Dine Brands Global Earnings 2019-09-30
DIN 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
| Comparables ($MM TTM) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Ticker | M Cap | Assets | Liab | Rev | G Profit | Net Inc | EBITDA | EV | G Margin | EV/EBITDA | ROA |
| SHAK | 2,069 | 898 | 598 | 529 | 0 | 21 | 63 | 2,040 | 0% | 32.1 | 2% |
| CNNE | 1,974 | 1,872 | 620 | 1,269 | 300 | 73 | 150 | 2,103 | 24% | 14.0 | 4% |
| CAKE | 1,971 | 2,074 | 1,534 | 2,368 | 1,834 | 0 | 98 | 1,983 | 77% | 20.2 | 0% |
| BLMN | 1,807 | 3,512 | 3,353 | 4,128 | 2,843 | 112 | 374 | 2,862 | 69% | 7.6 | 3% |
| DIN | 1,695 | 2,041 | 2,256 | 874 | 388 | 104 | 232 | 2,804 | 44% | 12.1 | 5% |
| ARCO | 1,637 | 1,578 | 1,185 | 0 | 0 | 0 | 0 | 2,076 | 0% | ||
| EAT | 1,546 | 1,258 | 2,036 | 3,218 | 2,395 | 155 | 465 | 2,739 | 74% | 5.9 | 12% |
| PLAY | 1,522 | 2,234 | 1,985 | 1,322 | 1,093 | 116 | 282 | 2,066 | 83% | 7.3 | 5% |
| DENN | 1,419 | 439 | 581 | 621 | 523 | 72 | 139 | 1,687 | 84% | 12.1 | 16% |
| PZZA | 1,378 | 727 | 787 | 1,536 | 0 | -19 | 20 | 1,732 | 0% | 86.9 | -3% |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2019
OR
For the transition period from to
Commission File Number 001-15283
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
(Address of principal executive offices) | (Zip Code) | |||
(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 | |
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.
☒ | 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 October 25, 2019, the Registrant had 16,791,860 shares of Common Stock outstanding.
Dine Brands Global, Inc. and Subsidiaries
Index
Page | ||
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: 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 business in international markets; the results of litigation and other legal proceedings; third-party claims with respect to
1
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, 2018, 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 2019 began on December 31, 2018 and ended on March 31, 2019; the second and third fiscal quarters of 2019 ended on June 30, 2019 and September 29, 2019, respectively. The first fiscal quarter of 2018 began on January 1, 2018 and ended on April 1, 2018; the second and third fiscal quarters of 2018 ended on July 1, 2018 and September 30, 2018, respectively.
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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 | September 30, 2019 | December 31, 2018 | ||||||
(Unaudited) | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Receivables, net | ||||||||
Restricted cash | ||||||||
Prepaid gift card costs | ||||||||
Prepaid income taxes | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Other intangible assets, net | ||||||||
Operating lease right-of-use assets | ||||||||
Goodwill | ||||||||
Property and equipment, net | ||||||||
Long-term receivables, net | ||||||||
Deferred rent receivable | ||||||||
Non-current restricted cash | ||||||||
Other non-current assets, net | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Stockholders’ Deficit | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | $ | ||||||
Accounts payable | ||||||||
Gift card liability | ||||||||
Current maturities of operating lease obligations | ||||||||
Current maturities of finance lease and financing obligations | ||||||||
Accrued employee compensation and benefits | ||||||||
Dividends payable | ||||||||
Deferred franchise revenue, short-term | ||||||||
Other accrued expenses | ||||||||
Total current liabilities | ||||||||
Long-term debt, less current maturities | ||||||||
Operating lease obligations, less current maturities | ||||||||
Finance lease obligations, less current maturities | ||||||||
Financing obligations, less current maturities | ||||||||
Deferred income taxes, net | ||||||||
Deferred franchise revenue, long-term | ||||||||
Other non-current liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Stockholders’ deficit: | ||||||||
Common stock, $0.01 par value; shares: 40,000,000 authorized; September 30, 2019 - 24,934,363 issued, 16,786,860 outstanding; December 31, 2018 - 24,984,898 issued, 17,644,267 outstanding | ||||||||
Additional paid-in-capital | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Treasury stock, at cost; shares: September 30, 2019 - 8,147,503; December 31, 2018 - 7,340,631 | ( | ) | ( | ) | ||||
Total stockholders’ deficit | ( | ) | ( | ) | ||||
Total liabilities and stockholders’ deficit | $ | $ | ||||||
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)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Franchise revenues: | ||||||||||||||||
Royalties, franchise fees and other | $ | $ | ||||||||||||||
Advertising revenue | ||||||||||||||||
Total franchise revenues | ||||||||||||||||
Company restaurant sales | ||||||||||||||||
Rental revenues | ||||||||||||||||
Financing revenues | ||||||||||||||||
Total revenues | ||||||||||||||||
Cost of revenues: | ||||||||||||||||
Franchise expenses: | ||||||||||||||||
Advertising expenses | ||||||||||||||||
Other franchise expenses | ||||||||||||||||
Total franchise expenses | ||||||||||||||||
Company restaurant expenses | ||||||||||||||||
Rental expenses: | ||||||||||||||||
Interest expense from finance leases | ||||||||||||||||
Other rental expenses | ||||||||||||||||
Total rental expenses | ||||||||||||||||
Financing expenses | ||||||||||||||||
Total cost of revenues | ||||||||||||||||
Gross profit | ||||||||||||||||
General and administrative expenses | ||||||||||||||||
Interest expense, net | ||||||||||||||||
Amortization of intangible assets | ||||||||||||||||
Closure and impairment charges | ||||||||||||||||
Loss on extinguishment of debt | ||||||||||||||||
Debt refinancing costs | ||||||||||||||||
Loss (gain) on disposition of assets | ( | ) | ( | ) | ||||||||||||
Income before income tax provision | ||||||||||||||||
Income tax provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income | ||||||||||||||||
Other comprehensive income (loss) net of tax: | ||||||||||||||||
Adjustment to unrealized loss on available-for-sale investments | ||||||||||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
Total comprehensive income | $ | $ | $ | $ | ||||||||||||
Net income available to common stockholders: | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Less: Net income allocated to unvested participating restricted stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income available to common stockholders | $ | $ | $ | $ | ||||||||||||
Net income available to common stockholders per share: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
See the accompanying Notes to Consolidated Financial Statements.
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Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Three and Nine Months ended September 30, 2019
(In thousands)
(Unaudited)
Three Months ended September 30, 2019 | ||||||||||||||||||||||||||||||
Common Stock | Accumulated Other Comprehensive Loss | Treasury Stock | ||||||||||||||||||||||||||||
Shares Outstanding | Amount | Additional Paid-in Capital | Retained Earnings | Shares | Cost | Total | ||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
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 September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Nine Months ended September 30, 2019 | ||||||||||||||||||||||||||||||
Common Stock | Accumulated Other Comprehensive Loss | Treasury Stock | ||||||||||||||||||||||||||||
Shares Outstanding | Amount | Additional Paid-in Capital | Retained Earnings | Shares | Cost | Total | ||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Adoption of ASC 842 (Note 3) | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
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 September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
See the accompanying Notes to Consolidated Financial Statements.
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Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Three and Nine Months ended September 30, 2018
(In thousands)
(Unaudited)
Three Months ended September 30, 2018 | ||||||||||||||||||||||||||||||
Common Stock | Accumulated Other Comprehensive Loss | Treasury Stock | ||||||||||||||||||||||||||||
Shares Outstanding | Amount | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Shares | Cost | Total | ||||||||||||||||||||||||
Balance at June 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
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 | — | — | — | — | — | |||||||||||||||||||||||||
Dividends on common stock in excess of retained earnings | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
Nine Months ended September 30, 2018 | ||||||||||||||||||||||||||||||
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, 2017 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive gain | — | — | — | — | — | — | ||||||||||||||||||||||||
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 | — | — | — | — | — | |||||||||||||||||||||||||
Dividends on common stock in excess of retained earnings | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
See the accompanying Notes to Consolidated Financial Statements.
6
Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
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 | ||||||||
Non-cash interest expense | ||||||||
Loss on extinguishment of debt | ||||||||
Debt refinancing costs | ||||||||
Closure and impairment charges | ||||||||
Deferred income taxes | ( | ) | ( | ) | ||||
Deferred revenue | ( | ) | ( | ) | ||||
Loss (gain) 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 | ||||||||
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: | ||||||||
Proceeds from issuance of long-term debt | ||||||||
Repayment of long-term debt | ( | ) | ( | ) | ||||
Borrowing from revolving financing facility | ||||||||
Repayment of revolving financing facility | ( | ) | ( | ) | ||||
Payment of debt issuance costs | ( | ) | ( | ) | ||||
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 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 | $ | $ | ||||||
Non-cash conversion of accounts receivable to notes receivable | $ | $ | ||||||
See the accompanying Notes to Consolidated Financial Statements.
7
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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2019.
The consolidated balance sheet at December 31, 2018 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, 2018.
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 2019 began on December 31, 2018 and ended on March 31, 2019; the second and third fiscal quarters of 2019 ended on June 30, 2019 and September 29, 2019, respectively. The first fiscal quarter of 2018 began on January 1, 2018 and ended on April 1, 2018; the second and third fiscal quarters of 2018 ended on July 1, 2018 and September 30, 2018, respectively.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
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.
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 guidance with respect to the accounting for leases, as codified in Accounting Standards Topic 842 (“ASC 842”). The guidance is intended to improve financial reporting of leasing transactions by requiring entities that lease assets to recognize assets and liabilities for the rights and obligations created by leases, as well as by requiring additional disclosures related to an entity's leasing activities. The Company adopted this change in accounting principle as of the first day of the first fiscal quarter of 2019 using the modified retrospective method. Accordingly, financial information for periods prior to the date of initial application has not been adjusted. The Company has elected the package of practical expedients for adoption that permitted the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs. The Company also elected a short-term lease exception policy and an accounting policy to not separate non-lease components from lease components. The Company did not elect to use an allowable expedient that permitted the use of hindsight in performing evaluations of its leases.
Upon adoption of ASC 842, the Company recognized operating lease obligations of $453.0 million, which represented the present value of the remaining minimum lease payments, discounted using the Company's incremental borrowing rate. The Company recognized operating lease right-of-use assets of $395.6 million. The Company recognized an adjustment to retained earnings upon adoption of $5.0 million, net of tax of $1.7 million, primarily related to an impairment resulting from an unfavorable differential between lease payments to be made and sublease rentals to be received on certain leases. The
8
Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted (Continued)
remaining difference of $50.7 million between the recognized operating lease obligation and the right-of-use assets related to the derecognition of certain assets and liabilities recorded in accordance with U.S. GAAP that had been applied prior to the adoption of ASC 842, primarily $43.3 million of accrued rent payments. Lease-related reserves for lease incentives, closed restaurants and unfavorable leaseholds were also derecognized.
The accounting for the Company's existing finance (capital) leases upon adoption of ASC 842 remained substantially unchanged. Adoption of ASC 842 had no significant impact on the Company's cash flows from operations or its results of operations and did not impact any covenant related to the Company's long-term debt. The Company implemented internal controls necessary to ensure compliance with the accounting and disclosure requirements of ASC 842. See Note 5 for additional disclosures related to the Company's leasing activities.
Additional new accounting guidance became effective for the Company as of the beginning of fiscal 2019 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 June 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. The new guidance will replace the incurred loss methodology of recognizing credit losses on financial instruments that is currently required 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. Application of the new guidance may result in the earlier recognition of credit losses as the new methodology will require entities to consider forward-looking information in addition to historical and current information used in assessing incurred losses. The Company will be required to adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2020. The Company is currently in the process of developing the methodology and key assumptions it will use in estimating expected credit losses but has not yet quantified the impact of the new guidance on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued guidance designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. The Company will be required to adopt the new guidance beginning with its first fiscal quarter of 2020; 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.
In August 2018, the FASB issued new guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with existing guidance for capitalizing implementation cost incurred to develop or obtain internal-use software. The guidance also provides presentation and disclosure requirements for such capitalized costs. The Company will be required to adopt the new guidance beginning with its first fiscal quarter of 2020; 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.
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.
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
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Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Revenue Disclosures (Continued)
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