UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM
10-Q
(Mark One)
For the quarterly period ended
March 31, 2020
OR
For the transition period from to
Commission File Number
001-15283
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(Registrant’s telephone number, including area code)
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______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading symbol(s)
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Name of each exchange on which registered
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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 every Interactive Data File required to be submitted 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 such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☒
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Accelerated filer
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☐
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Non-accelerated filer
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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As of
April 24, 2020
, the Registrant had
16,418,446
shares of Common Stock outstanding.
Dine Brands Global, Inc. and Subsidiaries
Index
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Cautionary Statement Regarding Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “goal” 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 Dine Brands Global, Inc. does not intend to, nor does it assume any obligation to, update or supplement any forward-looking statements after the date of this report to reflect actual results or future events or circumstances.
Factors that could cause actual results to differ materially from the projections, forecasts, estimates and expectations discussed in this Quarterly Report on Form 10-Q include, among other things: uncertainty regarding the duration and severity of the ongoing COVID-19 pandemic and its ultimate impact on our business; general economic conditions; our level of indebtedness; compliance with the terms of our securitized debt; our ability to refinance our current indebtedness or obtain additional financing; our dependence on information technology; potential cyber incidents; the implementation of restaurant development plans; our dependence on our franchisees; the concentration of our Applebee’s franchised restaurants in a limited number of franchisees; the financial health of our franchisees, including any insolvency or bankruptcy; credit risks from our IHOP franchisees operating under our previous IHOP business model in which we built and equipped IHOP restaurants and then franchised them to franchisees; insufficient insurance coverage to cover potential risks associated with the ownership and operation of restaurants; our franchisees’ and other licensees’ compliance with our quality standards and trademark usage; general risks associated with the restaurant industry; potential harm to our brands’ reputation; risks of food-borne illness or food tampering; possible future impairment charges; trading volatility and fluctuations in the price of our stock; our ability to achieve the financial guidance we provide to investors; successful implementation of our business strategy; the availability of suitable locations for new restaurants; shortages or interruptions in the supply or delivery of products from third parties or availability of utilities; the management and forecasting of appropriate inventory levels; development and implementation of innovative marketing and use of social media; changing health or dietary preference of consumers; risks associated with doing
1
business in international markets; the results of litigation and other legal proceedings; third-party claims with respect to intellectual property assets; delivery initiatives and use of third-party delivery vendors; our allocation of human capital and our ability to attract and retain management and other key employees; compliance with federal, state and local governmental regulations; risks associated with our self-insurance; natural disasters or other serious incidents; our success with development initiatives outside of our core business; the adequacy of our internal controls over financial reporting and future changes in accounting standards; and other matters in the “Risk Factors” section of this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, many of which are beyond our control.
Fiscal Quarter End
The Company’s fiscal quarters end on the Sunday closest to the last day of each calendar quarter. For convenience, the fiscal quarters of each year are referred to as ending on March 31, June 30, September 30 and December 31. The first fiscal quarter of
2020
began on
December 30, 2019
and ended on
March 29, 2020
. The first fiscal quarter of
2019
began on
December 31, 2018
and ended on
March 31, 2019
.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Dine Brands Global, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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Assets
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March 31, 2020
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December 31, 2019
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(Unaudited)
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Current assets:
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Cash and cash equivalents
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$
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$
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Receivables, gross
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Less: allowance for credit losses
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(
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(
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Receivables, net
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Restricted cash
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Prepaid gift card costs
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Prepaid income taxes
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Other current assets
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Total current assets
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Other intangible assets, net
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Operating lease right-of-use assets
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Goodwill
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Property and equipment, net
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Long-term receivables, gross
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Less: allowance for credit losses
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(
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)
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(
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Long-term receivables, net
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Deferred rent receivable
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Non-current restricted cash
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Other non-current assets, net
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Total assets
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$
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$
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Liabilities and Stockholders’ Deficit
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Current liabilities:
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Accounts payable
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Gift card liability
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Current maturities of operating lease obligations
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Current maturities of finance lease and financing obligations
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Accrued employee compensation and benefits
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Dividends payable
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Deferred franchise revenue, short-term
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Other accrued expenses
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Total current liabilities
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Long-term debt
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Operating lease obligations, less current maturities
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Finance lease obligations, less current maturities
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Financing obligations, less current maturities
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Deferred income taxes, net
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Deferred franchise revenue, long-term
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Other non-current liabilities
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Total liabilities
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Commitments and contingencies
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Stockholders’ deficit:
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Preferred stock, $1 par value, 10,000,000 shares authorized; no shares issued or outstanding
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Common stock, $0.01 par value; shares: 40,000,000 authorized; March 31, 2020 - 24,917,498 issued, 16,421,273 outstanding; December 31, 2019 - 24,925,447 issued, 16,521,921 outstanding
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Additional paid-in-capital
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Retained earnings
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Accumulated other comprehensive loss
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(
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(
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Treasury stock, at cost; shares: March 31, 2020 - 8,496,225; December 31, 2019 - 8,403,526
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(
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(
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Total stockholders’ deficit
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(
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(
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Total liabilities and stockholders’ deficit
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$
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$
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See the accompanying Notes to Consolidated Financial Statements.
3
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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March 31,
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2020
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2019
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Revenues:
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Franchise revenues:
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Royalties, franchise fees and other
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$
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$
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Advertising revenue
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Total franchise revenues
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Company restaurant sales
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Rental revenues
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Financing revenues
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Total revenues
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Cost of revenues:
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Franchise expenses:
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Advertising expenses
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Bad debt expense (credit)
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(
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Other franchise expenses
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Total franchise expenses
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Company restaurant expenses
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Rental expenses:
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Interest expense from finance leases
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Other rental expenses
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Total rental expenses
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Financing expenses
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Total cost of revenues
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Gross profit
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General and administrative expenses
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Interest expense, net
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Amortization of intangible assets
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Closure and impairment (credit) charges
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(
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(Gain) loss on disposition of assets
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(
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Income before income tax provision
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Income tax provision
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(
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(
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Net income
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Other comprehensive income (loss) net of tax:
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||||||||
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Foreign currency translation adjustment
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(
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)
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Total comprehensive income
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$
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$
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||
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Net income available to common stockholders:
|
||||||||
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Net income
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$
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$
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Less: Net income allocated to unvested participating restricted stock
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(
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)
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(
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)
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||||
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Net income available to common stockholders
|
$
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$
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||
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Net income available to common stockholders per share:
|
||||||||
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Basic
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$
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$
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Diluted
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$
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$
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Weighted average shares outstanding:
|
||||||||
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Basic
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Diluted
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See the accompanying Notes to Consolidated Financial Statements.
4
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(In thousands)
(Unaudited)
|
Three Months ended March 31, 2019
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Common Stock
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Accumulated
Other Comprehensive Loss |
Treasury Stock
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|
||||||||||||||||||||||||
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Shares
Outstanding |
Amount
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Additional
Paid-in Capital |
Retained Earnings
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Shares
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Cost
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Total
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|||||||||||||||||||||||
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Balance at December 31, 2018
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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(
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)
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||||||||
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Adoption of ASC 842
|
—
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—
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—
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(
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)
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—
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—
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—
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(
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)
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||||||||||||||
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Net income
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—
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—
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—
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—
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—
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—
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||||||||||||||
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Other comprehensive loss
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—
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—
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—
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—
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(
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)
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—
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—
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(
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)
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||||||||||||||
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Purchase of Company common stock
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(
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)
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—
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—
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—
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—
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(
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)
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(
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)
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||||||||||||||
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Reissuance of treasury stock
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—
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(
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)
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—
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—
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(
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)
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||||||||||||||
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Net issuance of shares for stock plans
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—
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—
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—
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—
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—
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—
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||||||||||||||
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Repurchase of restricted shares for taxes
|
(
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)
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—
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(
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)
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—
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—
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—
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—
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(
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)
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||||||||||||||
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Stock-based compensation
|
—
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—
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—
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—
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—
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—
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||||||||||||||
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Dividends on common stock
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—
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—
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(
|
)
|
—
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—
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—
|
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(
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)
|
||||||||||||||
|
Balance at March 31, 2019
|
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|
$
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|
$
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|
|
$
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|
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$
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(
|
)
|
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||||||
|
Three Months ended March 31, 2020
|
||||||||||||||||||||||||||||||
|
|
Common Stock
|
|
|
Accumulated
Other Comprehensive Loss |
Treasury Stock
|
|
||||||||||||||||||||||||
|
|
Shares
Outstanding |
Amount
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Additional
Paid-in Capital |
Retained Earnings
|
Shares
|
Cost
|
Total
|
|||||||||||||||||||||||
|
Balance at December 31, 2019
|
|
|
$
|
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|
$
|
|
|
$
|
|
|
$
|
(
|
)
|
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||||||
|
Adoption of credit loss accounting guidance (Note 3)
|
—
|
|
—
|
|
—
|
|
(
|
)
|
—
|
|
—
|
|
—
|
|
(
|
)
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
—
|
|
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|
||||||||||||||
|
Purchase of Company common stock
|
(
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||
|
Reissuance of treasury stock
|
|
|
—
|
|
|
|
—
|
|
—
|
|
(
|
)
|
|
|
|
|
||||||||||||||
|
Net issuance of shares for stock plans
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
||||||||||||||
|
Repurchase of restricted shares for taxes
|
(
|
)
|
—
|
|
(
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(
|
)
|
||||||||||||||
|
Stock-based compensation
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
||||||||||||||
|
Dividends on common stock
|
—
|
|
—
|
|
|
|
(
|
)
|
—
|
|
—
|
|
—
|
|
(
|
)
|
||||||||||||||
|
Balance at March 31, 2020
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(
|
)
|
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||||||
See the accompanying Notes to Consolidated Financial Statements.
5
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(
Unaudited)
|
Three Months Ended
|
||||||||
|
|
March 31,
|
|||||||
|
|
2020
|
2019
|
||||||
|
Cash flows from operating activities:
|
|
|
||||||
|
Net income
|
$
|
|
|
$
|
|
|
||
|
Adjustments to reconcile net income to cash flows provided by operating activities:
|
|
|
||||||
|
Depreciation and amortization
|
|
|
|
|
||||
|
Non-cash stock-based compensation expense
|
|
|
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|
||||
|
Non-cash interest expense
|
|
|
|
|
||||
|
Closure and impairment (credit) charges
|
(
|
)
|
|
|
||||
|
Deferred income taxes
|
(
|
)
|
(
|
)
|
||||
|
Deferred revenue
|
(
|
)
|
(
|
)
|
||||
|
(Gain) loss on disposition of assets
|
(
|
)
|
|
|
||||
|
Other
|
(
|
)
|
(
|
)
|
||||
|
Changes in operating assets and liabilities:
|
|
|
||||||
|
Accounts receivable, net
|
|
|
(
|
)
|
||||
|
Current income tax receivables and payables
|
|
|
(
|
)
|
||||
|
Gift card receivables and payables
|
|
|
(
|
)
|
||||
|
Other current assets
|
(
|
)
|
(
|
)
|
||||
|
Accounts payable
|
(
|
)
|
|
|
||||
|
Accrued employee compensation and benefits
|
(
|
)
|
(
|
)
|
||||
|
Other current liabilities
|
|
|
|
|
||||
|
Cash flows provided by operating activities
|
|
|
|
|
||||
|
Cash flows from investing activities:
|
|
|
|
|
||||
|
Principal receipts from notes, equipment contracts and other long-term receivables
|
|
|
|
|
||||
|
Net additions to property and equipment
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from sale of property and equipment
|
|
|
|
|
||||
|
Additions to long-term receivables
|
(
|
)
|
(
|
)
|
||||
|
Other
|
(
|
)
|
(
|
)
|
||||
|
Cash flows (used in) provided by investing activities
|
(
|
)
|
|
|
||||
|
Cash flows from financing activities:
|
|
|
||||||
|
Borrowing from revolving credit facility
|
|
|
|
|
||||
|
Repayment of revolving credit facility
|
|
|
(
|
)
|
||||
|
Dividends paid on common stock
|
(
|
)
|
(
|
)
|
||||
|
Repurchase of common stock
|
(
|
)
|
(
|
)
|
||||
|
Principal payments on finance lease obligations
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from stock options exercised
|
|
|
|
|
||||
|
Tax payments for restricted stock upon vesting
|
(
|
)
|
(
|
)
|
||||
|
Cash flows provided by (used in) financing activities
|
|
|
(
|
)
|
||||
|
Net change in cash, cash equivalents and restricted cash
|
|
|
(
|
)
|
||||
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
|
|
||||
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
|
|
$
|
|
|
||
|
Supplemental disclosures:
|
|
|
|
|
||||
|
Interest paid in cash
|
$
|
|
|
$
|
|
|
||
|
Income taxes paid in cash
|
$
|
|
|
$
|
|
|
||
See the accompanying Notes to Consolidated Financial Statements.
6
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.
General
The accompanying unaudited consolidated financial statements of Dine Brands Global, Inc. (the “Company” or “Dine Brands Global”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the
three months ended March 31, 2020
are not necessarily indicative of the results that may be expected for the twelve months ending December 31,
2020
.
The consolidated balance sheet at
December 31, 2019
has been derived from the audited consolidated financial statements at that date but does not include all of information and footnotes required by U.S. GAAP for complete financial statements.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2019
.
2.
Basis of Presentation
The Company’s fiscal quarters end on the Sunday closest to the last day of each calendar quarter. For convenience, the fiscal quarters of each year are referred to as ending on March 31, June 30, September 30 and December 31. The first fiscal quarter of
2020
began on
December 30, 2019
and ended on
March 29, 2020
. The first fiscal quarter of
2019
began on
December 31, 2018
and ended on
March 31, 2019
.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates are made in the calculation and assessment of the following: impairment of goodwill, other intangible assets and tangible assets; income taxes; allowance for doubtful accounts and notes receivables; lease accounting estimates; contingencies; and stock-based compensation. On an ongoing basis, the Company evaluates its estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the rapidly spreading outbreak of a novel strain of coronavirus, designated “COVID-19.” The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic varies by state and municipalities within states. Assessments of the success of measures taken and the timing of any relaxation thereof is rapidly evolving. The Company first began to experience impacts from COVID-19 in March 2020, as federal, state and local governments began to react to the public health crisis by encouraging “social distancing” and requiring, in varying degrees, restaurant dine-in limitations and other restrictions that largely limited the restaurants of the Company's franchisees and its company-operated restaurants to take-out and delivery sales. Many international restaurants were temporarily closed for at least a part of March as well as a result of government restrictions put in place in various countries. Additionally, economies worldwide also have been negatively impacted by the COVID-19 pandemic, which possibly could cause a domestic and/or global economic recession. Such economic disruption could have an ongoing material adverse effect on our business.
The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, whether, when or the manner in which the conditions surrounding the pandemic may change, including the timing of lifting any mandated closures or operating restrictions on restaurants, customer re-engagement with our brands and the short- and long-term impact on consumer discretionary spending and the domestic economy in general, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by the length of time dine-in restrictions are in place and the success of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by itself and its franchisees. As such, the extent to which
7
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is highly uncertain.
The Company has taken several actions to mitigate the effects of the COVID-19 pandemic on its operations and its franchisees, as follows: (i) drew down
$
220
million
from its revolving credit facility, leaving available remaining borrowing under the facility of approximately
$
2
million
; (ii) terminated repurchases of common stock for the foreseeable future; (iii) the Company's Board of Directors decided not to declare a dividend for the second quarter of 2020; (iv) reduced discretionary costs, frozen new hiring and suspended the use of independent contractors; (v) temporarily furloughed certain team members across various functional groups at its restaurant support centers and company-operated restaurants and also curtailed the hours of substantially all of the hourly restaurant associates at company-operated restaurants; (vi) deferred franchisee payment of royalty, advertising and other fees, and lease obligations for up to two months on a case-by-case basis; (vii) deferred franchisee remodel and development obligations for up to 12 months; and (vii) engaged a national real estate firm to assist franchisees and the Company with landlord discussions regarding rent abatements, deferrals and other modifications to lease agreements.
Reclassifications
3.
Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted
Accounting Standards Adopted in the Current Fiscal Year
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on the measurement of current expected credit losses (“CECL”) on financial instruments. The new guidance has replaced the incurred loss methodology of recognizing credit losses on financial instruments with a methodology that estimates the expected credit loss on financial instruments and reflects the net amount expected to be collected on the financial instrument. The Company adopted this change in accounting principle as of the first day of the first fiscal quarter of 2020 using the modified retrospective method. Accordingly, financial information for periods prior to the date of initial application has not been adjusted.
Upon adoption of the new CECL guidance, the Company recognized an increase to its allowance for credit losses of
$
0.7
million
. The Company recognized an adjustment to retained earnings upon adoption of
$
0.5
million
, net of tax of
$
0.2
million
.
Additional new accounting guidance became effective for the Company as of the beginning of fiscal 2020 that the Company reviewed and concluded was either not applicable to its operations or had no material effect on its consolidated financial statements in the current or future fiscal years.
Newly Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued new guidance intended to simplify the accounting for income taxes, change the accounting for certain income tax transactions, and make other minor changes. The Company will be required to adopt the new guidance beginning with its first fiscal quarter of 2021; early adoption in any interim period after issuance of the new guidance is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements but does not expect this standard to have a material effect on its financial statements. The Company does not intend to adopt the standard early.
The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements when adoption is required in the future.
4.
Revenue Disclosures
Franchise revenue (which comprises most of the Company's revenues) and revenue from company-operated restaurants are recognized in accordance with current guidance for revenue recognition as codified in Accounting Standards Topic 606 (“ASC 606”). Under ASC 606, revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration the Company expects to receive for those services or goods.
8
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Revenue Disclosures (Continued)
Franchising Activities
The Company owns, franchises and operates the Applebee's Neighborhood Grill & Bar
®
(“Applebee's”) concept in the casual dining category of the restaurant industry and the Company owns and franchises the International House of Pancakes
®
(“IHOP”) concept in the family dining category of the restaurant industry. The franchise arrangement for both brands is documented in the form of a franchise agreement and, in most cases, a development agreement. The franchise arrangement between the Company as the franchisor and the franchisee as the customer requires the Company to perform various activities to support the brands that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the respective brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement for both brands primarily consists of (a) initial franchise/development fees; (b) continuing franchise fees (royalties); and (c) advertising fees. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required. All domestic IHOP franchise agreements require franchisees to purchase proprietary pancake and waffle dry mix from the Company.
The Company recognizes the primary components of the transaction price as follows:
|
•
|
Franchise and development fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the restaurant opening date. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;
|
|
•
|
The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's reported sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or, once billed, accounts receivable, and are included in “receivables, net” in the Consolidated Balance Sheets.
|
|
•
|
Revenue from the sale of proprietary pancake and waffle dry mix is recognized in the period in which distributors ship the franchisee's order; recognition of revenue results in an accounts receivable included in “receivables, net” in the Consolidated Balance Sheets.
|
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectibility of the amount; however, the timing of recognition does not require significant judgments as it is based on either the term of the franchise agreement, the month of reported sales by the franchisee or the date of product shipment, none of which require estimation. The Company does not incur a significant amount of contract acquisition costs in conducting franchising activities. The Company's franchising arrangements do not contain a significant financing component.
Company Restaurant Revenue
Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant sales are reported net of sales taxes collected from guests that are remitted to the appropriate taxing authorities.
9
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Revenue Disclosures (Continued)
The following table disaggregates franchise revenue by major type for the
three months ended March 31, 2020
and 2019:
|
|
Three Months Ended
|
|||||||
|
March 31,
|
||||||||
|
|
2020
|
2019
|
||||||
|
(In thousands)
|
||||||||
|
Franchise Revenue:
|
||||||||
|
Royalties
|
$
|
|
|
$
|
|
|
||
|
Advertising fees
|
|
|
|
|
||||
|
Pancake and waffle dry mix sales and other
|
|
|
|
|
||||
|
Franchise and development fees
|
|
|
|
|
||||
|
Total franchise revenue
|
$
|
|
|
$
|
|
|
||
Accounts receivable from franchisees as of
March 31, 2020
and December 31, 2019 were
$
53.0
million
(net of allowance of
$
2.3
million
) and
$
63.5
million
(net of allowance of
$
0.7
million
), respectively, and were included in receivables, net in the Consolidated Balance Sheets.
Changes in the Company's contract liability for deferred franchise and development fees during the
three months ended March 31, 2020
are as follows:
|
|
Deferred Franchise Revenue (short- and long-term)
|
|||
|
(In thousands)
|
||||
|
Balance at December 31, 2019
|
$
|
|
|
|
|
Recognized as revenue during the three months ended March 31, 2020
|
(
|
)
|
||
|
Fees deferred during the three months ended March 31, 2020
|
|
|
||
|
Balance at March 31, 2020
|
$
|
|
|
|
The balance of deferred revenue as of
March 31, 2020
is expected to be recognized as follows:
|
|
(In thousands)
|
||
|
Remainder of 2020
|
$
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
2023
|
|
|
|
|
2024
|
|
|
|
|
Thereafter
|
|
|
|
|
Total
|
$
|
|
|
5.
Current Expected Credit Losses
Prior to the adoption of Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments-Credit Losses (“CECL”), the Company recorded incurred loss reserves against receivable balances based on current and historical information, with delinquency status being the primary indicator of a deterioration in credit quality. The recently adopted CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself.
Upon adoption of the CECL methodology, the Company developed its estimated loss reserves in the following manner. The Company continued to record specific reserves against account balances of franchisees deemed “at-risk” when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed “at-risk,” an allowance is recorded based
10
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
on expected loss rates derived pursuant to the following CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.
Historical Losses
Historical loss rates over a five-year span from 2015 to 2019 were calculated for financial assets with common risk characteristics. The Company believes that the past five years provide a reasonable representation of the Company’s operations and performance through various business cycles, both favorable and unfavorable. The Company also determined historical loss rate data for each franchise brand concept was more relevant than a single blended rate.
Historical losses were determined based on the average charge off method. Under this method, net charge off loss rates (gross charge offs less recoveries divided by average asset balances for the period) were calculated on a quarterly basis commencing with the first quarter of 2015 through the fourth quarter of 2019. The individual quarterly loss rates were then averaged over 20 quarters to derive an overall average 5-year historical loss rates for each financial asset type. As of each measurement date subsequent to the initial adoption, the 5-year average loss rate will be based on the most recent 20 quarters. Historical loss rates are further adjusted by factors related to current conditions and forecasts of future economic conditions.
Current Conditions
The Company identified three metrics that it believes provide the most relevant reflection of the current risks inherent in the Company’s franchisee-based restaurant business, as follows: (1) delinquency status, (2) system-wide same-restaurant sales, and (3) four-wall EBITDA profitability. For each metric, restaurant-level data was aggregated at the franchisee level. Each metric was weighted equally at one-third for each individual franchisee, unless certain data is missing or not available as of the quarterly assessment date. On occasion, new restaurant openings, closures/ reassignments, or franchisee failure to submit requested information, can lead to unavailable or missing data. In these cases, the remaining one or two metrics that are available are weighted at 100% or equally at 50% each, respectively.
A separate scale or data range was established for each of the three metrics to gauge each franchisee’s score relative to a pre-determined set of performance expectations. The distribution spread for each metric is static and will not change from one period to the next. The distribution spreads do not reflect the system average; rather, the distribution ranges were determined based on performance levels that the Company believes characterize relative franchisee health.
Based on the range of historical loss rate percentages derived for the various asset categories, the Company has determined that the total adjustment factor to be allocated to the current conditions component of its CECL methodology will be a maximum of 25 basis points (
0.25
%
) for the three months ended March 31, 2020.
During the second half of March 2020, the COVID-19 pandemic resulted in government-mandated restaurant closures in many areas both domestically and internationally. The restaurants that remained open were limited to off-premise sales channels (i.e. delivery and to-go) as dine-in operations were shuttered until further notice. As a result of these developments, system-wide sales decreased significantly. The initial current conditions adjustment factor was increased to account for the potential impact.
Reasonable and Supportable Forecasts
The third component in the CECL methodology involves consideration of macroeconomic conditions that can impact the estimate of expected credit losses in the future. The Company did not develop an internal methodology in this regard, rather, the Company utilizes existing, publicly accessible sources of economic data. The Company determined that forecasts of overall unemployment rate as well as consumer spending based on the personal consumption expenditure (PCE) index are two key macroeconomic factors that provide a meaningful outlook of expected consumer behaviors that impact the restaurant industry as well as franchisees' financial performance.
With respect to the unemployment rate, the Company analyzed annual historical data from the U.S. Bureau of Labor Statistics for the past 15 years to get a full view of the range of unemployment rates over a full economic cycle. With respect to consumer spending, the Company analyzed monthly historical data related to personal consumption expenditure (PCE) for the past ten years from 2010 to 2019 from the United States Bureau of Economic Analysis (BEA). The PCE measure is the
11
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
component statistic for consumption in gross domestic product collected by the BEA and is essentially a measure of goods and services targeted towards individuals and consumed by individuals.
Reversion to History
CECL requires a lifetime of losses calculated from the time of origination and are updated in each reported quarter for the losses expected over the remaining life of each asset, conditional on historical information, current conditions, and reasonable and supportable forecasts. Absent a reasonable forecast over the full lifetime of a financial asset, entities must forecast their losses over the time frame covered by reasonable and supportable forecasts. After that time period, entities must estimate future losses based on a reversion to unadjusted historical information. The Company has determined that reversion to history was not required since the remaining average lives of the Company’s financial assets are not exceedingly lengthy.
The Company considers its portfolio segments to be the following:
Accounts Receivable (Franchise-Related)
Most of the Company’s short-term receivables due from franchisees are derived from royalty and advertising fees. In addition to royalties and advertising fees, the Company also bills certain IHOP franchisees for franchise notes, equipment notes, and rent payments. Accounts receivable balances also include billings for help desk support services provided to Applebee's and IHOP franchises by the Company’s information technology personnel. As of March 31, 2020, and December 31, 2019, total accounts receivable amounted to
$
54.0
million
and
$
61.5
million
, respectively, predominantly from the Company’s domestic franchise operations, and to a much lesser extent, from restaurant locations outside the United States. The 5-year average historical loss rates related to accounts receivable balances were
0.19
%
for domestic IHOP franchisees and
1.27
%
for domestic Applebee's franchisees as of March 31, 2020. For international accounts receivable, 5-year average historical loss rates were
1.0
%
and
0.32
%
for IHOP and Applebee's, respectively, as of March 31, 2020.
Notes Receivable
Notes receivable balances primarily relate to the conversion of certain Applebee's franchisee accounts receivable to notes receivable, and to a lesser degree, cash loans to franchisees for working capital purposes, a note receivable in connection with the sale of IHOP company restaurants in June 2017, and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. Notes receivable totaled
$
29.8
million
and
$
29.0
million
as of March 31, 2020, and December 31, 2019, respectively. Due to the riskier nature of Applebee's notes that were converted from previously delinquent franchisee accounts receivable balances, a significant portion of these notes have specific reserves recorded against them amounting to
$
10.4
million
as of March 31, 2020. The other notes receivable balances are lower risk in nature, with IHOP notes receivable experiencing no historical losses over the past five years.
Direct Financing Leases Receivable
Direct financing lease receivables 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 leasing or subleasing the site. As of March 31, 2020 and December 31, 2019, the Company’s direct financing lease receivables totaled
$
31.3
million
and
$
34.0
million
, respectively. Direct financing leases at March 31, 2020, comprised
121
leases with a weighted average remaining life of
3.6
years
, relate to locations that IHOP is leasing from third parties and subleasing to franchisees. The inherent risk in this portfolio is fairly low based on the 5-year average historical loss rate.
Equipment Leases Receivable
Equipment leases receivable also relate to IHOP franchise development activity prior to 2003. Equipment lease contracts are collateralized by the equipment in the restaurant. The estimated fair value of the equipment collateralizing these lease contracts are not deemed to be significant given the very seasoned and mature nature of this portfolio. As of March 31, 2020 and December 31, 2019, the Company’s equipment leases receivable totaled
$
54.2
million
and
$
56.3
million
, respectively. The fair values of equipment leases are not deemed to be significant given that this portfolio is very seasoned and at the tail end of its collective useful life. The weighted average remaining life of the Company’s equipment leases is
6.0
years
as of March 29, 2020. The inherent risk in this portfolio is fairly low based on the 5-year average historical loss rate.
12
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Current Expected Credit Losses (Continued)
Distributor Receivables
Receivables due from distributors are related to the sale of IHOP’s proprietary pancake and waffle dry mix to franchisees through the Company’s network of suppliers and distributors. Receivables due from IHOP dry mix suppliers and distributors amounted to
$
3.0
million
and
$
5.3
million
, respectively as of March 31, 2020 and December 31, 2019. The inherent risk in this portfolio is fairly low based on the 5-year average historical loss rate.
Gift Card Receivables
Gift card receivables consist primarily of amounts due from third-party vendors. Receivables related to gift card sales are subject to seasonality and usually peak around year end as a result of the December holiday season. The Company’s gift card receivables amounted to
$
2.9
million
and
$
46.6
million
as of March 31, 2020 and December 31, 2019, respectively. The quick settlement periods and low risk nature of these assets have resulted in virtually no historical losses over the 5-year loss horizon.
Changes in the allowance for credit losses during the three months ended March 31, 2020 were as follows:
|
Accounts Receivable
|
Notes receivable, short-term
|
Notes receivable, long-term
|
Lease Receivables
|
Equipment Notes
|
Other
(1)
|
Total
|
|||||||||||||||||||||
|
|
(In thousands)
|
||||||||||||||||||||||||||
|
Balance, December 31, 2019
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
||||||
|
Increase due to CECL adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Bad debt expense for the three months ended March 31, 2020
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Advertising provision adjustment
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Write-offs
|
(
|
)
|
(
|
)
|
|
|
|
|
|
|
|
|
(
|
)
|
|||||||||||||
|
Recoveries
|
|
|
|
|
| ||||||||||||||||||||||