DIN-2012.3.31-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
 (Mark One)
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2012
 OR
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                  to                 
 
Commission File Number 001-15283
 ________________________________________________________________
DineEquity, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
 
95-3038279
(I.R.S. Employer Identification No.)
 
 
 
450 North Brand Boulevard,
Glendale, California
 
91203-1903
(Address of principal executive offices)
 
(Zip Code)
 
(818) 240-6055
(Registrant’s telephone number, including area code)
 ______________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was Required to submit and post such files).  Yes x  No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer 0
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of April 25, 2012
Common Stock, $.01 par value
 
18,312,741
 


Table of Contents

DINEEQUITY, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4—Mine and Safety Disclosure
 
 
 

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements.
DINEEQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
 
March 31,
2012
 
December 31,
2011
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
48,684

 
$
60,691

Receivables, net
 
80,746

 
115,667

Inventories
 
11,534

 
12,031

Prepaid income taxes
 

 
13,922

Prepaid gift cards
 
28,903

 
36,643

Deferred income taxes
 
22,852

 
20,579

Assets held for sale
 
3,986

 
9,363

Other current assets
 
18,448

 
8,051

Total current assets
 
215,153

 
276,947

Long-term receivables
 
224,348

 
226,526

Property and equipment, net
 
462,427

 
474,154

Goodwill
 
697,470

 
697,470

Other intangible assets, net
 
818,783

 
822,361

Other assets, net
 
116,305

 
116,836

Total assets
 
$
2,534,486

 
$
2,614,294

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Current maturities of long-term debt
 
$
7,420

 
$
7,420

Accounts payable
 
32,906

 
29,013

Accrued employee compensation and benefits
 
17,596

 
26,191

Gift card liability
 
92,154

 
146,955

Accrued interest payable
 
30,509

 
12,537

Current maturities of capital lease and financing obligations
 
13,618

 
13,480

Income taxes payable
 
10,159

 

Other accrued expenses
 
25,303

 
22,048

Total current liabilities
 
229,665

 
257,644

Long-term debt, less current maturities
 
1,337,960

 
1,411,448

Financing obligations, less current maturities
 
152,621

 
162,658

Capital lease obligations, less current maturities
 
131,903

 
134,407

Deferred income taxes
 
376,457

 
383,810

Other liabilities
 
110,200

 
109,107

Total liabilities
 
2,338,806

 
2,459,074

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Convertible preferred stock, Series B, at accreted value, shares:10,000,000 authorized; 35,000 issued; March 31, 2012 and December 31, 2011 - 34,900 outstanding
 
45,176

 
44,508

Common stock, $.01 par value, shares: 40,000,000 authorized; March 31, 2012 - 24,646,467 issued, 18,314,610 outstanding; December 31, 2011 - 24,658,985 issued,18,060,206 outstanding
 
246

 
247

Additional paid-in-capital
 
206,476

 
205,663

Retained earnings
 
227,545

 
196,869

Accumulated other comprehensive loss
 
(152
)
 
(294
)
Treasury stock, at cost; shares: March 31, 2012 - 6,331,857; December 31, 2011 - 6,598,779
 
(283,611
)
 
(291,773
)
Total stockholders’ equity
 
195,680

 
155,220

Total liabilities and stockholders’ equity
 
$
2,534,486

 
$
2,614,294


 See the accompanying Notes to Consolidated Financial Statements.

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DINEEQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Segment Revenues:
 
 

 
 

Franchise revenues
 
$
108,409

 
$
104,552

Company restaurant sales
 
100,885

 
154,703

Rental revenues
 
32,005

 
32,216

Financing revenues
 
4,283

 
8,729

Total segment revenues
 
245,582

 
300,200

Segment Expenses:
 
 

 
 

Franchise expenses
 
27,632

 
27,443

Company restaurant expenses
 
84,183

 
131,766

Rental expenses
 
24,537

 
24,647

Financing expenses
 
655

 
5,575

Total segment expenses
 
137,007

 
189,431

Gross segment profit
 
108,575

 
110,769

General and administrative expenses
 
39,632

 
37,969

Interest expense
 
30,221

 
36,306

Amortization of intangible assets
 
3,075

 
3,075

Impairment and closure charges
 
722

 
4,938

Gain on disposition of assets
 
(16,733
)
 
(23,754
)
Loss on extinguishment of debt
 
2,611

 
6,946

Debt modification costs
 

 
4,114

Income before income taxes
 
49,047

 
41,175

Provision for income taxes
 
(17,703
)
 
(11,476
)
Net income
 
31,344

 
29,699

Other comprehensive income:
 
 
 
 
Adjustment to unrealized loss on available-for-sale investments
 
140

 

Foreign currency translation adjustment
 
2

 
21

Total comprehensive income
 
$
31,486

 
$
29,720

Net income available to common stockholders:
 
 

 
 

Net income
 
$
31,344

 
$
29,699

Less: Accretion of Series B preferred stock
 
(668
)
 
(629
)
Less: Net income allocated to unvested participating restricted stock
 
(796
)
 
(1,014
)
Net income available to common stockholders
 
$
29,880

 
$
28,056

Net income available to common stockholders per share:
 
 

 
 

Basic
 
$
1.69

 
$
1.59

Diluted
 
$
1.64

 
$
1.53

Weighted average shares outstanding:
 
 

 
 

Basic
 
17,682

 
17,697

Diluted
 
18,651

 
18,763

 
See the accompanying Notes to Consolidated Financial Statements.

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DINEEQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Cash flows from operating activities:
 
 

 
 

Net income
 
$
31,344

 
$
29,699

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

 
 

Depreciation and amortization
 
10,463

 
13,290

Non-cash interest expense
 
1,529

 
1,417

Loss on extinguishment of debt
 
2,611

 
6,946

Impairment and closure charges
 
445

 
4,717

Deferred income taxes
 
(9,626
)
 
(3,903
)
Non-cash stock-based compensation expense
 
3,789

 
1,863

Tax benefit from stock-based compensation
 
4,000

 
5,121

Excess tax benefit from stock options exercised
 
(2,421
)
 
(4,866
)
Gain on disposition of assets
 
(16,733
)
 
(23,754
)
Other
 
(353
)
 
361

Changes in operating assets and liabilities:
 
 

 
 

Receivables
 
35,545

 
24,636

Inventories
 
197

 
(378
)
Prepaid expenses
 
(24
)
 
5,567

Current income tax receivables and payables
 
23,724

 
32,194

Accounts payable
 
1,660

 
1,358

Accrued employee compensation and benefits
 
(8,594
)
 
(12,249
)
Gift card liability
 
(54,801
)
 
(46,998
)
Other accrued expenses
 
21,938

 
15,455

Cash flows provided by operating activities
 
44,693

 
50,476

Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(4,150
)
 
(3,835
)
Proceeds from sale of property and equipment and assets held for sale
 
21,390

 
54,597

Principal receipts from notes, equipment contracts and other long-term receivables
 
3,437

 
3,395

Other
 
699

 
(128
)
Cash flows provided by investing activities
 
21,376

 
54,029

Cash flows from financing activities:
 
 

 
 

Repayment of long-term debt (including premiums)
 
(76,037
)
 
(145,273
)
Principal payments on capital lease and financing obligations
 
(3,007
)
 
(3,553
)
Payment of debt modification and issuance costs
 

 
(12,208
)
Repurchase of restricted stock
 
(859
)
 
(3,272
)
Proceeds from stock options exercised
 
2,045

 
5,378

Excess tax benefit from stock options exercised
 
2,421

 
4,866

Change in restricted cash
 
(2,639
)
 
(2,392
)
Cash flows used in financing activities
 
(78,076
)
 
(156,454
)
Net change in cash and cash equivalents
 
(12,007
)
 
(51,949
)
Cash and cash equivalents at beginning of period
 
60,691

 
102,309

Cash and cash equivalents at end of period
 
$
48,684

 
$
50,360

Supplemental disclosures:
 
 

 
 

Interest paid
 
$
14,777

 
$
22,292

Income taxes paid
 
$
1,545

 
$
1,276

 
See the accompanying Notes to Consolidated Financial Statements.

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

Restricted Cash
The Company receives funds from Applebee's franchisees pursuant to franchise agreements, usage of which is restricted to advertising activities. Restricted cash balances as of March 31, 2012 and December 31, 2011 totaled $3.8 million and $1.2 million, respectively. The balances were included as other current assets in the consolidated balance sheets.
Other Restricted Assets
As of March 31, 2012 and December 31, 2011, restricted assets related to a captive insurance subsidiary totaled $3.9 million and $3.6 million, respectively, and were included in other assets in the consolidated balance sheets. The captive insurance subsidiary, which has not underwritten coverage since January 2006, was formed to provide insurance coverage to Applebee's and its franchisees. These restricted assets were primarily investments, use of which is restricted to the payment of insurance claims that are in run-off.
3. Accounting Policies
 
Recently Adopted Accounting Standards
 
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income — Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in

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a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor did it affect how earnings per share is calculated or presented. The Company adopted ASU 2011-05 retrospectively in the first quarter of 2012 and adoption did not have a material impact on the Company’s consolidated financial statements.

The Company reviewed all other significant newly issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material effect is expected on the consolidated financial statements as a result of future adoption.
 
4. Assets Held for Sale
 
The Company classifies assets as held for sale and ceases the depreciation and amortization of the assets when there is a plan for disposal of the assets and those assets meet the held for sale criteria, as defined in applicable U.S. GAAP. The balance of assets held for sale at December 31, 2011 of $9.4 million was comprised of 17 Applebee's company-operated restaurants located in a six-state market area geographically centered around Memphis, Tennessee, one parcel of land on which a refranchised Applebee's formerly company-operated restaurant is situated and three parcels of land previously intended for future restaurant development.
 
During the three months ended March 31, 2012, the Company sold the 17 Applebee's company-operated restaurants located in a six-state market area geographically centered around Memphis, Tennessee. Additionally, an impairment of $0.3 million was recognized on one of the parcels of land previously intended for future restaurant development as an adjustment of the estimated fair value to be received upon sale.

The balance of assets held for sale at March 31, 2012 of $4.0 million was comprised of one parcel of land on which a refranchised Applebee's formerly company-operated restaurant is situated and three parcels of land previously intended for future restaurant development.
 
The following table summarizes changes in the balance of assets held for sale during the three months ended March 31, 2012:
 
 
(In millions)
Balance, December 31, 2011
$
9.4

Assets sold
(5.1
)
Impairment
(0.3
)
Balance, March 31, 2012
$
4.0


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

 
$
682.5

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

 
765.8

Discount
 
(27.4
)
 
(29.5
)
Total long-term debt
 
1,345.4

 
1,418.8

Less current maturities
 
(7.4
)
 
(7.4
)
Long-term debt, less current maturities
 
$
1,338.0

 
$
1,411.4

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


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

Loss on Extinguishment of Debt
 
During the three months ended March 31, 2012 and 2011, the Company recognized the following losses on the extinguishment of debt:

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

 
$
70.5

 
$
1.9

Senior Notes
 
5.0

 
5.5

 
0.7

Three months ended March 31, 2012
 
75.5

 
76.0

 
2.6

 
 
 
 
 
 
 
Term Loans
 
$
110.0

 
$
110.0

 
$
2.7

Senior Notes
 
32.3

 
35.3

 
4.2

Three months ended March 31, 2011
 
$
142.3

 
$
145.3

 
$
6.9


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

Compliance with Covenants and Restrictions
 
The Company was in compliance with all the covenants and restrictions related to its Senior Secured Credit Facility and Senior Notes as of March 31, 2012.
 
6. Financing Obligations
 
As of March 31, 2012, future minimum lease payments under financing obligations during the initial terms of the leases related to sale-leaseback transactions are as follows:
 
Fiscal Years
(In millions)
Remainder of 2012 (1)
$
11.4

2013
17.4

2014
17.6

2015 (1)
19.0

2016
17.6

Thereafter
206.2

Total minimum lease payments
289.2

Less interest
(132.8
)
Total financing obligations
156.4

Less current portion (2)
(3.8
)
Long-term financing obligations
$
152.6

 
(1)     Due to the varying closing dates of the Company’s fiscal years, 11 monthly payments will be made in fiscal 2012 and 13 monthly payments will be made in fiscal 2015.
(2)     Included in “current maturities of capital lease and financing obligations” on the consolidated balance sheet.
 
During the three months ended March 31, 2012, the Company’s continuing involvement with six properties subject to financing obligations was ended by assignment of the lease obligations to a qualified franchisee. As a result, the Company’s financing obligations were reduced by $9.2 million.

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7. Impairment and Closure Charges
 
The Company assesses tangible long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The following table summarizes the components of impairment and closure charges for the three months ended March 31, 2012 and 2011:
 
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
 
 
(In millions)
Impairment and closure charges:
 
 

 
 

Impairment
 
$
0.3

 
$
4.5

Closure charges
 
0.4

 
0.4

Total impairment and closure charges
 
$
0.7

 
$
4.9

 
Impairment and closure charges for the three months ended March 31, 2012 totaled $0.7 million. The impairment charge related to a parcel of land previously intended for future restaurant development (see Note 4). Closure charges related to several individually insignificant franchise restaurant closures.
 
Impairment and closure charges for the three months ended March 31, 2011 totaled $4.9 million. Impairment charges of $4.5 million related to furniture, fixtures and leasehold improvements at the Applebee's Restaurant Support Center in Lenexa, Kansas, whose book value was not realizable as a result of the Company's termination of the sublease of those premises. Closure charges related to several individually insignificant franchise restaurant closures.

8. Income Taxes
 
The effective tax rate was 36.1% for the three months ended March 31, 2012 compared to 27.9% for the three months ended March 31, 2011.The effective tax rate in the prior year was lower due to the release of liabilities for unrecognized tax benefits related to gift card income deferral as a result of the issuance of new guidance by the U.S. Internal Revenue Service.
 
At March 31, 2012, the Company had a liability for unrecognized tax benefits, including potential interest and penalties net of related tax benefit, totaling $8.2 million, of which approximately $1.6 million is expected to be paid within one year. For the remaining liability, due to the uncertainties related to these tax matters, the Company is unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur.

As of March 31, 2012, accrued interest and penalties were $2.5 million and $0.4 million, respectively, excluding any related income tax benefits. As of December 31, 2011, accrued interest and penalties were $3.0 million and $0.3 million, respectively, excluding any related income tax benefits. The decrease of $0.5 million of accrued interest is primarily related to the decrease of unrecognized tax benefits due to settlements with taxing authorities, partially offset by the accrual of interest during the three months ended March 31, 2012. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of income tax expense, which is recognized in the Consolidated Statements of Income.

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


9. Stock-Based Compensation
 
From time to time, the Company has granted nonqualified stock options, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and  non-employee directors of the Company. Currently, the Company is authorized to grant nonqualified stock options, stock appreciation rights, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and nonemployee directors under the DineEquity, Inc. 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan was approved by stockholders on May 17, 2011 and permits the issuance of up to 1,500,000 shares of the Company’s common stock. The 2011 Plan will expire in May 2021.

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The nonqualified stock options generally vest over a three-year period and have a term of ten years from the effective issuance date. Option exercise prices equal the closing price of the Company’s common stock on the New York Stock Exchange on the date of grant. Restricted stock and restricted stock units are issued at no cost to the holder and vest over terms determined by the Compensation Committee of the Company’s Board of Directors, generally three years.

The following table summarizes the components of the Company’s stock-based compensation expense included in general and administrative expenses in the consolidated financial statements:
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
 
 
(In millions)
Pre-tax compensation expense
 
$
4.5

 
$
3.1

Tax provision
 
(1.7
)
 
(1.2
)
Total stock-based compensation expense, net of tax
 
$
2.8

 
$
1.9

 
As of March 31, 2012, total unrecognized compensation cost (including estimated forfeitures) of $14.4 million related to restricted stock and restricted stock units and $12.3 million related to stock options is expected to be recognized over a weighted average period of 1.3 years for restricted stock and restricted stock units and 1.2 years for stock options.
 
The estimated fair values of the options granted during the three months ended March 31, 2012 were calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model:
 
Risk-free interest rate
0.86
%
Weighted average historical volatility
83.6
%
Dividend yield

Expected years until exercise
4.66

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

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

 
$
32.06

 
 
 
 

Granted
 
147,674

 
$
51.63

 
 
 
 

Exercised
 
(164,954
)
 
$
12.40

 
 
 
 

Forfeited
 
(13,335
)
 
$
44.44

 
 
 
 

Outstanding at March 31, 2012
 
1,288,025

 
$
36.69

 
6.89
 
$
18,277,000

Vested at March 31, 2012 and Expected to Vest
 
1,220,562

 
$
36.09

 
6.77
 
$
17,958,000

Exercisable at March 31, 2012
 
812,691

 
$
31.82

 
5.68
 
$
14,914,000

 
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price of the Company’s common stock on the last trading day of the first quarter of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2012. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock and the number of in-the-money options.
 

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A summary of restricted stock activity for the three months ended March 31, 2012 is presented below:
 
 
 
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
 
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2011
 
486,533

 
$
31.18

 
18,000

 
$
29.32

Granted
 
120,123

 
$
51.85

 
19,152

 
52.23

Released
 
(125,914
)
 
$
7.00

 

 

Forfeited
 
(14,194
)
 
$
38.68

 

 

Outstanding at March 31, 2012
 
466,548

 
$
42.80

 
37,152

 
$
41.13


The Company has issued 44,957 shares of cash-settled restricted stock units to members of the Board of Directors, of which 41,957 were outstanding at March 31, 2012. As these instruments can only be settled in cash, they are recorded as liabilities based on the closing price of the Company’s common stock as of March 31, 2012. For the three months ended March 31, 2012 and 2011, $0.3 million and $0.8 million, respectively, were included in pre-tax stock-based compensation expense for the cash-settled restricted stock units.
 
10. Segments
 
The Company’s revenues and expenses are recorded in four segments: franchise operations, company restaurant operations, rental operations and financing operations.
 
As of March 31, 2012, the franchise operations segment consisted of (i) 1,861 restaurants operated by Applebee’s franchisees in the United States, one U.S. territory and 15 countries outside the United States; and (ii) 1,542 restaurants operated by IHOP franchisees and area licensees in the United States, two U.S. territories and three countries outside the United States. Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products, certain franchise advertising fees and the portion of the franchise fees allocated to intellectual property.  Franchise operations expenses include advertising expense, the cost of proprietary products, preopening training expenses and costs related to intellectual property provided to certain franchisees.
 
As of March 31, 2012, the company restaurant operations segment consisted of 160 Applebee’s company-operated restaurants and 12 IHOP company-operated restaurants, all in the United States. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, benefits, utilities, rent and other restaurant operating costs.
 
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental operations expenses are costs of operating leases and interest expense on capital leases on franchisee-operated restaurants. 
Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases, as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants taken back from franchisees not allocated to IHOP intellectual property. Financing expenses are primarily the cost of restaurant equipment.
 

10

Table of Contents

Information on segments was as follows:
 
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
 
 
(In millions)
Revenues from External Customers
 
 

 
 

Franchise operations
 
$
108.4

 
$
104.6

Company restaurants
 
100.9

 
154.7

Rental operations
 
32.0

 
32.2

Financing operations
 
4.3

 
8.7

Total
 
$
245.6

 
$
300.2

Interest Expense
 
 

 
 

Company restaurants
 
$
0.1

 
$
0.2

Rental operations
 
4.4

 
4.6

Corporate
 
30.2

 
36.3

Total
 
$
34.7

 
$
41.1

Depreciation and amortization
 
 

 
 

Franchise operations
 
$
2.5

 
$
2.5

Company restaurants
 
2.4

 
4.9

Rental operations
 
3.5

 
3.5

Corporate
 
2.1

 
2.4

Total
 
$
10.5

 
$
13.3

Income (loss) before income taxes
 
 

 
 

Franchise operations
 
$
80.8

 
$
77.1

Company restaurants
 
16.7

 
22.9

Rental operations
 
7.5

 
7.6

Financing operations
 
3.6

 
3.2

Corporate
 
(59.6
)
 
(69.6
)
Total
 
$
49.0

 
$
41.2



11. Net Income per Share
 
The computation of the Company’s basic and diluted net income per share was as follows:
 
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
 
 
(In thousands, except per share data)
Numerator for basic and dilutive income - per common share:
 
 

 
 

Net income
 
$
31,344

 
$
29,699

Less: Accretion of Series B Preferred Stock
 
(668
)
 
(629
)
Less: Net income allocated to unvested participating restricted stock
 
(796
)
 
(1,014
)
Net income available to common stockholders - basic
 
29,880

 
28,056

Effect of unvested participating restricted stock in two-class calculation
 
40

 
57

Accretion of Series B Preferred Stock
 
668

 
629

Net income available to common stockholders - diluted
 
$
30,588

 
$
28,742

Denominator:
 
 

 
 

Weighted average outstanding shares of common stock - basic
 
17,682

 
17,697

Dilutive effect of:
 
 
 
 
Stock options
 
316

 
451

Series B Preferred Stock
 
653

 
615

Weighted average outstanding shares of common stock - diluted
 
18,651

 
18,763

Net income per common share:
 
 

 
 

Basic
 
$
1.69

 
$
1.59

Diluted
 
$
1.64

 
$
1.53


11

Table of Contents

 

12. Fair Value Measurements
The Company does not have a material amount of financial instruments that are required under U.S. GAAP to be measured on a recurring basis at fair value. None of the Company's non-financial assets or non-financial liabilities is required to be measured at fair value on a recurring basis. The Company has not elected to use fair value measurement, as provided under U.S. GAAP, for any assets or liabilities for which fair value measurement is not presently required.
 
The Company believes the fair values of cash equivalents, accounts receivable, accounts payable and the current portion of long-term debt approximate the carrying amounts due to their short duration.
 
The fair values of non-current financial liabilities at March 31, 2012 and December 31, 2011, determined based on Level 2 inputs, were as follows:
 
 
March 31, 2012
 
December 31, 2011
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
(in millions)
Long-term debt, less current maturities
 
$
1,338.0

 
$
1,436.5

 
$
1,411.4

 
$
1,486.2

 
13. Commitments and Contingencies
 
Litigation, Claims and Disputes
 
The Company is subject to various lawsuits, claims and governmental inspections or audits arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. In the opinion of management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such a nature or involve amounts that would not have a material adverse impact on the Company’s business or consolidated financial statements. 
Gerald Fast v. Applebee's
The Company is currently defending a collective action in United States District Court for the Western District of Missouri, Central Division filed on July 14, 2006 under the Fair Labor Standards Act, Gerald Fast v. Applebee's International, Inc., in which named plaintiffs claim that tipped workers in company restaurants perform excessive amounts of non-tipped work for which they should be compensated at the minimum wage. The court has conditionally certified a nationwide class of servers and bartenders who have worked in company-operated Applebee's restaurants since June 19, 2004. Unlike a class action, a collective action requires potential class members to “opt in” rather than “opt out.” On February 12, 2008, 5,540 opt-in forms were filed with the court.
 
In cases of this type, conditional certification of the plaintiff class is granted under a lenient standard. On January 15, 2009, the Company filed a motion seeking to have the class de-certified and the plaintiffs filed a motion for summary judgment, both of which were denied by the court.
 
The parties stipulated to a bench trial which was set to begin on September 8, 2009 in Jefferson City, Missouri. Just prior to trial, however, the court vacated the trial setting in order to submit key legal issues to the Eighth Circuit Court of Appeals for review on interlocutory appeal. On April 21, 2011, the Eighth Circuit affirmed the trial court's denial of the Company's motion for summary judgment.  On July 6, 2011, the Eighth Circuit denied the Company's petition for rehearing. 
 
On October 4, 2011, the Company filed a petition for certiorari asking the United States Supreme Court to review the decision of the Eighth Circuit. On January 17, 2012, the Supreme Court declined to review the case.  The bench trial is currently scheduled to begin on September 10, 2012.
 
The Company believes it has meritorious defenses and intends to vigorously defend this case. An estimate of the possible loss or a range of the loss, if any, cannot be made and, therefore, the Company has not accrued a loss contingency related to this matter.


12

Table of Contents

Lease Guarantees
 
In connection with the sale of Applebee’s restaurants or previous brands to franchisees and other parties, the Company has, in certain cases, guaranteed or had potential continuing liability for lease payments totaling $365.7 million as of March 31, 2012. This amount represents the maximum potential liability of future payments under these leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 2012 through 2048. In the event of default, the indemnity and default clauses in our sale or assignment agreements govern our ability to pursue and recover damages incurred.  No material liabilities have been recorded as of March 31, 2012.

14.  Consolidating Financial Information
 
Certain of our subsidiaries have guaranteed our obligations under the Credit Facility. The following presents the condensed consolidating financial information separately for: (i) the parent Company, the issuer of the guaranteed obligations; (ii) the guarantor subsidiaries, on a combined basis, as specified in the Credit Agreement; (iii) the non-guarantor subsidiaries, on a combined basis;     (iv) consolidating eliminations and reclassifications; and (v) DineEquity, Inc. and Subsidiaries, on a consolidated basis.
 
Each guarantor subsidiary is 100% owned by the Company at the date of each balance sheet presented. The notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements.
 

13

Table of Contents

Supplemental Condensed Consolidating Balance Sheet
March 31, 2012
(In millions)
 
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Current Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
7.7

 
$
40.2

 
$
0.8

 
$

 
$
48.7

Receivables, net
 
0.7

 
87.9

 
0.1

 
(8.0
)
 
80.7

Inventories
 

 
11.5

 

 

 
11.5

Prepaid expenses and other current assets
 
99.4

 
46.6

 

 
(98.6
)
 
47.4

Deferred income taxes
 
1.6

 
21.0

 
0.3

 

 
22.9

Assets held for sale
 

 
2.2

 
1.8

 

 
4.0

Intercompany
 
(265.3
)
 
260.1

 
5.2

 

 

Total current assets
 
(155.9
)
 
469.5

 
8.2

 
(106.6
)
 
215.2

Long-term receivables
 

 
224.3

 

 

 
224.3

Property and equipment, net
 
24.4

 
438.0

 

 

 
462.4

Goodwill
 

 
697.5

 

 

 
697.5

Other intangible assets, net
 

 
818.8

 

 

 
818.8

Other assets, net
 
21.7

 
94.6

 

 

 
116.3

Investment in subsidiaries
 
1,697.5

 

 

 
(1,697.5
)
 

Total assets
 
$
1,587.7

 
$
2,742.7

 
$
8.2

 
$
(1,804.1
)
 
$
2,534.5

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

 
$

 
$

 
$
(8.0
)
 
$
7.4

Accounts payable
 
1.3

 
31.6

 

 

 
32.9

Accrued employee compensation and benefits
 
3.4

 
14.2

 

 

 
17.6

Gift card liability
 

 
92.2

 

 

 
92.2

Income taxes payable
 
(11.8
)
 
120.4

 
0.2

 
(98.6
)
 
10.2

Other accrued expenses
 
33.6

 
35.8

 

 

 
69.4

Total current liabilities
 
41.9

 
294.2

 
0.2

 
(106.6
)
 
229.7

Long-term debt
 
1,338.0

 

 

 

 
1,338.0

Financing obligations
 

 
152.6

 

 

 
152.6

Capital lease obligations
 

 
131.9

 

 

 
131.9

Deferred income taxes
 
6.4

 
370.3

 
(0.3
)
 

 
376.4

Other liabilities
 
5.6

 
103.7

 
0.9

 

 
110.2

Total liabilities
 
1,391.9

 
1,052.7

 
0.8

 
(106.6
)
 
2,338.8

Total stockholders’ equity
 
195.8

 
1,690.0

 
7.4

 
(1,697.5
)
 
195.7

Total liabilities and stockholders’ equity
 
$
1,587.7

 
$
2,742.7

 
$
8.2

 
$
(1,804.1
)
 
$
2,534.5





14

Table of Contents

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

 
 

 
 

 
 

 
 

Current Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
9.9

 
$
50.4

 
$
0.4

 
$

 
$
60.7

Receivables, net
 
0.6

 
121.0

 
0.1

 
(6.0
)
 
115.7

Inventories
 

 
12.0

 

 

 
12.0

Prepaid expenses and other current assets
 
85.3

 
44.6

 

 
(71.3
)
 
58.6

Deferred income taxes
 
1.5

 
19.0

 
0.1

 

 
20.6

Assets held for sale
 

 
7.3

 
2.1

 

 
9.4

Intercompany
 
(300.2
)
 
294.5

 
5.7

 

 

Total current assets
 
(202.9
)
 
548.8

 
8.4

 
(77.3
)
 
276.9

Long-term receivables
 

 
226.5

 

 

 
226.5

Property and equipment, net
 
24.6

 
449.5

 

 

 
474.2

Goodwill
 

 
697.5

 

 

 
697.5

Other intangible assets, net
 

 
822.4

 

 

 
822.4

Other assets, net
 
23.2

 
93.5

 
0.1

 

 
116.8

Investment in subsidiaries
 
1,697.6

 

 

 
(1,697.6
)
 

Total assets
 
$
1,542.5

 
$
2,838.2

 
$
8.5

 
$
(1,774.9
)
 
$
2,614.3

Liabilities and Stockholders’ Equity
 
 

 
 

 
 

 
 

 
 

Current Liabilities
 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
 
$
13.4

 
$

 
$

 
$
(6.0
)
 
$
7.4

Accounts payable
 
2.8

 
26.2

 

 

 
29.0

Accrued employee compensation and benefits
 
6.7

 
19.5

 

 

 
26.2

Gift card liability
 

 
147.0

 

 

 
147.0

Other accrued expenses
 
(61.6
)
 
180.6

 
0.4

 
(71.3
)
 
48.1

Total current liabilities
 
(38.6
)
 
373.3

 
0.4

 
(77.3
)
 
257.6

Long-term debt
 
1,411.4

 

 

 

 
1,411.4

Financing obligations
 

 
162.7

 

 

 
162.7

Capital lease obligations
 

 
134.4

 

 

 
134.4

Deferred income taxes
 
8.9

 
375.3

 
(0.4
)
 

 
383.8

Other liabilities
 
5.4

 
102.6

 
1.1

 

 
109.1

Total liabilities
 
1,387.0

 
1,148.3

 
1.1

 
(77.3
)
 
2,459.1

Total stockholders’ equity
 
155.5

 
1,689.9

 
7.4

 
(1,697.6
)
 
155.2

Total liabilities and stockholders’ equity
 
$
1,542.5

 
$
2,838.2

 
$
8.5

 
$
(1,774.9
)
 
$
2,614.3









15

Table of Contents

Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2012
(In millions)
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Franchise revenues
 
$
0.6

 
$
107.5

 
$
0.3

 
$

 
$
108.4

Restaurant sales
 

 
100.9

 

 

 
100.9

Rental revenues
 

 
32.0

 

 

 
32.0

Financing revenues
 

 
4.3

 

 

 
4.3

Total revenue
 
0.6

 
244.7

 
0.3

 

 
245.6

Franchise expenses
 
0.6

 
27.0

 

 

 
27.6

Restaurant expenses
 

 
84.2

 

 

 
84.2

Rental expenses
 

 
24.5

 

 

 
24.5

Financing expenses
 

 
0.7

 

 

 
0.7

General and administrative
 
7.1

 
32.1

 
0.5

 

 
39.7

Interest expense
 
27.4

 
2.8

 

 

 
30.2

Amortization of intangible assets
 

 
3.1

 

 

 
3.1

Impairment and closure
 

 
0.4

 
0.3

 

 
0.7

Gain on disposition of assets
 

 
(16.4
)
 
(0.3
)
 
 
 
(16.7
)
Loss on extinguishment of debt
 
2.6

 

 

 

 
2.6

Intercompany dividend
 
(54.1
)
 

 

 
54.1

 

Income (loss) before income taxes
 
17.0

 
86.3

 
(0.2
)
 
(54.1
)
 
49.0

Benefit (provision) for income taxes
 
14.3

 
(32.0
)
 

 

 
(17.7
)
Net (loss) income
 
$
31.3

 
$
54.3

 
$
(0.2
)
 
$
(54.1
)
 
$
31.3

Total comprehensive income
 
$
31.3

 
$
54.5

 
$
(0.2
)
 
$
(54.1
)
 
$
31.5

 
Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2011
(In millions)
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Franchise revenues
 
$
0.7

 
$
103.6

 
$
0.3

 
$

 
$
104.6

Restaurant sales
 

 
154.3

 
0.4

 

 
154.7

Rental revenues
 

 
32.2

 

 

 
32.2

Financing revenues
 

 
8.7

 

 

 
8.7

Total revenue
 
0.7

 
298.8

 
0.7

 

 
300.2

Franchise expenses
 
0.5

 
27.0

 

 

 
27.5

Restaurant expenses
 

 
131.5

 
0.3

 

 
131.8

Rental expenses
 

 
24.6

 

 

 
24.6

Financing expenses
 

 
5.6

 

 

 
5.5

General and administrative
 
7.5

 
29.9

 
0.6

 

 
38.0

Interest expense
 
32.3

 
4.0

 

 

 
36.3

Amortization of intangible assets
 

 
3.1

 

 

 
3.1

Impairment and closure
 

 
4.9

 

 

 
4.9

Gain on disposition of assets
 

 
(23.7
)
 
(0.1
)
 
 
 
(23.8
)
Loss on extinguishment of debt
 
6.9

 

 

 

 
6.9

Debt modification costs
 
4.1

 

 

 

 
4.1

Other (income) expense
 

 
(23.4
)
 
(0.4
)
 
23.7

 

Intercompany dividend
 
(16.1
)
 

 

 
16.1

 

Income (loss) before income taxes
 
(34.6
)
 
115.3

 
0.3

 
(39.8
)
 
41.2

Benefit (provision) for income taxes
 
19.7

 
(31.0
)
 
(0.1
)
 
 
 
(11.4
)
Net (loss) income
 
$
(15.0
)
 
$
84.3

 
$
0.2

 
$
(39.8
)
 
$
29.7

Total comprehensive income
 
$
(15.0
)
 
$
84.3

 
$
0.2

 
$
(39.8
)
 
$
29.7




16

Table of Contents

 
Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2012
(In millions)
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Cash flows provided by (used in) operating activities
 
$
(15.0
)
 
$
59.8

 
$
(0.1
)
 

 
$
44.7

Investing cash flows
 
 
 
 
 
 
 
 
 
 
Additions to property and equipment
 
(1.3
)
 
(2.8
)
 

 


 
(4.1
)
Principal receipts from long-term receivables
 

 
3.4

 

 

 
3.4

Proceeds from sale of assets
 

 
21.4

 

 

 
21.4

Other
 

 
0.7

 

 

 
0.7

Cash flows provided by (used in) investing activities
 
(1.3
)
 
22.7

 

 

 
21.4

Financing cash flows
 
 
 
 
 
 
 
 
 
 
Payment of debt
 
(76.0
)
 
(3.0
)
 

 

 
(79.0
)
Restricted cash
 

 
(2.6
)
 

 

 
(2.6
)
Other
 
3.1

 
0.4

 

 

 
3.5

Intercompany transfers
 
87.0

 
(87.5
)
 
0.5

 

 

Cash flows provided by (used in) financing activities
 
14.1

 
(92.7
)
 
0.5

 

 
(78.1
)
Net change
 
(2.2
)
 
(10.2
)
 
0.4

 

 
(12.0
)
Beginning cash and equivalents
 
9.9

 
50.4

 
0.4

 

 
60.7

Ending cash and equivalents
 
$
7.7

 
$
40.2

 
$
0.8

 

 
$
48.7

 
Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2011
(In millions)
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Cash flows provided by (used in) operating activities
 
$
(26.3
)
 
$
76.3

 
$
0.5

 

 
$
50.5

Investing cash flows
 
 
 
 
 
 
 
 
 
 
Additions to property and equipment
 
(1.3
)
 
(2.5
)
 

 

 
(3.8
)
Principal receipts from long-term receivables
 

 
3.4

 

 

 
3.4

Proceeds from sale of assets
 

 
54.6