SEC Filing | Dine Brands

View:

Download DOC

Download PDF

Download XLS

Download XBRL

din-20210630

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ 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

https://cdn.kscope.io/32e6e9bf88273132a5b7c6ffcf961586-din-20210630_g1.jpg

Dine Brands Global, Inc.

(Exact name of registrant as specified in its charter)

Delaware

95-3038279

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

450 North Brand Boulevard,

91203-1903

Glendale,

(Address of principal executive offices)

(Zip Code)


(818)			240-6055
(Registrant’s telephone number, including area code)

______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	DIN	New York Stock Exchange

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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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 ☐

No ☒

As of July 29, 2021, the Registrant had 17,176,018 shares of Common Stock outstanding.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Index


		Page
PART I.	FINANCIAL INFORMATION	3
	Item 1—Financial Statements	3
	Consolidated Balance Sheets - June 30, 2021 (unaudited) and December 31, 2020	3
	Consolidated Statements of Comprehensive Income (unaudited) - Three and Six Months Ended June 30, 2021 and 2020	4
	Consolidated Statements of Stockholders' Deficit (unaudited) - Three and Six Months Ended June 30, 2021 and 2020	5
	Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2021 and 2020	7
	Notes to Consolidated Financial Statements (unaudited)	8
	Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3—Quantitative and Qualitative Disclosures about Market Risk	47
	Item 4—Controls and Procedures	47
PART II.	OTHER INFORMATION	48
	Item 1—Legal Proceedings	48
	Item 1A—Risk Factors	48
	Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3—Defaults Upon Senior Securities	48
	Item 4—Mine Safety Disclosures	48
	Item 5—Other Information	48
	Item 6—Exhibits	49
	Signatures	50

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

Table of Contents

marketing and use of social media; changing health or dietary preference of consumers; risks associated with doing 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, 2020 and in our other filings with the Securities and Exchange Commission, 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 2021 began on January 4, 2021 and ended on April 4, 2021; the second fiscal quarter of 2021 ended on July 4, 2021. The first fiscal quarter of 2020 began on December 30, 2019 and ended on March 29, 2020; the second fiscal quarter of 2020 ended on June 28, 2020.

Table of Contents

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)


Assets
	June 30, 2021		December 31, 2020
	(Unaudited)
Current assets:
Cash and cash equivalents	$	259,461	$	383,369


Receivables, net of allowance of $10,095 (2021) and $15,057 (2020)	99,308		121,897
Restricted cash	72,137		39,884
Prepaid gift card costs	21,716		29,080
Prepaid income taxes	397		6,178
Other current assets	8,134		6,098
Total current assets	461,153		586,506
Other intangible assets, net	544,587		549,671
Operating lease right-of-use assets	331,826		346,086
Goodwill	251,628		251,628
Property and equipment, net	178,571		187,977


Long-term receivables, net of allowance of $5,503 (2021) and $7,999 (2020)	47,839		54,512
Deferred rent receivable	53,017		56,449
Non-current restricted cash	16,400		32,800
Other non-current assets, net	10,902		9,316
Total assets	$	1,895,923	$	2,074,945
Liabilities and Stockholders’ Deficit
Current liabilities:
Current maturities of long-term debt	$	3,250	$	13,000
Accounts payable	40,126		37,424
Gift card liability	120,842		144,159
Current maturities of operating lease obligations	70,491		69,672
Current maturities of finance lease and financing obligations	10,954		11,293
Accrued employee compensation and benefits	22,785		21,237
Accrued advertising	52,707		21,641



Deferred franchise revenue, short-term	7,447		7,682
Other accrued expenses	16,253		22,460
Total current liabilities	344,855		348,568
Long-term debt	1,278,504		1,491,996
Operating lease obligations, less current maturities	325,278		345,163
Finance lease obligations, less current maturities	64,095		69,012
Financing obligations, less current maturities	32,393		32,797
Deferred income taxes, net	67,780		78,293
Deferred franchise revenue, long-term	47,794		52,237

Other non-current liabilities	17,975		11,530
Total liabilities	2,178,674		2,429,596
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $1 par value, 10,000,000 shares authorized; no shares issued or outstanding	—		—
Common stock, $0.01 par value; shares: 40,000,000 authorized; June 30, 2021 - 25,011,253 issued, 17,177,950 outstanding; December 31, 2020 - 24,882,122 issued, 16,452,174 outstanding	250		249
Additional paid-in-capital	250,509		257,625
Accumulated deficit	(588)		(55,553)
Accumulated other comprehensive loss	(57)		(55)
Treasury stock, at cost; shares: June 30, 2021 - 7,833,303; December 31, 2020 - 8,429,948	(532,865)		(556,917)
Total stockholders’ deficit	(282,751)		(354,651)
Total liabilities and stockholders’ deficit	$	1,895,923	$	2,074,945

See the accompanying Notes to Consolidated Financial Statements.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Revenues:
Franchise revenues:
Royalties, franchise fees and other	$	94,630	$	38,781	$	174,721	$	122,095
Advertising revenues	72,324		29,095		133,209		90,818
Total franchise revenues	166,954		67,876		307,930		212,913
Company restaurant sales	38,194		16,774		74,143		48,074
Rental revenues	27,382		23,707		53,524		52,716
Financing revenues	1,089		1,355		2,221		2,893
Total revenues	233,619		109,712		437,818		316,596
Cost of revenues:
Franchise expenses:
Advertising expenses	72,324		29,095		133,209		90,818
Bad debt (credit) expense	(291)		5,053		(2,284)		5,571
Other franchise expenses	7,224		2,932		13,275		10,141
Total franchise expenses	79,257		37,080		144,200		106,530
Company restaurant expenses	34,759		21,139		67,643		51,471
Rental expenses:
Interest expense from finance leases	893		1,137		1,855		2,347
Other rental expenses	19,718		20,106		39,714		41,429
Total rental expenses	20,611		21,243		41,569		43,776
Financing expenses	115		128		243		270
Total cost of revenues	134,742		79,590		253,655		202,047
Gross profit	98,877		30,122		184,163		114,549
General and administrative expenses	39,276		30,870		79,187		68,478
Interest expense, net	15,739		17,127		32,235		32,299
Impairment and closure charges	2,571		124,365		4,581		124,353
Amortization of intangible assets	2,663		2,755		5,351		5,581


(Gain) loss on disposition of assets	(30)		1,776		137		1,543
Income before income taxes	38,658		(146,771)		62,672		(117,705)
Income tax (provision) benefit	(9,296)		11,992		(7,707)		5,254
Net income (loss)	29,362		(134,779)		54,965		(112,451)
Other comprehensive income net of tax:

Foreign currency translation adjustment	(1)		—		(2)		—
Total comprehensive income (loss)	$	29,361	$	(134,779)	$	54,963	$	(112,451)
Net income (loss) available to common stockholders:
Net income (loss)	$	29,362	$	(134,779)	$	54,965	$	(112,451)
Less: Net income allocated to unvested participating restricted stock	(657)		—		(1,431)		(420)
Net income (loss) available to common stockholders	$	28,705	$	(134,779)	$	53,534	$	(112,871)

Net income (loss) available to common stockholders per share:
Basic	$	1.70	$	(8.33)	$	3.21	$	(6.96)
Diluted	$	1.69	$	(8.33)	$	3.19	$	(6.96)
Weighted average shares outstanding:
Basic	16,886		16,177		16,673		16,215
Diluted	16,977		16,177		16,802		16,215

See the accompanying Notes to Consolidated Financial Statements.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Deficit

(In thousands)

(Unaudited)


	Three Months ended June 30, 2021
	Common Stock							Accumulated Other Comprehensive Loss		Treasury Stock
	Shares Outstanding	Amount		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)				Shares	Cost		Total
Balance at March 31, 2021	17,142	$	250	$	247,498	$	(29,950)	$	(56)	7,891	$	(535,144)	$	(317,402)
Net income	—	—		—		29,362		—		—	—		29,362
Other comprehensive loss	—	—		—		—		(1)		—	—		(1)

Reissuance of treasury stock	58	—		748		—		—		(58)	2,279		3,027
Net issuance of shares for stock plans	(20)	—		—		—		—		—	—		—
Repurchase of restricted shares for taxes	(2)	—		(183)		—		—		—	—		(183)
Stock-based compensation	—	—		2,518		—		—		—	—		2,518


Tax payments for share settlement of restricted stock units	—	—		(72)		—		—		—	—		(72)
Balance at June 30, 2021	17,178	$	250	$	250,509	$	(588)	$	(57)	7,833	$	(532,865)	$	(282,751)


	Six Months ended June 30, 2021
	Common Stock							Accumulated Other Comprehensive Loss		Treasury Stock
	Shares Outstanding	Amount		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)				Shares	Cost		Total
Balance at December 31, 2020	16,452	$	249	$	257,625	$	(55,553)	$	(55)	8,430	$	(556,917)	$	(354,651)
Net income	—	—		—		54,965		—		—	—		54,965
Other comprehensive loss	—	—		—		—		(2)		—	—		(2)

Reissuance of treasury stock	597	1		(1,542)		—		—		(597)	24,052		22,511
Net issuance of shares for stock plans	146	—		—		—		—		—	—		—
Repurchase of restricted shares for taxes	(17)	—		(1,403)		—		—		—	—		(1,403)
Stock-based compensation	—	—		5,612		—		—		—	—		5,612

Tax payments for share settlement of restricted stock units	—	—		(9,783)		—		—		—	—		(9,783)
Balance at June 30, 2021	17,178	$	250	$	250,509	$	(588)	$	(57)	7,833	$	(532,865)	$	(282,751)

See the accompanying Notes to Consolidated Financial Statements.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Deficit

(In thousands)

(Unaudited)


	Three Months ended June 30, 2020
	Common Stock							Accumulated Other Comprehensive Loss		Treasury Stock
	Shares Outstanding	Amount		Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings				Shares	Cost		Total
Balance at March 31, 2020	16,421	$	249	$	252,443	$	70,769	$	(58)	8,496	$	(559,780)	$	(236,377)

Net loss	—	—		—		(134,779)		—		—	—		(134,779)


Reissuance of treasury stock	14	—		(600)		—		—		(13)	599		(1)
Net issuance of shares for stock plans	(14)	—		—		—		—		—	—		—
Repurchase of restricted shares for taxes	(3)	—		(129)		—		—		—	—		(129)
Stock-based compensation	—	—		2,632		—		—		—	—		2,632
Dividends on common stock	—	—		261		—		—		—	—		261
Tax payments for share settlement of restricted stock units	—	—		(178)		—		—		—	—		(178)
Balance at June 30, 2020	16,418	$	249	$	254,429	$	(64,010)	$	(58)	8,483	$	(559,181)	$	(368,571)


	Six Months ended June 30, 2020
	Common Stock							Accumulated Other Comprehensive Loss		Treasury Stock
	Shares Outstanding	Amount		Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings				Shares	Cost		Total
Balance at December 31, 2019	16,522	$	249	$	246,192	$	61,653	$	(58)	8,404	$	(549,810)	$	(241,774)
Adoption of credit loss accounting guidance (Note 3)	—	—		—		(497)		—		—	—		(497)
Net loss	—	—		—		(112,451)		—		—	—		(112,451)

Purchase of Company common stock	(460)	—		—		—		—		460	(26,527)		(26,527)
Reissuance of treasury stock	381	—		3,367		—		—		(381)	17,156		20,523
Net issuance of shares for stock plans	4	—		—		—		—		—	—		—
Repurchase of restricted shares for taxes	(29)	—		(2,129)		—		—		—	—		(2,129)
Stock-based compensation	—	—		6,670		—		—		—	—		6,670
Dividends on common stock	—	—		507		(12,715)		—		—	—		(12,208)
Tax payments for share settlement of restricted stock units	—	—		(178)		—		—		—	—		(178)
Balance at June 30, 2020	16,418	$	249	$	254,429	$	(64,010)	$	(58)	8,483	$	(559,181)	$	(368,571)

See the accompanying Notes to Consolidated Financial Statements.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	54,965	$	(112,451)
Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities:
Non-cash impairment and closure charges	4,514		124,343
Depreciation and amortization	19,976		21,345
Non-cash stock-based compensation expense	5,612		6,670
Non-cash interest expense	1,427		1,318

Deferred income taxes	(10,007)		(10,793)
Deferred revenue	(4,678)		(4,840)

Loss on disposition of assets	137		1,543

Other	(3,608)		(252)
Changes in operating assets and liabilities:
Accounts receivable, net	4,928		(31,039)
Current income tax receivables and payables	5,315		(5,456)
Gift card receivables and payables	(3,837)		2,293
Other current assets	(2,036)		(2,503)
Accounts payable	6,195		(903)
Accrued employee compensation and benefits	1,466		(13,336)

Accrued advertising	31,066		13,012
Other current liabilities	(5,419)		532
Cash flows provided by (used in) operating activities	106,016		(10,517)
Cash flows from investing activities:
Principal receipts from notes, equipment contracts and other long-term receivables	9,703		10,772
Net additions to property and equipment	(4,064)		(7,380)
Proceeds from sale of property and equipment	946		456
Additions to long-term receivables	—		(1,475)
Other	(237)		(276)
Cash flows provided by investing activities	6,348		2,097
Cash flows from financing activities:

Repayment of long-term debt	(6,500)		—
Borrowing from revolving credit facility	—		220,000
Repayment of revolving credit facility	(220,000)		—

Dividends paid on common stock	—		(23,934)
Repurchase of common stock	—		(29,853)
Principal payments on finance lease obligations	(5,244)		(5,993)
Proceeds from stock options exercised	22,511		20,523
Repurchase of restricted stock for tax payments upon vesting	(1,403)		(2,129)
Tax payments for share settlement of restricted stock units	(9,783)		(178)
Cash flows (used in) provided by financing activities	(220,419)		178,436
Net change in cash, cash equivalents and restricted cash	(108,055)		170,016
Cash, cash equivalents and restricted cash at beginning of period	456,053		172,475
Cash, cash equivalents and restricted cash at end of period	$	347,998	$	342,491
Supplemental disclosures:
Interest paid in cash	$	33,405	$	34,108
Income taxes paid in cash	$	13,341	$	11,103
Non-cash conversion of accounts receivable to notes receivable	$	1,640	$	—

See the accompanying Notes to Consolidated Financial Statements.

Table of Contents

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 six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2021.

The consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of information and footnotes required by U.S. GAAP for complete financial statements.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

2. Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates may include the calculation and assessment of the following: impairment of goodwill, other intangible assets and tangible assets; income taxes; allowance for credit losses on accounts and notes receivables; lease accounting estimates; contingencies; and stock-based compensation. On an ongoing basis, the Company evaluates its estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

Risks and Uncertainties

The Company was subject to risks and uncertainties as a result of the continuing outbreak of a novel strain of coronavirus, designated “COVID-19.” The extent of the continued impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as measures taken in response to and the effect of the pandemic have varied and continue to vary by state and municipalities within states. Assessments of the success of measures taken and the timing of any further restrictions, or lifting of such restrictions, continues to evolve. The Company first began to experience impacts from COVID-19 in March 2020, as federal, state, local and international governments began to react to the public health crisis by encouraging “social distancing” and requiring, in varying degrees, restaurant dine-in limitations and other restrictions that largely limited the restaurants of the Company's franchisees and its company-operated restaurants to take-out and delivery sales. Subsequently, government-imposed dine-in restrictions have been relaxed in many of the locations in which the Company operates as incidents of infection decline within the respective governmental jurisdictions. As of June 30, 2021, 98% of domestic Applebee's and IHOP restaurants were operating at 100% capacity and 99% of domestic Applebee's and IHOP restaurants were open.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Basis of Presentation (Continued)

The Company took several actions to mitigate the effects of the COVID-19 pandemic on its operations and its franchisees, as follows: (i) drew down $220 million from its revolving credit facility in March 2020 and repaid the borrowing in March 2021; (ii) suspended repurchases of common stock and the declaration of dividends on common stock after the first quarter of 2020.; (iii) deferred franchisee payment of royalty, advertising and other fees, and lease obligations for up to two months on a case-by-case basis, with 98% of Applebee's and 87% of IHOP deferrals collected as of June 30, 2021; (iv) deferred franchisee remodel and development obligations for up to 15 months; and (v) negotiated deferrals and abatements for properties on which the Company was lessee.

The severity of the continued impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, how long the pandemic will last, whether/when recurrences of the virus and variants of the virus may arise, the availability and acceptance of vaccines, what restrictions on in-restaurant dining may be imposed or re-imposed, the timing and extent of customer re-engagement with the Company's brands and, in general, what the short- and long-term impact on consumer discretionary spending the COVID-19 pandemic might have on the Company and the restaurant industry as a whole, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could adversely be impacted by the length of time dine-in restrictions remain in place and the success of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by itself and its franchisees. As such, the extent to which the COVID-19 pandemic may continue to materially impact the Company's financial condition, liquidity, or results of operations is highly uncertain.

3. Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted

Accounting Standards Adopted in the Current Fiscal Year

In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance intended to simplify the accounting for income taxes, change the accounting for certain income tax transactions, and make other minor changes. The Company adopted the new guidance at the beginning of the first fiscal quarter of 2021. Adoption did not have any material effect on the consolidated financial statements.

Additional new accounting guidance became effective for the Company as of the beginning of fiscal 2021 that the Company reviewed and concluded was either not applicable to its operations or had no material effect on its consolidated financial statements in the current or future fiscal years.

Newly Issued Accounting Standards Not Yet Adopted

In March 2020, with an update in January 2021, the FASB issued guidance which provides optional expedients and exceptions for applying current U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The guidance can be adopted immediately and is applicable to contracts entered into on or before December 31, 2022. The Company is currently evaluating its contracts that reference LIBOR and the potential effects of adopting this new guidance.

In July 2021, the FASB issued guidance which affect lessors with lease contracts that (i) have variable lease payments that do not depend on a reference index or a rate and (ii) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. The amendments are effective for fiscal years beginning after December 15, 2021. The Company is are currently evaluating lease contracts and the potential effects of adopting this new guidance.

The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements when adoption is required in the future.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

4. Revenue Disclosures

Franchise revenue and revenue from company-operated restaurants are recognized in accordance with current guidance for revenue recognition as codified in Accounting Standards Topic 606 (“ASC 606”). Under ASC 606, revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration the Company expects to receive for those services or goods.

Franchising Activities

The Company owns, franchises and operates the Applebee's Neighborhood Grill & Bar® (“Applebee's”) concept in the casual dining category of the restaurant industry and the Company owns and franchises the International House of Pancakes® (“IHOP”) concept in the family dining category of the restaurant industry. The franchise arrangement for both brands is documented in the form of a franchise agreement and, in most cases, a development agreement. The franchise arrangement between the Company as the franchisor and the franchisee as the customer requires the Company to perform various activities to support the brands that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the respective brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.

The transaction price in a standard franchise arrangement for both brands primarily consists of (a) initial franchise/development fees; (b) continuing franchise fees (royalties); and (c) advertising fees. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required. All domestic IHOP franchise agreements require franchisees to purchase proprietary pancake and waffle dry mix from the Company.

The Company recognizes the primary components of the transaction price as follows:

•Franchise and development fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the restaurant opening date. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;

•The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's reported sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or once billed, accounts receivable, and are included in “receivables, net” in the Consolidated Balance Sheets.

•Revenue from the sale of proprietary pancake and waffle dry mix is recognized in the period in which distributors ship the franchisee's order; recognition of revenue results in an accounts receivable included in “receivables, net” in the Consolidated Balance Sheets.

In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgments as it is based on either the term of the franchise agreement, the month of reported sales by the franchisee or the date of product shipment, none of which require estimation. The Company does not incur a significant amount of contract acquisition costs in conducting franchising activities. The Company's franchising arrangements do not contain a significant financing component.

Company Restaurant Revenue

Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant sales are reported net of sales taxes collected from guests that are remitted to the appropriate taxing authorities.

Table of Contents

Dine Brands Global, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

4. Revenue Disclosures (Continued)

The following table disaggregates franchise revenue by major type for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Franchise Revenue:
Royalties	$	78,124	$	31,011	$	142,401	$	98,611
Advertising fees	72,324		29,095		133,209		90,818
Pancake and waffle dry mix sales and other	13,525		4,037		24,415		16,885
Franchise and development fees	2,981		3,733		7,905		6,599
Total franchise revenue	$	166,954	$	67,876	$	307,930	$	212,913

Accounts and other receivables from franchisees as of June 30, 2021 and December 31, 2020 were $69.4 million (net of allowance of $6.0 million) and $76.3 million (net of allowance of $11.4 million), respectively, and were included in receivables, net in the Consolidated Balance Sheets.

Changes in the Company's contract liability for deferred franchise and development fees during the six months ended June 30, 2021 are as follows:


	Deferred Franchise Revenue (short- and long-term)
	(In thousands)
Balance at December 31, 2020	$	59,919
Recognized as revenue during the six months ended June 30, 2021	(7,433)
Fees deferred during the six months ended June 30, 2021	2,755
Balance at June 30, 2021	$	55,241

The balance of deferred revenue as of June 30, 2021 is expected to be recognized as follows:


	(In thousands)
Remainder of 2021	$	3,743
2022	7,278
2023	6,644
2024	6,051
2025	5,274
Thereafter	26,251
Total	$	55,241

5. Current Expected Credit Losses (“CECL”)

The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself. The Company records specific reserves against account balances of franchisees deemed at-risk when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed at-risk, an allowance is recorded based on expected loss rates derived pursuant to the Company's CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.

Dine Brands Global, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Current Expected Credit Losses (Continued)

The Company considers its portfolio segments to be the following:

Accounts Receivable (Franchise-Related)

Most of the Company’s short-term receivables due from franchisees are derived from royalty, advertising and other franchise-related fees.

Gift Card Receivables

Gift card receivables consist primarily of amounts due from third-party vendors. Receivables related to gift card sales are subject to seasonality and usually peak around year-end as a result of the December holiday season.

Notes Receivable

Notes receivable balances primarily relate to the conversion of certain Applebee's franchisee accounts receivable to notes receivable, cash loans to franchisees for working capital purposes, a note receivable in connection with the sale of IHOP company restaurants and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. A significant portion of these notes have specific reserves recorded against them amounting to $9.2 million as of June 30, 2021.

Equipment Leases Receivable

Equipment leases receivable relate to IHOP franchise development activity prior to 2003 when IHOP typically leased or purchased the restaurant site, built and equipped the restaurant, then franchised the restaurant to a franchisee. Equipment lease contracts are collateralized by the equipment in the restaurant. The estimated fair value of the equipment collateralizing these lease contracts are not deemed to be significant given the very seasoned and mature nature of this portfolio. The weighted average remaining life of the Company’s equipment leases is 5.1 years as of June 30, 2021.

Direct Financing Leases Receivable

Direct financing lease receivables also relate to IHOP franchise development activity prior to 2003. IHOP provided the financing for leasing or subleasing the site. Direct financing leases at June 30, 2021, comprised 81 leases with a weighted average remaining life of 4.4 years, and relate to locations that IHOP is leasing from third parties and subleasing to franchisees.

Distributor Receivables

Receivables due from distributors are related to the sale of IHOP’s proprietary pancake and waffle dry mix to franchisees through the Company’s network of suppliers and distributors and are included as part of Other receivables.


	June 30, 2021		December 31, 2020
	(In millions)
Accounts receivable	$	72.8	$	85.7
Gift card receivables	6.9		22.5
Notes receivable	20.1		18.6
Financing receivables:
Equipment leases receivable	37.5		43.9
Direct financing leases receivable	18.9		22.7
Franchise fee notes receivable	0.1		0.1
Other	6.4		6.0
	162.7		199.5
Less: allowance for credit losses	(15.6)		(23.1)
	147.1		176.4
Less: current portion	(99.3)		(121.9)
Long-term receivables	$	47.8	$	54.5

Dine Brands Global, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Current Expected Credit Losses (Continued)

Changes in the allowance for credit losses during the six months ended June 30, 2021 were as follows:



	Accounts Receivable		Notes receivable, short-term		Notes receivable, long-term		Lease Receivables		Equipment Notes		Other (1)		Total
	(In millions)
Balance, December 31, 2020	$	11.2	$	3.6	$	5.3	$	0.4	$	2.3	$	0.3	$	23.1

Bad debt (credit) expense for the six months ended June 30, 2021	(2.2)		0.4		(0.1)		0.1		(0.4)		(0.1)		(2.3)
Advertising provision adjustment	(2.9)		0.0		—		—		—		—		(2.9)
Write-offs	(0.2)