of debt in the Consolidated Statements of Comprehensive Income, with a nominal
amount written off for the year ended December 31, 2013.
As of December 31, 2013 and 2012, $14.0 million and $16.8 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, 2013, 2012, and 2011, $3.5 million, $3.4 million and $3.4 million,
respectively, of the discount was amortized as additional interest expense under the effective interest method. Additionally,
$2.7 million and $3.1 million, respectively, was written off in connection with debt retirement for the years ended
December 31, 2012 and 2011 and is reflected in the loss on extinguishment of debt in the Consolidated Statements of
Comprehensive Income, with a nominal amount written off for the year ended December 31, 2013.
Maturities of Long-term Debt
At December 31, 2013, the aggregate principal amounts of existing long-term debt maturing in each of the next five years
and thereafter are as follows:
2014........................................................................................................................................................................ $
2015........................................................................................................................................................................
2016........................................................................................................................................................................
2017........................................................................................................................................................................
2018........................................................................................................................................................................
Thereafter ...............................................................................................................................................................
$
(In millions)
4.7
4.7
4.7
453.0
760.8
—
1,227.9
8. 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
82
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 Sale-Leaseback 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 were
recorded as a financing obligation. A portion of the lease payments is recorded as a decrease to the financing obligation and a
portion is recognized as interest expense. In the event the lease obligation of any individual property or group of properties is
assumed by a qualified franchisee, the Company's continuing involvement will cease. At that time, that portion of the
transaction related to that property or group of properties is 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, 2013, the Company's continuing involvement with 148 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 $264.4 million.
As of December 31, 2013, 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
2014.................................................................................................................................................................. $
2015(1) ................................................................................................................................................................................
2016..................................................................................................................................................................
2017..................................................................................................................................................................
2018..................................................................................................................................................................
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.
(2) Included in current maturities of capital lease and financing obligations on the consolidated balance sheet.
(In millions)
5.7
6.2
5.7
5.2
6.0
92.4
121.2
(72.3)
48.9
(0.1)
48.8
9. Leases
The Company is the lessor or sub-lessor of approximately half 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:
Total minimum rents receivable ................................................................................................. $
Less: unearned income ...............................................................................................................
Net investment in direct financing lease receivables..................................................................
Less: current portion ...................................................................................................................
Long-term direct financing lease receivables ............................................................................. $
144.8
(56.2)
88.6
(7.0)
81.6
$
$
163.4
(68.3)
95.1
(6.2)
88.9
December 31,
2013
2012
(In millions)
83
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
9. Leases (Continued)
Contingent rental income, which is the amount above and beyond base rent, for the years ended December 31, 2013, 2012
and 2011 was $12.7 million, $12.5 million and $13.1 million, respectively.
The following is the Company's net investment in equipment leases receivable:
December 31,
2013
2012
(In millions)
Total minimum leases receivable................................................................................................ $
Less: unearned income ...............................................................................................................
Net investment in equipment leases receivables ........................................................................
Less: current portion ...................................................................................................................
Long-term equipment leases receivable ..................................................................................... $
184.2
(69.1)
115.1
(7.1)
108.0
$
$
209.3
(86.9)
122.4
(6.8)
115.6
The following are minimum future lease payments on noncancelable leases as lessee at December 31, 2013:
Capital
Leases
Operating
Leases
2014 ........................................................................................................................................ $
2015 (1).......................................................................................................................................................................
2016 ........................................................................................................................................
2017 ........................................................................................................................................
2018 ........................................................................................................................................
Thereafter................................................................................................................................
Total minimum lease payments ..............................................................................................
Less: interest ...........................................................................................................................
Capital lease obligations .........................................................................................................
Less: current portion(1)........................................................................................................................................
Long-term capital lease obligations........................................................................................ $
____________________________________________________________
(1) Due to the varying closing date of the Company's fiscal year, 13 monthly payments will be made in fiscal 2015
(2) Included in current maturities of capital lease and financing obligations on the consolidated balance sheet.
76.7
82.3
74.4
67.0
71.1
392.2
763.7
$
(In millions)
24.3
26.1
23.9
21.2
20.4
76.3
192.2
(68.4)
123.8
(12.1)
111.7
$
The asset cost and carrying amount on company-owned property leased at December 31, 2013 was $90.1 million and
$66.1 million, respectively. 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 amounts represent the land and building asset values
and net book values on sites leased to franchisees.
84
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
9. Leases (Continued)
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, 2013:
Direct
Financing
Leases
Operating
Leases
2014 ............................................................................................................................................ $
2015 (1)............................................................................................................................................................................
2016 ............................................................................................................................................
2017 ............................................................................................................................................
2018 ............................................................................................................................................
Thereafter....................................................................................................................................
Total minimum rents receivable ................................................................................................. $
________________________________________________________________________
(1) Due to the varying closing date of the Company's fiscal year, 13 monthly payments will be made in fiscal 2015
$
(In millions)
18.1
18.3
17.8
17.9
17.5
55.2
144.8
$
98.9
101.1
99.0
99.0
98.3
652.2
1,148.5
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, 2013, 2012
and 2011 was $2.8 million, $2.7 million and $2.8 million, respectively. Minimum rent expense for all noncancelable operating
leases for the years ended December 31, 2013, 2012 and 2011 was $75.4 million, $78.0 million and $81.8 million, respectively.
10. 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, 2013, the outstanding purchase commitments were $90.9
million, the majority of which related to advertising.
Lease Guarantees
In connection with the sale of Applebee's restaurants to franchisees and other parties, the Company has, in certain cases,
guaranteed or had potential continuing liability for lease payments. As of December 31, 2013 and 2012, the Company has
outstanding lease guarantees or is contingently liable for approximately $417.8 million and $448.5 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 2014 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, 2013.
Contingencies
In February 2013, an IHOP franchisee and its affiliated entities which owned and operated 19 restaurants located in the
states of Illinois, Wisconsin and Missouri filed for bankruptcy protection. As a result of an order issued by the bankruptcy
court, two of the 19 restaurants were returned to the Company in the third quarter of 2013. A non-cash charge of $0.5 million
was recorded in the Consolidated Statement of Comprehensive Income against deferred rental revenue associated with the
leases for those two restaurants. During the third quarter of 2013, the Company received favorable rulings from the bankruptcy
court which, if upheld, would allow the transfer of the remaining 17 restaurants to another franchisee. These rulings have been
appealed by the current franchisee and are presently subject to a continued stay order, pursuant to which the current franchisee
is operating these restaurants only on a day-to-day basis and is continuing to make payments to the Company pursuant to the
terms of the original franchise agreements. Accordingly, the Company is unable to determine the ultimate outcome of the
bankruptcy proceedings at this time.
85
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.
Letters of Credit
The Company provides letters of credit, primarily to various insurance carriers to collateralize obligations for outstanding
claims. As of December 31, 2013, the Company had approximately $10.9 million of unused letters of credit outstanding. These
letters expire on various dates in 2014 and are automatically renewed for an additional year if no cancellation notice is
submitted.
11. Preferred Stock and Stockholders' Equity
Preferred Stock
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 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, 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 was referred to
as the accreted value of the share as of that date. 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 was 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.
86
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
11. Preferred Stock and Stockholders' Equity (Continued)
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.
Stock Repurchase Programs
On February 26, 2013, the Company's Board of Directors approved a stock repurchase authorization of up to $100 million
of DineEquity common stock, replacing an authorization approved in 2011 to repurchase up to $45 million of DineEquity
common stock. Under the current 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, 2013, the Company repurchased 412,022 shares of stock for $29.7
million. There were no stock repurchases in 2012. During the year ended December 31, 2011, the Company repurchased
534,101 shares of stock for $21.2 million. Repurchases of common stock are subject to limitations under our Credit Agreement
and Senior Notes (see Note 7 - Long-Term Debt).
Treasury Stock
Repurchases of DineEquity common stock are included in treasury stock at the cost of shares repurchased plus any
transaction costs. Treasury stock may be re-issued when vested stock options are exercised, when restricted stock awards are
granted and when restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is determined on the
first-in, first-out (“FIFO”) method. The Company re-issued 318,644 shares, 433,732 shares and 135,230 shares, respectively,
during the years ended December 31, 2013, 2012 and 2011 at a total FIFO cost of $11.7 million, $14.1 million and $4.3 million,
respectively.
Dividends
During the year ended December 31, 2013, we declared and paid dividends on our common stock as follows:
Year ended December 31, 2013
Declaration date
Payment date
First quarter ................................................... February 26, 2013
May 14, 2013
Second quarter ...............................................
Third quarter..................................................
Fourth quarter ................................................
Total...............................................................
August 2, 2013 September 27, 2013
October 3, 2013 December 27, 2013
March 29, 2013
$
June 28, 2013
Dividend per
share
Total(1)
(In millions)
0.75
0.75
0.75
0.75
3.00
$
$
14.6
14.4
14.3
14.3
57.6
$
______________________________________________________
(1) Includes dividend equivalents paid on restricted stock units
On February 25, 2014, the Company's Board of Directors approved payment of a cash dividend of $0.75 per share of
DineEquity common stock, payable at the close of business on March 28, 2014 to the stockholders of record as of the close of
business on March 14, 2014
Payment of dividends is subject to limitations under our Credit Agreement and Senior Notes (see Note 7 - Long-Term
Debt). There were no dividends declared or paid on common shares in 2012 or 2011.
87
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
12. Closure and Impairment Charges
Closure and impairment charges for the years ended December 31, 2013, 2012 and 2011 were as follows:
Closure charges
Long-lived tangible asset impairment
Lenexa lease termination
Total closure and impairment charges
Closure Charges
Year Ended December 31,
2013
2012
(In millions)
2011
$
$
1.0
0.8
—
1.8
$
$
2.3
1.9
—
4.2
$
$
2.0
4.9
23.0
29.9
Closure charges for the year ended December 31, 2013 primarily related to adjustments to the estimated reserve for closed
surplus IHOP and Applebee's restaurants. 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. Closure charges for the year ended December 31, 2011 primarily related to
adjustments to the estimated reserve for previously closed surplus IHOP properties.
Long-lived Tangible Asset Impairment
Long-lived tangible asset impairment charges for the year ended December 31, 2013 related to three Applebee's company-
operated restaurants in the Kansas City, Missouri area. The Company evaluated the causal factors of all impairments of long-
lived assets as they were recorded during 2013 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, 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.
Lenexa Lease Termination
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.
13. 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)
13. 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, 2013.
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, 2013.
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,
2013
2012
(In millions)
2011
Total stock-based compensation expense:
Equity classified awards............................................................................. $
Liability classified awards..........................................................................
Total pre-tax compensation expense................................................................
Tax benefit..................................................................................................
Total stock-based compensation expense, net of tax ...................................... $
9.4
0.9
10.3
(3.9)
6.4
$
$
11.4
4.8
16.3
(6.2)
10.1
$
$
9.5
1.1
10.6
(4.2)
6.4
As of December 31, 2013, total unrecognized compensation cost related to restricted stock and restricted stock units of
$8.2 million and $4.1 million related to stock options is expected to be recognized over a weighted average period of
approximately 1.83 years for restricted stock and restricted stock units and 1.57 years for stock options.
Equity Classified Awards - Stock Options
The per share fair values of the stock options granted have been estimated as of the date of grant 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:
89
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Stock-Based Incentive Plans (Continued)
Risk free interest rate ......................................................................................
Weighted average historical volatility.............................................................
Dividend yield.................................................................................................
Expected years until exercise ..........................................................................
Forfeitures .......................................................................................................
Weighted average fair value of options granted.............................................. $
0.8%
83.4%
4.15%
4.6
11.0%
36.00
$
0.9%
84.5%
—%
4.7
11.0%
33.53
$
1.8%
79.1%
—%
4.6
11.0%
34.31
2013
2012
2011
Stock option activity for the years ended December 31, 2013, 2012 and 2011 is summarized as follows:
Outstanding at December 31, 2010 .....................................
Granted ................................................................................
Exercised .............................................................................
Forfeited ..............................................................................
Expired ................................................................................
Outstanding at December 31, 2011 .....................................
Granted ................................................................................
Exercised .............................................................................
Forfeited ..............................................................................
Expired ................................................................................
Outstanding at December 31, 2012 .....................................
Granted ................................................................................
Exercised .............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2013 .....................................
Vested and Expected to Vest at December 31, 2013............
Exercisable at December 31, 2013 ......................................
Number of
Shares Under
Option
1,523,710
233,449
(393,075)
(42,593)
(2,851)
1,318,640
147,674
(455,217)
(39,381)
(13,470)
958,246
81,328
(225,272)
(39,243)
775,059
758,338
567,630
$
$
$
$
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term (in Years)
Aggregate
Intrinsic
Value
24.90
53.04
17.11
27.89
47.08
32.06
51.63
20.91
46.97
38.64
39.67
72.28
40.31
55.78
42.09
41.64
35.91
6.28
6.23
5.55
$ 32,100,000
$ 31,800,000
$ 27,000,000
The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $7.5 million,
$15.0 million and $14.6 million, respectively.
Cash received from options exercised under all stock-based payment arrangements for the years ended December 31, 2013,
2012 and 2011 was $9.1 million, $9.3 million and $6.7 million, respectively. The actual tax benefit realized for the tax
deduction from option exercises under the stock-based payment arrangements totaled $3.7 million, $6.2 million and $5.8
million, respectively, for the years ended December 31, 2013, 2012 and 2011.
90
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Stock-Based Incentive Plans (Continued)
Equity Classified Awards - Restricted Stock and Restricted Stock Units
Activity in equity classified awards of restricted stock and restricted stock units for the years ended December 31, 2013, 2012
and 2011 is as follows:
Outstanding at December 31, 2010 .....................................
Granted ................................................................................
Released...............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2011 .....................................
Granted ................................................................................
Released...............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2012 .....................................
Granted ................................................................................
Conversion of cash-settled restricted stock units ................
Released...............................................................................
Forfeited ..............................................................................
Outstanding at December 31, 2013 .....................................
Liability Classified Awards - Restricted Stock Units
Shares of
Restricted Stock
666,244
164,632
(287,735)
(56,608)
486,533
137,852
(179,465)
(98,357)
346,563
97,812
—
(117,075)
(61,048)
266,252
Weighted
Average
Grant-Date Per
Share
Fair Value
Restricted
Stock Units
Weighted
Average
Grant-Date
Per Share
Fair Value
$
$
28.62
53.03
37.82
31.56
31.08
52.23
13.83
44.40
44.74
73.11
—
30.96
55.37
58.87
18,000
—
—
—
18,000
19,152
(3,910)
—
33,242
15,804
37,184
(39,000)
—
47,230
$
$
29.32
—
—
—
29.32
52.23
40.58
—
41.19
72.04
72.28
54.66
—
64.57
The Company previously had issued shares of cash-settled restricted stock units to members of the Board of Directors.
Originally these instruments were expected to be settled in cash and were recorded as liabilities based on the closing price of
the Company’s common stock as of each period end. In February 2013, it was determined that, pursuant to the terms of the
Plan, these restricted stock units would be settled in shares of common stock and all outstanding restricted stock units were
converted to equity classified awards. Activity in liability classified awards of restricted stock units for the years ended
December 31, 2013, 2012 and 2011 is as follows:
Cash-Settled
Restricted Stock
Units
Weighted
Average
Per Share
Fair Value
Outstanding at December 31, 2010......................................................................................
Granted.................................................................................................................................
Released ...............................................................................................................................
Outstanding at December 31, 2011......................................................................................
Granted.................................................................................................................................
Released ...............................................................................................................................
Outstanding at December 31, 2012......................................................................................
Conversion to stock-settled restricted stock units................................................................
Outstanding at December 31, 2013......................................................................................
$
26,000
15,957
—
41,957
—
(4,773)
37,184
(37,184)
—
64.23
64.30
—
64.26
—
49.66
66.13
72.28
For the years ended December 31, 2013, 2012 and 2011, $0.3 million, $1.0 million and $0.5 million, respectively, was
included as stock-based compensation expense related to these cash-settled restricted stock units. At December 31, 2012, a
liability of $2.4 million was 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, 2013, 2012 and 2010, $0.6 million, $3.8 million and $0.6 million, respectively, were included in stock-
91
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Stock-Based Incentive Plans (Continued)
based compensation expense related to the LTIP awards. At December 31, 2013 and 2012, liabilities of $2.8 million and $4.5
million, respectively, were included as accrued employee compensation and benefits in the consolidated balance sheet.
14. Employee Benefit Plans
401(k) Savings and Investment Plan
Effective January 1, 2013, the Company amended the DineEquity, Inc. 401(k) Plan to (i) modify the Company matching
formula and (ii) eliminate the one year completed service requirement that previously had to be met to become eligible for
Company matching contributions. As amended, the Company matches 100% of the first four percent of the employee's eligible
compensation deferral and 50% of the next two percent of the employee's eligible compensation deferral. All contributions
under this plan vest immediately. 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 matching contribution expense was $2.3 million, $2.2 million and $2.8 million
for the years ended December 31, 2013, 2012 and 2011, respectively.
15. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011 was as follows:
Provision (benefit) for income taxes:
Current........................................................................................................
Federal ................................................................................................... $
State .......................................................................................................
Foreign...................................................................................................
Deferred
Federal ...................................................................................................
State .......................................................................................................
Provision for income taxes ......................................................................... $
Year Ended December 31,
2013
2012
(In millions)
2011
48.5
2.1
2.4
53.0
(13.5)
(0.9)
(14.4)
38.6
$
$
77.4
1.9
1.8
81.1
(12.2)
(1.7)
(13.9)
67.2
$
$
13.2
1.0
1.8
16.0
11.4
2.4
13.8
29.8
The provision for income taxes differs from the expected federal income tax rates as follows:
Year Ended December 31,
2013
2012
2011
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 ................................
Other............................................................................................................
Effective tax rate .........................................................................................
35.0%
2.9
1.4
(2.7)
(1.1)
(0.6)
—
—
—
34.9%
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%
92
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
Note 15. 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.
2013
2012
(In millions)
$
4.8
1.8
15.0
6.3
29.8
35.0
92.7
(1.1)
91.6
(51.2)
(301.1)
(7.1)
(19.5)
(10.1)
(20.3)
(409.3)
(317.7) $
24.2
$
(0.3)
23.9
(340.8)
(0.8)
(341.6)
(317.7) $
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)
The Company files federal income tax returns and the Company or one of its subsidiaries file 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. In the second quarter of 2013, the Internal Revenue Service (“IRS”)
issued a Revenue Agent’s Report (“RAR”) related to its examination of the Company’s U.S federal income tax return for the
tax years 2008 to 2010. The Company disagrees with a portion of the proposed assessments and has contested them through the
IRS administrative appeals procedures. We anticipate the appeals process to continue into 2014. The Company continues to
believe that adequate reserves have been provided relating to all matters contained in the tax periods open to examination.
The total gross unrecognized tax benefit as of December 31, 2013 and 2012 was $2.7 million and $6.7 million,
respectively, excluding interest, penalties and related income tax benefits. The decrease of $4.0 million is primarily related to
recent settlements with taxing authorities. The entire $2.7 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
$0.2 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 15. Income Taxes (Continued)
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 ..............................................................................................
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, 2013 .............................................................................................. $
(In millions)
8.2
0.8
0.2
(0.9)
(1.6)
6.7
0.8
(4.7)
(0.1)
2.7
As of December 31, 2013, the accrued interest and penalties were $2.9 million and $0.1 million, respectively, excluding
any related income tax benefits. 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. The increase of $1.5 million of accrued interest is primarily
related to an increase in unrecognized tax benefits as a result of recent audits by taxing authorities. The Company recognizes
interest accrued related to unrecognized tax benefits and penalties as a component of the income tax provision recognized in the
Consolidated Statements of Comprehensive Income.
For the years ended December 31, 2013 and 2012, the Company had a total valuation allowance in the amounts of $1.1
million and $4.1 million, respectively. The entire $1.1 million in 2013 is related to the Massachusetts enacted legislation
requiring unitary businesses to file combined reports. The decrease of $3.0 million in the valuation allowance was as a result of
releasing valuation allowance that was previously set up for various state net operating losses at DineEquity, Inc. and
International House of Pancakes, LLC and Subsidiaries. The Company implemented a tax planning strategy that enables the
Company to utilize the state net operating loss carryovers from prior years before they expire.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could
impact management’s view with regards to future realization of deferred tax assets. As of December 31, 2013, because the
Company implemented a tax planning strategy that was prudent and feasible in the current year, management determined that
sufficient positive evidence existed as of December 31, 2013, to conclude that was more likely than not that additional deferred
taxes of $3.0 million are realizable, and therefore, reduced the valuation allowance.
94
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
16. Net Income 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 per common share:
Net income
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 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,
2013
2012
2011
(In thousands, except per share data)
$
$
$
$
$
72,037
—
—
(1,200)
70,837
4
$
127,674
—
(2,498)
(2,718)
122,458
127
—
70,841
$
2,498
125,083
$
18,871
270
—
19,141
17,992
264
621
18,877
3.75
3.70
$
$
6.81
6.63
$
$
75,192
—
(2,573)
(1,886)
70,733
34
—
70,767
17,846
339
—
18,185
3.96
3.89
For the year ended December 31, 2011, diluted income per common share is computed using the basic weighted average
number of common shares outstanding during the period, as the 643,000 shares from common stock equivalents would have
been antidilutive.
95
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. 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............................................................................................................ $
Closure and impairment 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............................................................................................................ $
18. Consolidating Financial Information
Year Ended December 31,
2013
2012
(In millions)
2011
439.2
63.4
124.8
13.1
640.5
329.5
(0.2)
27.5
12.9
(259.1)
110.6
0.4
15.7
100.3
116.4
10.8
2.2
13.4
9.0
35.4
1.8
—
1.8
1.3
5.7
7.0
697.5
1,606.4
191.6
364.0
117.1
125.5
2,404.6
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
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)
Note 18. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Balance Sheet
December 31, 2013
(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.......... $
50.3
2.0
189.2
(4.1)
(435.2)
(197.8)
—
23.5
—
—
16.2
1,697.6
1,539.5
12.7
1.4
14.5
—
(13.7)
15.0
1,203.5
—
—
(0.3)
5.9
1,224.2
315.3
1,539.5
$
$
$
$
54.7
150.0
56.1
28.0
429.4
718.1
197.2
249.7
697.5
794.1
93.9
—
2,750.4
$
$
— $
38.6
10.4
172.0
244.1
465.0
—
48.8
111.7
342.1
92.7
1,060.4
1,690.0
2,750.4
$
$
— $
1.0
0.1
—
—
5.8
7.0
—
1.0
—
—
—
—
8.0
$
— $
—
—
—
—
—
—
—
—
(0.3)
0.9
0.6
7.4
8.0
$
(8.0)
(187.7)
—
(195.7)
—
—
—
—
—
(1,697.6)
(1,893.3) $
(8.0) $
(187.7)
(195.7)
—
(195.7)
(1,697.6)
(1,893.3) $
106.0
144.1
57.6
23.9
—
331.6
197.2
274.3
697.5
794.1
110.1
—
2,404.6
4.7
40.1
25.0
172.0
42.6
284.3
1,203.5
48.8
111.7
341.6
99.5
2,089.5
315.2
2,404.6
(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)
18. 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
357.6
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
98
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
18. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2013
(In millions(1))
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-guarantor
Subsidiaries
Franchise and restaurant revenues ................... $
Rental revenues................................................
Financing revenues ..........................................
Total revenue...............................................
Franchise and restaurant expenses ...................
Rental expenses................................................
Financing expenses ..........................................
General and administrative expenses...............
Interest expense................................................
Closure and impairment charges......................
Amortization of intangible assets.....................
Loss on extinguishment of debt .......................
Loss (gain) on disposition of assets .................
Other expense...................................................
Intercompany dividend ....................................
Income before income taxes ............................
Benefit (provision) for income taxes ...............
Net income ...................................................... $
2.8
—
—
2.8
2.7
—
—
38.7
98.9
—
—
0.1
—
1.3
(173.6)
34.7
37.3
72.0
$
$
498.5
124.8
13.1
636.4
170.5
97.3
0.2
103.6
1.4
1.5
12.3
—
0.8
—
—
248.9
(75.9)
173.0
$
$
1.2
—
—
1.2
0.1
—
—
1.3
—
0.3
—
—
(1.0)
—
—
0.6
—
0.6
$
Eliminations and
Reclassification
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
173.6
(173.6)
—
(173.6) $
Consolidated
502.6
124.8
13.1
640.5
173.3
97.3
0.2
143.6
100.3
1.8
12.3
0.1
(0.2)
1.3
—
110.6
(38.6)
72.0
(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)
18. 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 and restaurant revenues ................... $
Rental revenues................................................
Financing revenues ..........................................
Total revenue...............................................
Franchise and restaurant expenses ...................
Rental expenses................................................
Financing expenses ..........................................
General and administrative expenses...............
Interest expense................................................
Closure and impairment charges......................
Amortization of intangible assets.....................
Loss on extinguishment of debt .......................
(Loss) gain on disposition of assets .................
Intercompany dividend ....................................
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
$
$
708.8
122.9
14.5
846.2
356.6
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
712.5
122.9
14.5
849.9
359.2
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
100
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
18. 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 and restaurant revenues ................... $
Rental revenues................................................
Financing revenues ..........................................
Total revenue...............................................
Franchise and restaurant expenses ...................
Rental expenses................................................
Financing expenses ..........................................
General and administrative expenses...............
Interest expense................................................
Closure and impairment charges......................
Amortization of intangible assets.....................
Loss on extinguishment of debt .......................
Gain on disposition of assets............................
Other (income) expense ...................................
Income (loss) before taxes ...............................
Benefit (provision) for income taxes ...............
Net income ...................................................... $
2.5
—
—
2.5
2.1
—
—
28.3
117.2
—
—
11.2
—
(150.6)
(5.7)
61.3
55.6
$
$
924.8
125.8
19.7
1,070.3
560.4
98.1
6.0
125.3
15.5
29.5
12.3
—
(43.3)
21.2
245.3
(90.9)
154.4
$
$
2.3
0.1
—
2.4
0.9
0.1
—
2.2
—
0.4
—
—
—
(1.7)
0.5
(0.2)
0.3
$
Eliminations and
Reclassification
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
135.1
(135.1)
—
(135.1) $
Consolidated
929.5
126.0
19.7
1,075.2
563.4
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
101
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
18. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2013
(In millions(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
Payment of debt ...............................................
Payment of debt issuance costs........................
Purchase of DineEquity common stock...........
Dividends paid on 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......................... $
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-
guarantor
Subsidiaries
Eliminations and
Reclassification
Consolidated
(113.1) $
240.8
$
0.1
$
— $
127.8
(5.4)
—
—
—
(5.4)
(4.8)
(1.3)
(29.7)
(57.4)
—
8.3
243.7
158.8
40.4
9.9
50.3
$
(1.7)
14.0
—
0.1
12.4
(10.0)
—
—
—
1.2
0.3
(244.1)
(252.5)
0.7
54.0
54.7
$
—
—
—
—
—
—
—
—
—
—
—
0.4
0.4
0.4
0.6
1.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
$
(7.0)
14.0
—
0.1
7.0
(14.8)
(1.3)
(29.7)
(57.4)
1.2
8.6
—
(93.3)
41.5
64.5
106.0
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
102
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
18. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2012
(In millions(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
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......................... $
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-
guarantor
Subsidiaries
Eliminations and
Reclassification
Consolidated
(130.1) $
182.5
$
0.4
$
— $
52.9
(4.9)
—
—
—
(4.9)
50.0
(50.0)
(216.0)
—
—
—
11.8
339.2
135.0
—
9.9
9.9
$
(12.0)
12.2
168.9
1.2
170.3
—
—
(10.9)
—
—
(0.7)
1.4
(339.0)
(349.2)
3.6
50.4
54.0
$
—
—
—
—
—
—
—
—
—
—
—
—
(0.2)
(0.2)
0.2
0.4
0.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
$
(17.0)
12.2
168.9
1.2
165.4
50.0
(50.0)
(226.9)
—
—
(0.7)
13.2
—
(214.5)
3.8
60.7
64.5
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
103
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
18. Consolidating Financial Information (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2011
(In millions(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
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......................... $
Parent
Combined
Guarantor
Subsidiaries
Combined
Non-
guarantor
Subsidiaries
Eliminations and
Reclassification
Consolidated
(139.4) $
261.4
$
(0.3) $
— $
121.7
(6.7)
—
—
—
(6.7)
40.0
(40.0)
(225.7)
(12.3)
(21.2)
—
6.2
385.6
132.6
(13.5)
23.4
9.9
$
(19.6)
13.1
115.6
(0.7)
108.4
—
—
(13.4)
—
—
0.5
0.9
(384.7)
(396.7)
(26.9)
77.3
50.4
$
—
—
—
—
—
—
—
—
—
—
—
—
(0.9)
(0.9)
(1.2)
1.6
0.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
$
(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
(1) Supplemental statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands
104
DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
19. Selected Quarterly Financial Data (Unaudited)
Revenues(1)
Operating
Margin
Net Income (2)
(In thousands, except per share amounts)
Net Income
(Loss)
Per Share—
Basic(3)
Net Income
(Loss)
Per Share—
Diluted(3)
2013
1st Quarter ................................................ $
2nd Quarter ...............................................
3rd Quarter................................................
4th Quarter................................................
2012
1st Quarter ................................................ $
2nd Quarter ...............................................
3rd Quarter................................................
4th Quarter................................................
$
$
163,169
158,114
161,283
157,901
245,582
229,391
216,318
158,637
$
$
94,424
91,026
93,043
91,199
108,575
98,254
96,377
88,738
$
$
18,239
16,937
18,730
18,131
31,344
16,938
60,573
18,819
$
$
0.95
0.88
0.98
0.95
1.69
0.89
3.26
0.98
0.93
0.87
0.97
0.94
1.64
0.88
3.14
0.97
______________________________________________________________________________________________________
(1) Revenues in 2012 were impacted by the refranchising of 154 Applebee's company-operated restaurants in 2012 as follows: 17 in the first
quarter of 2012, 98 in the third quarter of 2012 and 39 in the fourth quarter of 2012.
(2) Net income in 2012 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 and
$13.0 million in the fourth quarter of 2012.
(3) The quarterly amounts may not add to the full year amount as each quarterly calculation is discrete from the full-year calculation.
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.
105
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, 2013 based on the framework in Internal Control—Integrated Framework (1992) 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, 2013.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report that appears herein.
106
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, 2013, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 framework) (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, 2013, 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, 2013 and 2012 and the
related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2013 of DineEquity, Inc. and Subsidiaries and our report dated February 26, 2014 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 26, 2014
107
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 2013
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 2014 Annual Meeting of Shareholders ("2014 Proxy Statement") to be filed with the SEC within
120 days after the end of our fiscal year ended December 31, 2013.
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 2014 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 2014 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
2014 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 2014 Proxy Statement.
108
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:
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2013 and 2012.
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31,
2013.
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31,
2013.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2013.
Notes to the Consolidated Financial Statements.
(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 filed on
December 18, 2012 is incorporated herein by reference).
3.2 Amended Bylaws of DineEquity, Inc. (Exhibit 3.2 to Registrant's Form 8-K filed on 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 on October 21, 2010 is
incorporated herein by reference).
4.2 First Supplemental Indenture dated as of July 2, 2013, by and between DineEquity, Inc. and Wells Fargo Bank,
National Association (Exhibit 4.1 to Registrant’s Form 10-Q, filed on July 30, 2013 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 DineEquity, Inc. 2011 Stock Incentive Plan (Annex A to Registrant's Proxy Statement, filed on April 13, 2011 is
incorporated herein by reference).
.
†10.6 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).
†10.7 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).
†10.8 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).
†10.9 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).
109
†10.10 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).
†10.11 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).
†10.12 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).
†10.13 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).
†10.14 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).
†10.15 DineEquity Inc. 2011 Stock Incentive Plan Performance Shares Award Agreement - Employees (50/50)
(Exhibit 10.18 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 Shares Award Agreement (Exhibit 10.19 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 Unit Award Agreement (Exhibit 10.20 to Registrant's
Form 10-K for the year ended December 31, 2011 is incorporated herein by reference).
†10.18 DineEquity Inc. 2011 Stock Incentive Plan Restricted Stock Award Agreement - Refranchising Event
(Exhibit 10.21 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 (Ratable Vesting - Employees).
†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 DineEquity, Inc. Senior Executive Incentive Plan as amended and restated (Annex "A" to Registrant's Proxy
Statement, filed on April 15, 2012 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, 2008.
†10.27 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).
10.28 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 on October 21, 2010 is incorporated herein by reference).
10.29 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 on February 28, 2011 is incorporated herein by
reference).
10.30 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 on February 5, 2013 is incorporated herein by
reference).
10.31 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 on 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, 2013.
110
*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.
111
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 26th day of February 2014.
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 26th day of February 2014.
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/ DOUGLAS M. PASQUALE
Douglas M. Pasquale
/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
Director
112
DINEEQUITY, INC.
Computation of Consolidated Leverage Ratio and Cash Interest Coverage Ratio
for the Trailing Twelve Months Ended December 31, 2013
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 ..............................................................................................................
1,336,666
277,088
4.8
277,088
110,618
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, 2013
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.
DineEquity 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 26, 2014, 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, 2013.
/s/ Ernst & Young LLP
Los Angeles, California
February 26, 2014
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 26, 2014
/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 26, 2014
/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, 2013, 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 26, 2014
/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, 2013, 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 26, 2014
/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.
(This page has been left blank intentionally)
Corporate Offices
DineEquity, Inc.
450 North Brand Blvd.
Glendale, CA 91203-2306
866-995-DINE
www.dineequity.com
Stock Transfer Agent
Computershare
250 Royall Street
Canton, MA 02021
Toll Free within the U.S.:
(866) 282-3708
Foreign Shareholders:
(201) 680-6578
Hearing Impaired:
(800) 952-9245
Investor Information
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
www.computershare.com/investor
Manual, each listed company CEO must
Independent Accountants
Ernst & Young LLP
Los Angeles, CA
certify to the NYSE each year that he
or she is not aware of any violation by
the company of NYSE corporate gover-
nance listing standards. Julia Stewart’s
annual CEO certification regarding the
NYSE’s corporate governance listing
standards was submitted to the NYSE
on May 31, 2013.
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Everywhere
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ways to
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