XNYS:DIN DineEquity Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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DIN-2012.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
 (Mark One)
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2012
 OR
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                  to                 
 
Commission File Number 001-15283
 ________________________________________________________________
DineEquity, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
 
95-3038279
(I.R.S. Employer Identification No.)
 
 
 
450 North Brand Boulevard,
Glendale, California
 
91203-1903
(Address of principal executive offices)
 
(Zip Code)
 
(818) 240-6055
(Registrant’s telephone number, including area code)
 ______________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of July 27, 2012
Common Stock, $0.01 par value
 
18,319,035
 



DineEquity, Inc. and Subsidiaries
Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements.
DineEquity, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
 
 
June 30,
2012
 
December 31,
2011
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
32,371

 
$
60,691

Receivables, net
 
77,873

 
115,667

Inventories
 
12,056

 
12,031

Prepaid income taxes
 
5,721

 
13,922

Prepaid gift cards
 
29,352

 
36,643

Deferred income taxes
 
24,984

 
20,579

Assets held for sale
 
27,648

 
9,363

Other current assets
 
21,170

 
8,051

Total current assets
 
231,175

 
276,947

Long-term receivables
 
219,425

 
226,526

Property and equipment, net
 
435,582

 
474,154

Goodwill
 
697,470

 
697,470

Other intangible assets, net
 
815,577

 
822,361

Other assets, net
 
114,718

 
116,836

Total assets
 
$
2,513,947

 
$
2,614,294

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Current maturities of long-term debt
 
$
7,420

 
$
7,420

Accounts payable
 
28,532

 
29,013

Accrued employee compensation and benefits
 
19,106

 
26,191

Gift card liability
 
91,266

 
146,955

Accrued interest payable
 
12,437

 
12,537

Current maturities of capital lease and financing obligations
 
14,154

 
13,480

Other accrued expenses
 
23,431

 
22,048

Total current liabilities
 
196,346

 
257,644

Long-term debt, less current maturities
 
1,338,819

 
1,411,448

Financing obligations, less current maturities
 
151,638

 
162,658

Capital lease obligations, less current maturities
 
129,070

 
134,407

Deferred income taxes
 
372,246

 
383,810

Other liabilities
 
109,185

 
109,107

Total liabilities
 
2,297,304

 
2,459,074

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Convertible preferred stock, Series B, at accreted value, shares:10,000,000 authorized; 35,000 issued; June 30, 2012 and December 31, 2011 - 34,900 outstanding
 
45,853

 
44,508

Common stock, $0.01 par value, shares: 40,000,000 authorized; June 30, 2012 - 24,636,137 issued, 18,326,803 outstanding; December 31, 2011 - 24,658,985 issued,18,060,206 outstanding
 
246

 
247

Additional paid-in-capital
 
209,737

 
205,663

Retained earnings
 
243,806

 
196,869

Accumulated other comprehensive loss
 
(155
)
 
(294
)
Treasury stock, at cost; shares: June 30, 2012 - 6,309,334; December 31, 2011 - 6,598,779
 
(282,844
)
 
(291,773
)
Total stockholders’ equity
 
216,643

 
155,220

Total liabilities and stockholders’ equity
 
$
2,513,947

 
$
2,614,294


 See the accompanying Notes to Consolidated Financial Statements.

2


DineEquity, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Segment Revenues:
 

 
 

 
 
 
 
Franchise revenues
$
102,459

 
$
98,551

 
$
210,868

 
$
203,103

Company restaurant sales
93,802

 
134,634

 
194,687

 
289,337

Rental revenues
29,171

 
31,624

 
61,176

 
63,840

Financing revenues
3,959

 
3,529

 
8,242

 
12,258

Total segment revenues
229,391

 
268,338

 
474,973

 
568,538

Segment Expenses:
 

 
 

 
 
 
 
Franchise expenses
26,346

 
26,207

 
53,978

 
53,650

Company restaurant expenses
79,574

 
117,279

 
163,757

 
249,045

Rental expenses
24,301

 
24,566

 
48,838

 
49,213

Financing expenses
916

 
1

 
1,571

 
5,576

Total segment expenses
131,137

 
168,053

 
268,144

 
357,484

Gross segment profit
98,254

 
100,285

 
206,829

 
211,054

General and administrative expenses
37,239

 
38,450

 
76,871

 
76,419

Interest expense
29,650

 
32,867

 
59,871

 
69,173

Impairment and closure charges
122

 
21,816

 
844

 
26,754

Amortization of intangible assets
3,075

 
3,075

 
6,150

 
6,150

Loss (gain) on disposition of assets
741

 
1,291

 
(15,992
)
 
(22,463
)
Loss on extinguishment of debt

 
939

 
2,611

 
7,885

Debt modification costs

 
10

 

 
4,124

Income before income taxes
27,427

 
1,837

 
76,474

 
43,012

Provision for income taxes
(10,489
)
 
(1,489
)
 
(28,192
)
 
(12,965
)
Net income
16,938

 
348

 
48,282

 
30,047

Other comprehensive income:
 
 
 
 
 
 
 
Adjustment to unrealized loss on available-for-sale investments

 

 
140

 

Foreign currency translation adjustment
(3
)
 
(1
)
 
(1
)
 
20

Total comprehensive income
$
16,935

 
$
347

 
$
48,421

 
$
30,067

Net income available to common stockholders:
 

 
 

 
 
 
 
Net income
$
16,938

 
$
348

 
$
48,282

 
$
30,047

Less: Accretion of Series B preferred stock
(677
)
 
(639
)
 
(1,345
)
 
(1,268
)
Less: Net income allocated to unvested participating restricted stock
(388
)
 
7

 
(1,169
)
 
(846
)
Net income (loss) available to common stockholders
$
15,873

 
$
(284
)
 
$
45,768

 
$
27,933

Net income (loss) available to common stockholders per share:
 

 
 

 
 
 
 
Basic
$
0.89

 
$
(0.02
)
 
$
2.57

 
$
1.56

Diluted
$
0.88

 
$
(0.02
)
 
$
2.52

 
$
1.53

Weighted average shares outstanding:
 

 
 

 
 
 
 
Basic
17,890

 
18,072

 
17,786

 
17,884

Diluted
18,138

 
18,072

 
18,731

 
18,280

 
See the accompanying Notes to Consolidated Financial Statements.

3


DineEquity, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
Cash flows from operating activities:
 
 

 
 

Net income
 
$
48,282

 
$
30,047

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 

 
 

Depreciation and amortization
 
20,956

 
26,339

Non-cash interest expense
 
3,045

 
2,988

Loss on extinguishment of debt
 
2,611

 
7,885

Impairment and closure charges
 
571

 
26,540

Deferred income taxes
 
(15,969
)
 
(2,592
)
Non-cash stock-based compensation expense
 
6,573

 
5,063

Tax benefit from stock-based compensation
 
4,653

 
6,021

Excess tax benefit from share-based compensation
 
(2,820
)
 
(5,687
)
Gain on disposition of assets
 
(15,992
)
 
(22,463
)
Other
 
894

 
116

Changes in operating assets and liabilities:
 
 

 
 

Receivables
 
38,598

 
26,337

Inventories
 
(325
)
 
(1,053
)
Prepaid expenses
 
(2,058
)
 
4,067

Current income tax receivables and payables
 
7,414

 
22,052

Accounts payable
 
69

 
(8,042
)
Accrued employee compensation and benefits
 
(7,084
)
 
(10,955
)
Gift card liability
 
(55,690
)
 
(49,183
)
Other accrued expenses
 
2,628

 
(9,292
)
Cash flows provided by operating activities
 
36,356

 
48,188

Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(10,650
)
 
(13,510
)
Proceeds from sale of property and equipment and assets held for sale
 
21,500

 
55,494

Principal receipts from notes, equipment contracts and other long-term receivables
 
6,577

 
7,055

Other
 
(760
)
 
(574
)
Cash flows provided by investing activities
 
16,667

 
48,465

Cash flows from financing activities:
 
 

 
 

Borrowings under revolving credit facilities
 
35,000

 
25,000

Repayments under revolving credit facilities
 
(35,000
)
 
(25,000
)
Repayment of long-term debt (including premiums)
 
(76,037
)
 
(153,437
)
Principal payments on capital lease and financing obligations
 
(6,125
)
 
(6,764
)
Payment of debt modification and issuance costs
 

 
(12,316
)
Repurchase of restricted stock
 
(1,344
)
 
(4,742
)
Proceeds from stock options exercised
 
3,120

 
6,240

Excess tax benefit from share-based compensation
 
2,820

 
5,687

Change in restricted cash
 
(3,777
)
 
1,492

Other
 

 
(600
)
Cash flows used in financing activities
 
(81,343
)
 
(164,440
)
Net change in cash and cash equivalents
 
(28,320
)
 
(67,787
)
Cash and cash equivalents at beginning of period
 
60,691

 
102,309

Cash and cash equivalents at end of period
 
$
32,371

 
$
34,522

Supplemental disclosures:
 
 

 
 

Interest paid in cash
 
$
65,040

 
$
79,482

Income taxes paid in cash
 
$
34,061

 
$
11,071

 
See the accompanying Notes to Consolidated Financial Statements.

4


DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
1. General
 
The accompanying unaudited consolidated financial statements of DineEquity, Inc. (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2012.
 
The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
 
These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
2. Basis of Presentation
 
The Company’s fiscal quarters end on the Sunday closest to the last day of each quarter. For convenience, the fiscal quarters are reported as ending on March 31, June 30, September 30 and December 31. The first and second fiscal quarters of 2012 ended on April 1, 2012 and July 1, 2012, respectively; the first and second fiscal quarters of 2011 ended on April 3, 2011 and July 3, 2011, respectively.
 
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated in consolidation.
 
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to provisions for doubtful accounts, legal contingencies, income taxes, long-lived assets, goodwill and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
 
Restricted Assets

Restricted Cash
The Company receives funds from Applebee's franchisees pursuant to franchise agreements, usage of which is restricted to advertising activities. Cash balances restricted for this purpose as of June 30, 2012 and December 31, 2011 totaled $4.9 million and $1.2 million, respectively. The balances were included as other current assets in the consolidated balance sheets.
Other Restricted Assets
As of June 30, 2012 and December 31, 2011, restricted assets related to a captive insurance subsidiary totaled $3.8 million and $3.6 million, respectively, and were included in other assets in the consolidated balance sheets. The captive insurance subsidiary, which has not underwritten coverage since January 2006, was formed to provide insurance coverage to Applebee's and its franchisees. These restricted assets were primarily investments, use of which is restricted to the payment of insurance claims for incidents that occurred during the period coverage had been provided.


5

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

3. Accounting Policies
 
Recently Adopted Accounting Standards
 
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. ASU 2011-05 did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor did it affect how earnings per share is calculated or presented. The Company adopted ASU 2011-05 retrospectively in the first quarter of 2012 and adoption did not have a material impact on the Company’s consolidated financial statements.

Newly Issued Accounting Standards

The Company reviewed all significant 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 consolidated financial statements as a result of future adoption.
 
4. Assets Held for Sale
 
The Company classifies assets as held for sale and ceases the depreciation and amortization of the assets when there is a plan for disposal of the assets and those assets meet the held for sale criteria, as defined in applicable U.S. GAAP. The balance of assets held for sale at December 31, 2011 of $9.4 million was comprised of 17 Applebee's company-operated restaurants located in a six-state market area geographically centered around Memphis, Tennessee, one parcel of land on which a refranchised Applebee's formerly company-operated restaurant is situated and three parcels of land previously intended for future restaurant development.
 
During the six months ended June 30, 2012, the Company completed the refranchising and sale of related restaurant assets of the 17 Applebee's company-operated restaurants located in a six-state market area geographically centered around Memphis, Tennessee. In April 2012, the Company entered into an asset purchase agreement for the refranchising and sale of related restaurant assets of 39 Applebee's company-operated restaurants located in Virginia. In May 2012, the Company entered into an asset purchase agreement for the refranchising and sale of related restaurant assets of 33 Applebee's company-operated restaurants located primarily in Missouri and Indiana. Accordingly, $23.7 million, representing the net book value of the assets related to these 72 restaurants, was transferred to assets held for sale.

Assets held for sale at June 30, 2012 of $27.6 million was comprised of 72 Applebee's company-operated restaurants located primarily in Virginia, Missouri and Indiana, one parcel of land on which a refranchised Applebee's formerly company-operated restaurant is situated and three parcels of land previously intended for future restaurant development.
 
The following table summarizes changes in assets held for sale during the six months ended June 30, 2012:
 
 
(In millions)
Balance, December 31, 2011
$
9.4

Assets transferred to held for sale
23.7

Assets sold
(5.1
)
Other
(0.4
)
Balance, June 30, 2012
$
27.6




6

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

5. Long-Term Debt
 
Long-term debt consisted of the following components:
 
 
June 30, 2012
 
December 31, 2011
 
 
(In millions)
Senior Secured Credit Facility, due October 2017, at a variable interest rate of 4.25% as of June 30, 2012 and December 31, 2011
 
$
612.0

 
$
682.5

Senior Notes due October 2018, at a fixed rate of 9.5%
 
760.8

 
765.8

Discount
 
(26.6
)
 
(29.5
)
Total long-term debt
 
1,346.2

 
1,418.8

Less current maturities
 
(7.4
)
 
(7.4
)
Long-term debt, less current maturities
 
$
1,338.8

 
$
1,411.4

 
For a description of the respective instruments, refer to Note 8 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Debt Modification Costs
 
On February 25, 2011, the Company entered into Amendment No. 1 (the ''Amendment'') to the Credit Agreement dated as of October 8, 2010. For a description of the Amendment, refer to Note 8 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Fees of $4.1 million paid to third parties in connection with the Amendment were included as “Debt modification costs” in the Consolidated Statement of Income for the six months ended June 30, 2011.

Loss on Extinguishment of Debt
 
During the six months ended June 30, 2012 and 2011, the Company recognized the following losses on the extinguishment of debt:

Quarter Ended
Instrument Repaid/Retired
 
Face Amount
Repaid/Retired
 
Cash Paid
 
Loss (1)
 
 
 
(In millions)
March 2012
Term Loans
 
$
70.5

 
$
70.5

 
$
1.9

March 2012
Senior Notes
 
5.0

 
5.5

 
0.7

 
Total 2012
 
75.5

 
76.0

 
2.6

 
 
 
 
 
 
 
 
March 2011
Term Loans
 
$
110.0

 
$
110.0

 
$
2.7

March 2011
Senior Notes
 
32.3

 
35.3

 
4.3

June 2011
Senior Notes
 
7.5

 
8.2

 
0.9

 
Total 2011
 
$
149.8

 
$
153.5

 
$
7.9


(1) Including write-off of the discount and deferred financing costs related to the debt retired.

Compliance with Covenants and Restrictions
 
The Company was in compliance with all the covenants and restrictions related to its Senior Secured Credit Facility and Senior Notes as of June 30, 2012.
 


7

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

6. Financing Obligations
 
As of June 30, 2012, future minimum lease payments under financing obligations during the initial terms of the leases related to sale-leaseback transactions are as follows:
 
Fiscal Years
(In millions)
 
Remainder of 2012
$
7.2

(1 
) 
2013
17.4

 
2014
17.6

 
2015
19.0

(1 
) 
2016
17.6

 
Thereafter
207.5

 
Total minimum lease payments
286.3

 
Less interest
(130.9
)
 
Total financing obligations
155.4

 
Less current portion
(3.8
)
(2 
) 
Long-term financing obligations
$
151.6

 
 
(1)     Due to the varying closing dates of the Company’s fiscal years, 11 monthly payments will be made in fiscal 2012 and 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.
 
During the six months ended June 30, 2012, the Company’s continuing involvement with six properties subject to financing obligations was ended by assignment of the lease obligations to a qualified franchisee. As a result, the Company’s financing obligations were reduced by $9.2 million.
 
7. Impairment and Closure Charges
 
The Company assesses tangible long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The following table summarizes the components of impairment and closure charges for the three and six months ended June 30, 2012 and 2011:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
Impairment and closure charges:
 

 
 

 
 
 
 
Impairment
$

 
$
0.3

 
$
0.3

 
$
4.8

Lenexa lease termination

 
21.3

 

 
21.3

Closure charges
0.1

 
0.2

 
0.5

 
0.7

Total impairment and closure charges
$
0.1

 
$
21.8

 
$
0.8

 
$
26.8

 
Impairment and closure charges for the six months ended June 30, 2012 totaled $0.8 million. The impairment charge related to a parcel of land previously intended for future restaurant development. Closure charges related to several individually insignificant franchise restaurant closures.
 
Impairment and closure charges for the six months ended June 30, 2011 totaled $26.8 million and primarily related to termination of the Company's sublease of the commercial space previously occupied by the Applebee's Restaurant Support Center in Lenexa, Kansas. The Company recognized $21.3 million for the termination fee and other closing costs in the second quarter of 2011. The Company recognized a $4.5 million impairment charge in the quarter ended March 31, 2011 related to furniture, fixtures and leasehold improvements at the facility whose book value was not realizable as the result of the termination of the sublease. Closure charges related to several individually insignificant franchise restaurant closures.



8

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

8. Income Taxes
 
The effective tax rate was 36.9% for the six months ended June 30, 2012 as compared to 30.1% for the six months ended June 30, 2011. The effective tax rate in the prior year was lower due to the release of liabilities for unrecognized tax benefits related to gift card income deferral as a result of the issuance of guidance by the U.S. Internal Revenue Service.
 
At June 30, 2012, the Company had a liability for unrecognized tax benefits, including potential interest and penalties net of related tax benefit, totaling $7.9 million, of which approximately $1.2 million is expected to be paid within one year. For the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur.

As of June 30, 2012, accrued interest and penalties were $2.6 million and $0.4 million, respectively, excluding any related income tax benefits. As of December 31, 2011, accrued interest and penalties were $3.0 million and $0.3 million, respectively, excluding any related income tax benefits. The decrease of $0.4 million of accrued interest is primarily related to the decrease of unrecognized tax benefits due to settlements with taxing authorities, partially offset by the accrual of interest during the six months ended June 30, 2012. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of income tax expense, which is recognized in the Consolidated Statements of Income.

The Company and its subsidiaries file federal income tax returns as well as income tax returns in various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state or non-United States tax examinations by tax authorities for years before 2008. The Internal Revenue Service commenced examination of the Company's U.S. federal income tax return for the tax years 2008 to 2010 in the first quarter of 2012. The examination is anticipated to be completed by the first quarter of 2013.


9. Stock-Based Compensation
 
From time to time, the Company has granted nonqualified stock options, restricted stock, 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 nonqualified stock options, stock appreciation rights, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and nonemployee 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. The 2011 Plan will expire in May 2021.
 
The nonqualified stock options generally vest over a three-year period and have a term of ten years from the effective issuance date. Option exercise prices equal the closing price of the Company’s common stock on the New York Stock Exchange 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.

The following table summarizes the components of the Company’s stock-based compensation expense included in general and administrative expenses in the consolidated financial statements:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
Pre-tax compensation expense
$
2.5

 
$
3.3

 
$
7.0

 
$
6.4

Tax provision
(1.0
)
 
(1.3
)
 
(2.7
)
 
(2.5
)
Total stock-based compensation expense, net of tax
$
1.5

 
$
2.0

 
$
4.3

 
$
3.9

 
As of June 30, 2012, total unrecognized compensation cost (including estimated forfeitures) of $12.2 million related to restricted stock and restricted stock units and $10.6 million related to stock options is expected to be recognized over a weighted average period of 1.2 years for restricted stock and restricted stock units and 1.1 years for stock options.
 

9

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

The estimated fair values of the options granted during the six months ended June 30, 2012 were calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model:
 
Risk-free interest rate
0.86
%
Weighted average historical volatility
83.6
%
Dividend yield

Expected years until exercise
4.66

Forfeitures
11.0
%
Weighted average fair value of options granted
$
33.11

 
Option balances as of June 30, 2012 and activity related to the Company’s stock options during the six months then ended were as follows:
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2011
 
1,318,640

 
$
32.06

 
 
 
 

Granted
 
147,674

 
$
51.63

 
 
 
 

Exercised
 
(212,308
)
 
$
15.94

 
 
 
 

Forfeited
 
(24,775
)
 
$
39.09

 
 
 
 

Outstanding at June 30, 2012
 
1,229,231

 
$
37.05

 
6.87
 
$
13,145,000

Vested at June 30, 2012 and Expected to Vest
 
1,173,783

 
$
36.48

 
6.76
 
$
12,991,000

Exercisable at June 30, 2012
 
780,398

 
$
31.89

 
5.8
 
$
11,172,000

 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing stock price of the Company’s common stock on the last trading day of the second quarter of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2012. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock and the number of in-the-money options.
 
A summary of restricted stock activity for the six months ended June 30, 2012 is presented below:
 
 
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
 
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2011
 
486,533

 
$31.25
 
18,000

 
$29.32
Granted
 
120,123

 
$51.85
 
19,152

 
$52.23
Released
 
(154,903
)
 
$11.03
 
(3,910
)
 
$40.58
Forfeited
 
(36,976
)
 
$40.90
 

 
Outstanding at June 30, 2012
 
414,777

 
$43.72
 
33,242

 
$41.19

The Company has issued 44,957 shares of cash-settled restricted stock units to members of the Board of Directors, of which 37,184 were outstanding at June 30, 2012. As these instruments can only be settled in cash, they are recorded as liabilities based on the closing price of the Company’s common stock as of June 30, 2012. For the six months ended June 30, 2012 and 2011, $0.2 million and $0.8 million, respectively, were included in pretax stock-based compensation expense for the cash-settled restricted stock units.
 


10

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

10. Segments
 
The Company’s revenues and expenses are recorded in four segments: franchise operations, company restaurant operations, rental operations and financing operations.
 
As of June 30, 2012, the franchise operations segment consisted of (i) 1,858 restaurants operated by Applebee’s franchisees in the United States, one U.S. territory and 15 countries outside the United States; and (ii) 1,540 restaurants operated by IHOP franchisees and area licensees in the United States, two U.S. territories and three countries outside the United States. Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products, certain franchise advertising fees and the portion of the franchise fees allocated to intellectual property.  Franchise operations expenses include advertising expense, the cost of proprietary products, pre-opening training expenses and costs related to intellectual property provided to certain franchisees.
 
As of June 30, 2012, the company restaurant operations segment consisted of 160 Applebee’s company-operated restaurants and 17 IHOP company-operated restaurants, all 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, labor, benefits, utilities, rent and other restaurant operating costs.
 
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental operations expenses are costs of operating leases and interest expense on capital leases on franchisee-operated restaurants. 
Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases, as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants taken back from franchisees not allocated to IHOP intellectual property. Financing expenses are primarily the cost of restaurant equipment.
 
Information on segments was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In millions)
Revenues from External Customers
 
 

 
 

 
 
 
 
Franchise operations
 
$
102.5

 
$
98.6

 
$
210.9

 
$
203.1

Company restaurants
 
93.8

 
134.6

 
194.7

 
289.3

Rental operations
 
29.1

 
31.6

 
61.2

 
63.8

Financing operations
 
4.0

 
3.5

 
8.2

 
12.3

Total
 
$
229.4

 
$
268.3

 
$
475.0

 
$
568.5

Interest Expense
 
 

 
 

 
 
 
 
Company restaurants
 
$
0.1

 
$
0.1

 
$
0.2

 
$
0.3

Rental operations
 
4.3

 
4.5

 
8.6

 
9.2

Corporate
 
29.7

 
32.9

 
59.9

 
69.2

Total
 
$
34.1

 
$
37.5

 
$
68.7

 
$
78.7

Depreciation and amortization
 
 

 
 

 
 
 
 
Franchise operations
 
$
2.5

 
$
2.6

 
$
4.9

 
$
5.1

Company restaurants
 
2.3

 
4.6

 
4.7

 
9.5

Rental operations
 
3.4

 
3.5

 
6.9

 
7.1

Corporate
 
2.3

 
2.4

 
4.5

 
4.6

Total
 
$
10.5

 
$
13.1

 
$
21.0

 
$
26.3

Income (loss) before income taxes
 
 

 
 

 
 
 
 
Franchise operations
 
$
76.2

 
$
72.4

 
$
156.9

 
$
149.4

Company restaurants
 
14.2

 
17.3

 
30.9

 
40.3

Rental operations
 
4.8

 
7.0

 
12.3

 
14.6

Financing operations
 
3.1

 
3.6

 
6.7

 
6.7

Corporate
 
(70.9
)
 
(98.5
)
 
(130.3
)
 
(168.0
)
Total
 
$
27.4

 
$
1.8

 
$
76.5

 
$
43.0





11

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

11. Net Income (Loss) per Share
 
The computation of the Company’s basic and diluted net income (loss) per share was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Numerator for basic and dilutive income - per common share:
 

 
 

 
 
 
 
Net income
$
16,938

 
$
348

 
$
48,282

 
$
30,047

Less: Accretion of Series B Preferred Stock
(677
)
 
(639
)
 
(1,345
)
 
(1,268
)
Less: Net income allocated to unvested participating restricted stock
(388
)
 
7

 
(1,169
)
 
(846
)
Net income (loss) available to common stockholders - basic
15,873

 
(284
)
 
45,768

 
27,933

Effect of unvested participating restricted stock in two-class calculation
5

 

 
58

 
17

Accretion of Series B Preferred Stock

 

 
1,345

 

Net income (loss) available to common stockholders - diluted
$
15,878

 
$
(284
)
 
$
47,171

 
$
27,950

Denominator:
 

 
 

 
 
 
 
Weighted average outstanding shares of common stock - basic
17,890

 
18,072

 
17,786

 
17,884

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
248

 

 
282

 
396

Series B Preferred Stock

 

 
663

 

Weighted average outstanding shares of common stock - diluted
18,138

 
18,072

 
18,731

 
18,280

Net income (loss) per common share:
 

 
 

 
 
 
 
Basic
$
0.89

 
$
(0.02
)
 
$
2.57

 
$
1.56

Diluted
$
0.88

 
$
(0.02
)
 
$
2.52

 
$
1.53

For the three months ended June 30, 2012 and the six months ended June 30, 2011, the diluted income per common share was computed excluding 662,500 and 624,000 shares, respectively, of common stock equivalents from the conversion of Series B Preferred Stock that were antidilutive. For the three months ended June 30, 2011, the diluted loss per common share was computed excluding 965,000 shares of common stock equivalents that were antidilutive.
12. Fair Value Measurements
The Company does not have a material amount of financial instruments that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company does not have a material amount of non-financial assets or non-financial liabilities that are 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 the carrying amounts due to their short duration.
 
The fair values of non-current financial liabilities at June 30, 2012 and December 31, 2011, determined based on Level 2 inputs, were as follows:
 
 
June 30, 2012
 
December 31, 2011
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
(in millions)
Long-term debt, less current maturities
 
$
1,338.8

 
$
1,438.4

 
$
1,411.4

 
$
1,486.2

 


12

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

13. Commitments and Contingencies
 
Litigation, Claims and Disputes
 
The Company is subject to various lawsuits, administrative proceedings, audits, and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The Company is required to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of the Company's litigation are expensed as such fees and expenses are incurred. Management regularly assesses the Company's insurance 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 upon 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.

Gerald Fast v. Applebee's

The Company is currently defending a collective action in United States District Court for the Western District of Missouri, Central Division filed on July 14, 2006 under the Fair Labor Standards Act, Gerald Fast v. Applebee's International, Inc., in which named plaintiffs claim that tipped servers and bartenders in Applebee's company-operated restaurants spend more than 20% of their time performing general preparation and maintenance duties, or “non-tipped work,” for which they should be compensated at the minimum wage. On June 19, 2007, the court granted conditional certification of a nationwide class of servers and bartenders who had worked in Applebee's company-operated restaurants since June 19, 2004. As of February 2008, there were 5,540 potential class members who had opted into the collective action. Under this action, plaintiffs currently are seeking unpaid wages and other relief of up to $17 million plus plaintiffs' attorneys' fees and expenses. The bench trial is currently scheduled to begin on September 10, 2012.
 
The Company believes it has meritorious defenses and intends to vigorously defend this case. Due to the inherent uncertainty in litigation, however, there can be no guarantee that the Company ultimately will be successful. Substantial losses from or costs related to this legal proceeding could have a material impact on the Company. As of June 30, 2012, the Company had not accrued a loss contingency related to this matter. Given the uncertainty of the potential outcome, the Company is also unable to estimate, for financial reporting purposes, a reasonably possible loss or a range of reasonably possible losses for this matter.

Lease Guarantees
 
In connection with the sale of Applebee’s restaurants or previous brands to franchisees and other parties, the Company has, in certain cases, guaranteed or had potential continuing liability for lease payments totaling $370.4 million as of June 30, 2012. This amount represents the maximum potential liability for future payments under these leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 2012 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 June 30, 2012.

14.  Consolidating Financial Information
 
Certain of the Company's subsidiaries have guaranteed the Company's obligations under the Senior Secured 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 reclassifications; and (v) DineEquity, Inc. and Subsidiaries, on a consolidated basis.
 
Each guarantor subsidiary is 100% owned by the Company at the date of each balance sheet presented. The notes 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.
 

13

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

Supplemental Condensed Consolidating Balance Sheet
June 30, 2012
(In millions(1))
 
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Current Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$
31.9

 
$
0.5

 
$

 
$
32.4

Receivables, net
 
0.9

 
84.9

 
0.1

 
(8.0
)
 
77.9

Inventories
 

 
12.1

 

 

 
12.1

Prepaid expenses and other current assets
 
118.5

 
48.8

 

 
(111.1
)
 
56.2

Deferred income taxes
 
2.3

 
22.4

 
0.3

 

 
25.0

Assets held for sale
 

 
25.8

 
1.8

 

 
27.6

Intercompany
 
(283.6
)
 
278.0

 
5.6

 

 

Total current assets
 
(161.9
)
 
503.9

 
8.3

 
(119.1
)
 
231.2

Long-term receivables
 

 
219.4

 

 

 
219.4

Property and equipment, net
 
24.3

 
411.3

 

 

 
435.6

Goodwill
 

 
697.5

 

 

 
697.5

Other intangible assets, net
 

 
815.6

 

 

 
815.6

Other assets, net
 
20.9

 
93.7

 

 

 
114.6

Investment in subsidiaries
 
1,697.6

 

 

 
(1,697.6
)
 

Total assets
 
$
1,580.9

 
$
2,741.4

 
$
8.3

 
$
(1,816.7
)
 
$
2,513.9

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
 
$
15.4

 
$

 
$

 
$
(8.0
)
 
$
7.4

Accounts payable
 
2.2

 
26.3

 

 

 
28.5

Accrued employee compensation and benefits
 
4.6

 
14.5

 

 


 
19.1

Gift card liability
 

 
91.3

 

 


 
91.3

Income taxes payable
 
(23.9
)
 
135.0

 

 
(111.1
)
 

Other accrued expenses
 
15.0

 
34.7

 
0.3

 


 
50.0

Total current liabilities
 
13.3

 
301.8

 
0.3

 
(119.1
)
 
196.3

Long-term debt
 
1,338.8

 

 

 


 
1,338.8

Financing obligations
 

 
151.6

 

 


 
151.6

Capital lease obligations
 

 
129.1

 

 


 
129.1

Deferred income taxes
 
6.5

 
366.0

 
(0.3
)
 

 
372.2

Other liabilities
 
5.5

 
102.9

 
0.9

 


 
109.3

Total liabilities
 
1,364.1

 
1,051.4

 
0.9

 
(119.1
)
 
2,297.3

Total stockholders’ equity
 
216.8

 
1,690.0

 
7.4

 
(1,697.6
)
 
216.6

Total liabilities and stockholders’ equity
 
$
1,580.9

 
$
2,741.4

 
$
8.3

 
$
(1,816.7
)
 
$
2,513.9

(1) Supplemental statements presented in millions may not add due to rounding from Consolidated Statements presented in thousands.



14

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

Supplemental Condensed Consolidating Balance Sheet
December 31, 2011
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Current Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
9.9

 
$
50.4

 
$
0.4

 
$

 
$
60.7

Receivables, net
 
0.6

 
121.0

 
0.1

 
(6.0
)
 
115.7

Inventories
 

 
12.0

 

 

 
12.0

Prepaid expenses and other current assets
 
85.3

 
44.6

 

 
(71.3
)
 
58.6

Deferred income taxes
 
1.5

 
19.0

 
0.1

 

 
20.6

Assets held for sale
 

 
7.3

 
2.1

 

 
9.4

Intercompany
 
(300.2
)
 
294.5

 
5.7

 

 

Total current assets
 
(202.9
)
 
548.7

 
8.4

 
(77.3
)
 
276.9

Long-term receivables
 

 
226.5

 

 

 
226.5

Property and equipment, net
 
24.6

 
449.6

 

 

 
474.2

Goodwill
 

 
697.5

 

 

 
697.5

Other intangible assets, net
 

 
822.4

 

 

 
822.4

Other assets, net
 
23.2

 
93.5

 
0.1

 

 
116.8

Investment in subsidiaries
 
1,697.6

 

 

 
(1,697.6
)
 

Total assets
 
$
1,542.5

 
$
2,838.2

 
$
8.5

 
$
(1,774.9
)
 
$
2,614.3

Liabilities and Stockholders’ Equity
 
 

 
 

 
 

 
 

 
 

Current Liabilities
 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
 
$
13.4

 
$

 
$

 
$
(6.0
)
 
$
7.4

Accounts payable
 
2.8

 
26.2

 

 

 
29.0

Accrued employee compensation and benefits
 
6.7

 
19.5

 

 

 
26.2

Gift card liability
 

 
147.0

 

 

 
147.0

Other accrued expenses
 
(61.6
)
 
180.6

 
0.4

 
(71.3
)
 
48.1

Total current liabilities
 
(38.7
)
 
373.3

 
0.4

 
(77.3
)
 
257.6

Long-term debt
 
1,411.4

 

 

 

 
1,411.4

Financing obligations
 

 
162.7

 

 

 
162.7

Capital lease obligations
 

 
134.4

 

 

 
134.4

Deferred income taxes
 
8.9

 
375.3

 
(0.4
)
 

 
383.8

Other liabilities
 
5.4

 
102.6

 
1.1

 

 
109.1

Total liabilities
 
1,387.0

 
1,148.3

 
1.1

 
(77.3
)
 
2,459.1

Total stockholders’ equity
 
155.5

 
1,689.9

 
7.4

 
(1,697.6
)
 
155.2

Total liabilities and stockholders’ equity
 
$
1,542.5

 
$
2,838.2

 
$
8.5

 
$
(1,774.9
)
 
$
2,614.3

(1) Supplemental statements presented in millions may not add due to rounding from Consolidated Statements presented in thousands.









15

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)

Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2012
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Franchise revenues
 
$
0.6

 
$
101.6

 
$
0.3

 
$

 
$
102.5

Restaurant sales
 

 
93.8

 

 

 
93.8

Rental revenues
 

 
29.2

 

 

 
29.1

Financing revenues
 

 
4.0

 

 

 
4.0

Total revenue
 
0.6

 
228.6

 
0.3

 

 
229.4

Franchise expenses
 
0.6

 
25.7

 

 

 
26.3

Restaurant expenses
 

 
79.6

 

 

 
79.6

Rental expenses
 

 
24.3

 

 

 
24.3

Financing expenses
 

 
0.9

 

 

 
0.9

General and administrative
 
6.1

 
30.6

 
0.5

 

 
37.2

Interest expense
 
27.0

 
2.7

 

 

 
29.7

Impairment and closure
 

 
0.1

 

 

 
0.1

Amortization of intangible assets
 

 
3.1

 

 

 
3.1

Loss (gain) on disposition of assets
 

 
1.2

 
(0.4
)
 

 
0.7

Loss on extinguishment of debt
 

 

 

 

 

Intercompany dividend
 
(37.0
)
 

 

 
37.0

 

Income (loss) before income taxes
 
3.9

 
60.4

 
0.2

 
(37.0
)
 
27.4

Benefit (provision) for income taxes
 
12.8

 
(23.3
)
 

 

 
(10.5
)
Net (loss) income
 
$
16.9

 
$
36.9

 
$
0.1

 
$
(37.0
)
 
$
16.9

Total comprehensive income
 
$
16.9

 
$
36.9

 
$
0.1

 
$
(37.0
)
 
$
16.9

 
Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2011
(In millions(1))