DIN-2014.3.31-10Q
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, 2014
 OR
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                  to                
 
Commission File Number 001-15283
 ________________________________________________________________
DineEquity, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
 
95-3038279
(I.R.S. Employer Identification No.)
 
 
 
450 North Brand Boulevard,
Glendale, California
 
91203-1903
(Address of principal executive offices)
 
(Zip Code)
 
(818) 240-6055
(Registrant’s telephone number, including area code)
 ______________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of April 25, 2014
Common Stock, $0.01 par value
 
19,148,067
 


Table of Contents

DineEquity, Inc. and Subsidiaries
Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

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,
2014
 
December 31, 2013
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
133,218

 
$
106,011

Receivables, net
 
91,493

 
144,137

Prepaid gift cards
 
39,559

 
49,223

Prepaid income taxes
 

 
4,708

Deferred income taxes
 
26,501

 
23,853

Other current assets
 
8,092

 
3,650

Total current assets
 
298,863

 
331,582

Long-term receivables
 
194,066

 
197,153

Property and equipment, net
 
264,855

 
274,295

Goodwill
 
697,470

 
697,470

Other intangible assets, net
 
791,033

 
794,057

Other assets, net
 
108,960

 
110,085

Total assets
 
$
2,355,247

 
$
2,404,642

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Current maturities of long-term debt
 
$
4,720

 
$
4,720

Accounts payable
 
39,857

 
40,050

Gift card liability
 
111,020

 
171,955

Accrued employee compensation and benefits
 
10,099

 
24,956

Accrued interest payable
 
31,671

 
13,575

Income taxes payable
 
12,890

 

Current maturities of capital lease and financing obligations
 
12,577

 
12,247

Other accrued expenses
 
22,940

 
16,770

Total current liabilities
 
245,774

 
284,273

Long-term debt, less current maturities
 
1,203,247

 
1,203,517

Capital lease obligations, less current maturities
 
108,533

 
111,707

Financing obligations, less current maturities
 
46,848

 
48,843

Deferred income taxes
 
334,195

 
341,578

Other liabilities
 
98,470

 
99,545

Total liabilities
 
2,037,067

 
2,089,463

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value, shares: 40,000,000 authorized; March 31, 2014 - 25,284,475 issued, 19,155,078 outstanding; December 31, 2013 - 25,299,315 issued, 19,040,890 outstanding
 
253

 
253

 Additional paid-in-capital
 
274,557

 
274,202

 Retained earnings
 
343,095

 
336,578

 Accumulated other comprehensive loss
 
(170
)
 
(164
)
Treasury stock, at cost; shares: March 31, 2014 - 6,129,397; December 31, 2013 - 6,258,425
 
(299,555
)
 
(295,690
)
Total stockholders’ equity
 
318,180

 
315,179

Total liabilities and stockholders’ equity
 
$
2,355,247

 
$
2,404,642


 See the accompanying Notes to Consolidated Financial Statements.

2

Table of Contents

DineEquity, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Segment Revenues:
 
 
 
 
Franchise and restaurant revenues
 
$
131,795

 
$
128,329

Rental revenues
 
30,753

 
31,003

Financing revenues
 
4,653

 
3,837

Total segment revenues
 
167,201

 
163,169

Segment Expenses:
 
 
 
 
Franchise and restaurant expenses
 
45,678

 
44,476

Rental expenses
 
23,866

 
24,269

Financing expenses
 
585

 

Total segment expenses
 
70,129

 
68,745

Gross segment profit
 
97,072

 
94,424

General and administrative expenses
 
34,185

 
34,032

Interest expense
 
24,969

 
25,295

Amortization of intangible assets
 
3,071

 
3,071

Closure and impairment charges
 
200

 
838

Loss on extinguishment of debt
 
6

 
20

Debt modification costs
 

 
1,296

Loss (gain) on disposition of assets
 
927

 
(318
)
Income before income taxes
 
33,714

 
30,190

Income tax provision
 
(12,890
)
 
(11,951
)
Net income
 
20,824

 
18,239

Other comprehensive loss, net of tax:
 
 
 
 
Foreign currency translation adjustment
 
(6
)
 
(4
)
Total comprehensive income
 
$
20,818

 
$
18,235

Net income available to common stockholders:
 
 
 
 
Net income
 
$
20,824

 
$
18,239

Less: Net income allocated to unvested participating restricted stock
 
(343
)
 
(329
)
Net income available to common stockholders
 
$
20,481

 
$
17,910

Net income available to common stockholders per share:
 
 
 
 
Basic
 
$
1.09

 
$
0.95

Diluted
 
$
1.08

 
$
0.93

Weighted average shares outstanding:
 
 
 
 
Basic
 
18,794

 
18,911

Diluted
 
19,054

 
19,193

 
 
 
 
 
Dividends declared per common share
 
$
0.75

 
$
0.75

Dividends paid per common share
 
$
0.75

 
$
0.75

 


See the accompanying Notes to Consolidated Financial Statements.

3

Table of Contents

DineEquity, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Cash flows from operating activities:
 
 

 
 

Net income
 
$
20,824

 
$
18,239

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

 
 

Depreciation and amortization
 
8,783

 
8,836

Non-cash interest expense
 
1,642

 
1,503

Deferred income taxes
 
(10,031
)
 
(8,253
)
Non-cash stock-based compensation expense
 
3,143

 
3,189

Tax benefit from stock-based compensation
 
3,524

 
2,228

Excess tax benefit from share-based compensation
 
(4,455
)
 
(966
)
Loss (gain) on disposition of assets
 
927

 
(318
)
Debt modification costs
 

 
1,282

Other
 
(196
)
 
1,806

Changes in operating assets and liabilities:
 
 

 
 

Receivables
 
52,887

 
47,216

Current income tax receivables and payables
 
18,020

 
16,528

Other current assets
 
8,913

 
16,678

Accounts payable
 
775

 
1,659

Accrued employee compensation and benefits
 
(14,857
)
 
(11,482
)
Gift card liability
 
(60,936
)
 
(54,332
)
Other accrued expenses
 
23,877

 
27,413

Cash flows provided by operating activities
 
52,840

 
71,226

Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(2,039
)
 
(1,495
)
Proceeds from sale of property and equipment
 
681

 

Principal receipts from notes, equipment contracts and other long-term receivables
 
3,415

 
3,810

Other
 
(55
)
 
68

Cash flows provided by investing activities
 
2,002

 
2,383

Cash flows from financing activities:
 
 
 
 

Repayment of long-term debt
 
(1,200
)
 
(1,200
)
Payment of debt modification costs
 

 
(1,282
)
Principal payments on capital lease and financing obligations
 
(2,695
)
 
(2,483
)
Repurchase of DineEquity common stock
 
(15,002
)
 

Dividends paid on common stock
 
(14,293
)
 
(14,512
)
Repurchase of restricted stock
 
(1,831
)
 
(2,590
)
Proceeds from stock options exercised
 
6,623

 
3,018

Excess tax benefit from share-based compensation
 
4,455

 
966

Change in restricted cash
 
(3,692
)
 
(2,681
)
Cash flows used in financing activities
 
(27,635
)
 
(20,764
)
Net change in cash and cash equivalents
 
27,207

 
52,845

Cash and cash equivalents at beginning of period
 
106,011

 
64,537

Cash and cash equivalents at end of period
 
$
133,218

 
$
117,382

Supplemental disclosures:
 
 

 
 

Interest paid in cash
 
$
8,901

 
$
9,030

Income taxes paid in cash
 
$
2,294

 
$
912

 
See the accompanying Notes to Consolidated Financial Statements.

4

Table of Contents

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

1. General
 
The accompanying unaudited consolidated financial statements of DineEquity, Inc. (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2014.
 
The consolidated balance sheet at December 31, 2013 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, 2013.
 
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 of each year are referred to as ending on March 31, June 30, September 30 and December 31. The first quarter of fiscal 2014 began December 30, 2013 and ended on March 30, 2014; the first quarter of fiscal 2013 began December 31, 2012 and ended on March 31, 2013.
 
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, 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, and the valuation of 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.
 
3. Accounting Policies
 
Accounting Standards Adopted in the Current Fiscal Year
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The amendments in ASU 2013-04 require an entity to measure obligations resulting from joint and several liability arrangements as the amount the entity agreed to pay on the basis of the arrangement among its co-obligors plus the amount an entity expects to pay on behalf of co-obligors. ASU 2013-04 also requires an entity to disclose the nature, amount and other information about each obligation or group of similar obligations. The adoption of ASU 2013-04 as of January 1, 2014 did not have an impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. The adoption of ASU 2013-11 as of January 1, 2014 did not have a material impact on the Company's consolidated financial statements.




5

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

3. Accounting Policies (Continued)

Newly Issued Accounting Standards Not Yet Adopted

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in ASU 2014-08 change the criteria for the reporting of discontinued operations. Under ASU 2014-08, only disposals resulting in a strategic shift that will have a major effect on an entity's operations and financial results will be reported as discontinued operations. ASU 2014-08 also removes the requirement under current U.S. GAAP that an entity not have any significant continuing involvement in the operations of the component after disposal to qualify for reporting of the disposal as a discontinued operation. The Company will be required to apply the provisions of ASU 2014-08 prospectively to all disposals of components beginning with its first fiscal quarter of 2015. Early adoption is permitted for any disposal transaction not previously reported.

The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company or are not expected to have a material effect on the Company's consolidated financial statements as a result of future adoption.
 
4. Long-Term Debt
 
Long-term debt consisted of the following components:
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013
 
 
(In millions)
Senior Secured Credit Facility, due October 2017, at a variable interest rate of 3.75% as of March 31, 2014 and December 31, 2013
 
$
466.0

 
$
467.2

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

 
760.8

Discount
 
(18.9
)
 
(19.8
)
Total long-term debt
 
1,207.9

 
1,208.2

Less: current maturities
 
(4.7
)
 
(4.7
)
Long-term debt, less current maturities
 
$
1,203.2

 
$
1,203.5

 
For a description of the respective instruments, refer to Note 7 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Debt Modification Costs
 
In February 2013, the Company entered into Amendment No. 2 (“Amendment No. 2”) to the Credit Agreement under the Senior Secured Credit Facility (the “Credit Agreement”). For a description of Amendment No. 2, refer to Note 7 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Fees of $1.3 million paid to third parties in connection with Amendment No. 2 were included as “Debt modification costs” in the Consolidated Statement of Comprehensive Income for the three months ended March 31, 2013.

Compliance with Covenants and Restrictions
 
The Credit Agreement contains provisions considered customary for similar types of facilities that limit certain permitted restricted payments, including those related to dividends on and repurchases of the Company's common stock. The limitation on restricted payments under the Credit Agreement is calculated quarterly. Such restricted payments are limited to a cumulative amount comprised of (i) a general restricted payments allowance of $35.0 million, plus (ii) 50% of Excess Cash Flow (as defined in the Credit Agreement) for each fiscal quarter in which the consolidated leverage ratio is greater than or equal to 5.75:1; (iii) 75% of Excess Cash Flow for each fiscal quarter in which the consolidated leverage ratio is less than 5.75:1 and greater than or equal to 5.25:1; (iv) 100% of Excess Cash Flow for each fiscal quarter in which the consolidated leverage ratio is less than 5.25:1; and (v) proceeds from the exercise of stock options, less any amounts paid as dividends or to repurchase the Company's common stock. As of March 31, 2014, our permitted amount of future restricted payments under the Credit Agreement was approximately $120 million.


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Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

4. Long-Term Debt (Continued)

The Indenture under which the Senior Notes due October 2018 (the “Senior Notes”) were issued (the “Indenture”) also contains a limitation on restricted payments that is calculated on an annual basis. Such restricted payments are limited to a cumulative amount comprised of (i) 50% of consolidated net income (as defined in the Indenture), plus (ii) proceeds from exercise of stock options, less any amounts paid as dividends or to repurchase the Company's common stock. The permitted amount of future restricted payments under the Indenture, calculated as of December 31, 2013, was approximately $112 million.

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, 2014.
 
5. Stockholders' Equity

Dividends
 
In February 2014, the Company's Board of Directors approved payment of a first quarter 2014 cash dividend of $0.75 per share of common stock to the stockholders of record as of the close of business on March 14, 2014. The cash dividend totaling $14.3 million was paid on March 28, 2014. Payment of dividends is subject to limitations under both the Credit Agreement and the Indenture (see Note 4 - Long-Term Debt).

Stock Repurchase Program

In February 2013, the Company's Board of Directors approved a stock repurchase authorization of up to $100 million of DineEquity common stock. Under this program, the Company may repurchase shares on an opportunistic basis from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements, and other considerations. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time. During the three months ended March 31, 2014, the Company repurchased 178,528 shares of common stock at a cost of $15.0 million. As of March 31, 2014, the Company has repurchased under the current authorization a cumulative total of 590,550 shares of common stock at a total cost of $44.7 million. The Company may repurchase up to an additional $55.3 million of common stock under the outstanding Board authorization. Repurchases of common stock are subject to limitations under both the Credit Agreement and the Indenture (see Note 4 - Long-Term Debt).

Treasury Stock

Repurchases of DineEquity common stock are included in treasury stock at the cost of shares repurchased plus any transaction costs. Treasury stock may be re-issued when stock options are exercised, when restricted stock awards are granted and when restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is determined using the first-in, first-out (“FIFO”) method. During the three months ended March 31, 2014, the Company re-issued 307,556 treasury shares at a total FIFO cost of $11.1 million.

6. Income Taxes
 
The Company's effective tax rate was 38.2% for the three months ended March 31, 2014 as compared to 39.6% for the three months ended March 31, 2013. The effective tax rate in 2014 was lower compared to the same period of 2013 due to the tax provision in 2013 reflecting a higher amount of unrecognized tax benefits as a result of audits from taxing authorities.

 The total gross unrecognized tax benefit as of March 31, 2014 and December 31, 2013 was $2.8 million and $2.7 million, respectively, excluding interest, penalties and related tax benefits. The Company estimates the unrecognized tax benefit may decrease over the upcoming 12 months by an amount up to $0.9 million related to settlements with taxing authorities and the lapse of statutes of limitations. 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.


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Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

6. Income Taxes (Continued)

As of March 31, 2014, accrued interest was $3.1 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. As of December 31, 2013, accrued interest and penalties were $2.9 million and $0.1 million, respectively, excluding any related income tax benefits. The increase of $0.2 million of accrued interest is primarily related to an increase in unrecognized tax benefits as a result of recent audits by taxing authorities. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as a component of its income tax provision recognized in the Consolidated Statements of Comprehensive Income.

The Company files federal income tax returns and the Company or one of its subsidiaries files 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. In the second quarter of 2013, the Internal Revenue Service (“IRS”) issued a Revenue Agent’s Report (“RAR”) related to its examination of the Company’s U.S federal income tax return for the tax years 2008 to 2010. The Company disagrees with a portion of the proposed assessments and has contested them through the IRS administrative appeals procedures. We anticipate the appeals process to continue into 2014. The Company believes that adequate reserves have been provided relating to all matters contained in the tax periods open to examination.

7. Stock-Based Compensation
 
From time to time, the Company has granted nonqualified stock options, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and non-employee directors of the Company. Currently, the Company is authorized to grant nonqualified stock options, stock appreciation rights, restricted stock, cash-settled and stock-settled restricted stock units and performance units to officers, other employees and nonemployee directors under the DineEquity, Inc. 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan was approved by stockholders on May 17, 2011 and permits the issuance of up to 1,500,000 shares of the Company’s common stock. The 2011 Plan will expire in May 2021.
 
The nonqualified stock options generally vest ratably over a three-year period in one-third increments and have a term of ten years from the grant 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 from the grant date.

The following table summarizes the components of the Company’s stock-based compensation expense included in general and administrative expenses in the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
(In millions)
Total stock-based compensation expense:
 
 
 
 
Equity classified awards expense
 
$
3.2

 
$
3.2

Liability classified awards (credit) expense
 
(0.2
)
 
0.5

Total pre-tax stock-based compensation expense
 
3.0

 
3.7

Tax benefit
 
(1.1
)
 
(1.4
)
Total stock-based compensation expense, net of tax
 
$
1.9

 
$
2.3

 
As of March 31, 2014, total unrecognized compensation costs of $13.4 million related to restricted stock and restricted stock units and $5.8 million related to stock options are expected to be recognized over a weighted average period of 1.8 years for restricted stock and restricted stock units and 1.7 years for stock options.
 

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Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

7. Stock-Based Compensation (Continued)

Equity Classified Awards - Stock Options

The estimated fair value of the stock options granted during the three months ended March 31, 2014 was calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model:
 
Risk-free interest rate
1.57
%
Weighted average historical volatility
51.4
%
Dividend yield
3.68
%
Expected years until exercise
4.6

Forfeitures
11.0
%
Weighted average fair value of options granted
$27.02
 

Stock option balances as of March 31, 2014 and activity related to stock options for the three months ended March 31, 2014 were as follows:
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2013
 
775,059

 
$
42.09

 
 
 
 

Granted
 
117,424

 
81.57

 
 
 
 

Exercised
 
(221,725
)
 
29.87

 
 
 
 

Forfeited
 
(1,889
)
 
72.28

 
 
 
 

Outstanding at March 31, 2014
 
668,869

 
52.99

 
6.7
 
$
17,200,000

Vested at March 31, 2014 and Expected to Vest
 
634,658

 
51.77

 
6.6
 
$
17,000,000

Exercisable at March 31, 2014
 
451,812

 
$
44.17

 
5.6
 
$
15,300,000

 
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 2014 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, 2014. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock and the number of in-the-money options.

Equity Classified Awards - Restricted Stock and Restricted Stock Units

Outstanding balances as of March 31, 2014 and activity related to restricted stock and restricted stock units for the three months ended March 31, 2014 were as follows:
 
 
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
 
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2013
 
266,252

 
$
58.87
 
47,230

 
$
64.57

Granted
 
85,831

 
81.69
 
12,483

 
81.57

Released
 
(54,267
)
 
56.35
 
(14,784
)
 
72.28

Forfeited
 
(6,923
)
 
65.11
 

 

Outstanding at March 31, 2014
 
290,893

 
$
65.92
 
44,929

 
$
66.61



9

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

7. Stock-Based Compensation (Continued)

Liability Classified Awards - Restricted Stock Units

The Company previously had issued shares of cash-settled restricted stock units to members of the Board of Directors. Originally these instruments were expected to be settled in cash and were recorded as liabilities based on the closing price of the Company’s common stock as of each period end. In February 2013, it was determined that, pursuant to the terms of the Plan, these restricted stock units would be settled in shares of common stock and all outstanding restricted stock units were converted to equity classified awards. Prior to the conversion, for the three months ended March 31, 2013, $0.3 million was included in pre-tax stock-based compensation expense for the cash-settled restricted stock units.

Liability Classified Awards - Long-Term Incentive Awards
The Company has granted cash long-term incentive awards (“LTIP awards”) to certain employees. Annual LTIP awards vest over a three-year period and are determined using a multiplier from 0% to 200% of the target award based on the total shareholder return of DineEquity, Inc. common stock compared to the total shareholder returns of a peer group of companies. Although LTIP awards are both denominated and paid only in cash, because the multiplier is based on the price of the Company's common stock, the awards are considered stock-based compensation in accordance with U.S. GAAP and are liability classified awards. For the three months ended March 31, 2014 and 2013, a credit of $0.2 million and an expense of $0.2 million, respectively, were included in total stock-based compensation expense related to the LTIP awards. At March 31, 2014 and December 31, 2013, liabilities of $1.4 million and $2.8 million, respectively, related to LTIP awards were included as accrued employee compensation and benefits in the Consolidated Balance Sheets.

8. Segments
 
The Company has four reporting segments: franchise operations, company restaurant operations, rental operations and financing operations.
 
As of March 31, 2014, the franchise operations segment consisted of (i) 1,988 restaurants operated by Applebee’s franchisees in the United States, one U.S. territory and 14 countries outside the United States; and (ii) 1,617 restaurants operated by IHOP franchisees and area licensees in the United States, two U.S. territories and nine countries outside the United States. Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products to franchisees (primarily pancake and waffle dry mixes for the IHOP restaurants), IHOP franchise advertising fees and the portion of the franchise fees allocated to IHOP and Applebee's intellectual property.  Franchise operations expenses include IHOP advertising expenses, the cost of IHOP proprietary products, IHOP and Applebee's pre-opening training expenses and other franchise-related costs.
 
At March 31, 2014, the company restaurant operations segment consisted of 23 Applebee’s company-operated restaurants and 10 IHOP company-operated restaurants, all of which are located in the United States. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, 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 from capital leases on franchisee-operated restaurants. 
Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases and sales of equipment associated with refranchised IHOP restaurants. Financing expenses are primarily the cost of restaurant equipment associated with refranchised IHOP restaurants.
 

10

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

8. Segments (Continued)

Information on segments and a reconciliation to net income before income taxes for the three months ended March 31, 2014 and 2013 were as follows:
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
(In millions)
Revenues (all from external customers)
 
 
 
 
Franchise operations
 
$
115.5

 
$
111.9

Company restaurants
 
16.3

 
16.5

Rental operations
 
30.7

 
31.0

Financing operations
 
4.7

 
3.8

Total
 
$
167.2

 
$
163.2

Interest expense
 
 
 
 
Company restaurants
 
$
0.1

 
$
0.1

Rental operations
 
3.9

 
4.1

Corporate
 
25.0

 
25.3

Total
 
$
29.0

 
$
29.5

Depreciation and amortization
 
 
 
 
Franchise operations
 
$
2.6

 
$
2.8

Company restaurants
 
0.5

 
0.5

Rental operations
 
3.4

 
3.4

Corporate
 
2.3

 
2.1

Total
 
$
8.8

 
$
8.8

Income before income taxes
 
 
 
 
Franchise operations
 
$
86.1

 
$
83.7

Company restaurants
 
(0.0
)
 
0.2

Rental operations
 
6.9

 
6.7

Financing operations
 
4.1

 
3.8

Corporate
 
(63.4
)
 
(64.2
)
Total
 
$
33.7

 
$
30.2


9. Net Income per Share

The computation of the Company's basic and diluted net income per share for the three months ended March 31, 2014 and 2013 was as follows:
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
 
(In thousands, except per share data)
Numerator for basic and dilutive income per common share:
 
 
 
 
Net income
 
$
20,824

 
$
18,239

Less: Net income allocated to unvested participating restricted stock
 
(343
)
 
(329
)
Net income available to common stockholders - basic
 
20,481

 
17,910

Effect of unvested participating restricted stock in two-class calculation
 
2

 
1

Net income available to common stockholders - diluted
 
$
20,483

 
$
17,911

Denominator:
 
 
 
 
Weighted average outstanding shares of common stock - basic
 
18,794

 
18,911

Dilutive effect of stock options
 
260

 
282

Weighted average outstanding shares of common stock - diluted
 
19,054

 
19,193

Net income per common share:
 
 
 
 
Basic
 
$
1.09

 
$
0.95

Diluted
 
$
1.08

 
$
0.93



11

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

10. Fair Value Measurements
The Company does not have a material amount of financial assets or liabilities that are required under U.S. GAAP to be measured on a recurring basis at fair value. The Company is not a party to any derivative financial instruments. The Company does not have a material amount of non-financial assets or non-financial liabilities that are required under U.S. GAAP to be measured at fair value on a recurring basis. The Company has not elected to use the fair value measurement option, as permitted 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 their carrying amounts due to their short duration.
 
The fair values of non-current financial liabilities at March 31, 2014 and December 31, 2013, determined based on Level 2 inputs, were as follows:
 
 
March 31, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
(In millions)
Long-term debt, less current maturities
 
$
1,203.2

 
$
1,294.4

 
$
1,203.5

 
$
1,306.2

 
11. Commitments and Contingencies
 
Litigation, Claims and Disputes
 
The Company is subject to various lawsuits, administrative proceedings, audits, and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The Company is required under U.S. GAAP to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of the Company's litigation are expensed as such fees and expenses are incurred. Management regularly assesses the Company's insurance coverage, analyzes litigation information with the Company's attorneys and evaluates the Company's loss experience in connection with pending legal proceedings. While the Company does not presently believe that any of the legal proceedings to which it is currently a party will ultimately have a material adverse impact on the Company, there can be no assurance that the Company will prevail in all the proceedings the Company is party to, or that the Company will not incur material losses from them.

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 has potential continuing liability for lease payments totaling $405.1 million as of March 31, 2014. This amount represents the maximum potential liability for future payments under these leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from 2014 through 2048. In the event of default, the indemnity and default clauses in the sale or assignment agreements govern the Company's ability to pursue and recover damages incurred.  No material liabilities have been recorded as of March 31, 2014.

Contingencies

In February 2013, an IHOP franchisee and its affiliated entities which owned and operated 19 restaurants located in the states of Illinois, Wisconsin and Missouri filed for bankruptcy protection. As a result of an order issued by the bankruptcy court, two of the 19 restaurants were returned to the Company in the third quarter of 2013. A non-cash charge of $0.5 million was recorded in the Consolidated Statement of Comprehensive Income against deferred rental revenue associated with the leases for those two restaurants. During the third quarter of 2013, the Company received favorable rulings from the bankruptcy court which, if upheld, would allow the Company to transfer the remaining 17 restaurants to another franchisee. These rulings have been appealed by the current franchisee and are presently subject to a stay, pursuant to which the current franchisee is operating these restaurants only on a day-to-day basis and is continuing to make payments to the Company pursuant to the terms of the original franchise agreements.


12

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

12.  Consolidating Financial Information
 
Certain of the Company's subsidiaries have guaranteed the Company's obligations under the Senior Secured Credit Facility. The following presents the condensed consolidating financial information separately for: (i) the parent Company, the issuer of the guaranteed obligations; (ii) the guarantor subsidiaries, on a combined basis, as specified in the Credit Agreement; (iii) the non-guarantor subsidiaries, on a combined basis; (iv) consolidating eliminations and reclassifications; and (v) DineEquity, Inc. and Subsidiaries on a consolidated basis.
 
Each guarantor subsidiary is 100% owned by the Company at the date of each balance sheet presented. The notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary. Each entity in the consolidating financial information follows the same accounting policies as described in Note 2 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
 
Supplemental Condensed Consolidating Balance Sheet
March 31, 2014
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations and
Reclassification
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Current Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
65.8

 
$
66.8

 
$
0.6

 
$

 
$
133.2

Receivables, net
 
3.1

 
96.2

 
0.1

 
(8.0
)
 
91.5

Prepaid expenses and other current assets
 
197.6

 
49.7

 

 
(199.7
)
 
47.7

Deferred income taxes
 
(3.7
)
 
30.2

 

 

 
26.5

Intercompany
 
(425.8
)
 
419.6

 
6.2

 

 

Total current assets
 
(163.0
)
 
662.6

 
6.9

 
(207.7
)
 
298.9

Long-term receivables
 

 
194.1

 

 

 
194.1

Property and equipment, net
 
22.7

 
241.1

 
1.0

 

 
264.9

Goodwill
 

 
697.5

 

 

 
697.5

Other intangible assets, net
 

 
791.0

 

 

 
791.0

Other assets, net
 
15.5

 
93.5

 

 

 
109.0

Investment in subsidiaries
 
1,697.6

 

 

 
(1,697.6
)
 

Total assets
 
$
1,572.8

 
$
2,679.8

 
$
8.0

 
$
(1,905.2
)
 
$
2,355.2

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
 
$
12.7

 
$

 
$

 
$
(8.0
)
 
$
4.7

Accounts payable
 
1.3

 
38.6

 

 

 
39.9

Accrued employee compensation and benefits
 
5.5

 
4.6

 

 

 
10.1

Gift card liability
 

 
111.0

 

 

 
111.0

Other accrued expenses
 
28.5

 
251.3

 
(0.1
)
 
(199.7
)
 
80.1

Total current liabilities
 
47.9

 
405.6

 

 
(207.7
)
 
245.8

Long-term debt
 
1,203.2

 

 

 

 
1,203.2

Financing obligations
 

 
46.8

 

 

 
46.8

Capital lease obligations
 

 
108.5

 

 

 
108.5

Deferred income taxes
 
(2.9
)
 
337.3

 
(0.3
)
 

 
334.2

Other liabilities
 
6.1

 
91.5

 
0.9

 

 
98.5

Total liabilities
 
1,254.4

 
989.8

 
0.6

 
(207.7
)
 
2,037.1

Total stockholders’ equity
 
318.4

 
1,690.0

 
7.4

 
(1,697.6
)
 
318.2

Total liabilities and stockholders’ equity
 
$
1,572.8

 
$
2,679.8

 
$
8.0

 
$
(1,905.2
)
 
$
2,355.2

(1) Supplemental condensed statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands.

13

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

12. Consolidating Financial Information (Continued)



Supplemental Condensed Consolidating Balance Sheet
December 31, 2013
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations  and
Reclassification
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Current Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
50.3

 
$
54.7

 
$
1.0

 
$

 
$
106.0

Receivables, net
 
2.0

 
150.0

 
0.1

 
(8.0
)
 
144.1

Prepaid expenses and other current assets
 
189.2

 
56.1

 

 
(187.7
)
 
57.6

Deferred income taxes
 
(4.1
)
 
28.0

 

 

 
23.9

Intercompany
 
(435.2
)
 
429.4

 
5.8

 

 

Total current assets
 
(197.8
)
 
718.1

 
7.0

 
(195.7
)
 
331.6

Long-term receivables
 

 
197.2

 

 

 
197.2

Property and equipment, net
 
23.5

 
249.7

 
1.0

 

 
274.3

Goodwill
 

 
697.5

 

 

 
697.5

Other intangible assets, net
 

 
794.1

 

 

 
794.1

Other assets, net
 
16.2

 
93.9

 

 

 
110.1

Investment in subsidiaries
 
1,697.6

 

 

 
(1,697.6
)
 

Total assets
 
$
1,539.5

 
$
2,750.4

 
$
8.0

 
$
(1,893.3
)
 
$
2,404.6

Liabilities and Stockholders’ Equity
 
 

 
 

 
 

 
 

 
 

Current Liabilities:
 
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
 
$
12.7

 
$

 
$

 
$
(8.0
)
 
$
4.7

Accounts payable
 
1.4

 
38.6

 

 

 
40.1

Accrued employee compensation and benefits
 
14.5

 
10.4

 

 

 
25.0

Gift card liability
 

 
172.0

 

 

 
172.0

Other accrued expenses
 
(13.7
)
 
244.1

 

 
(187.7
)
 
42.6

Total current liabilities
 
15.0

 
465.0

 

 
(195.7
)
 
284.3

Long-term debt
 
1,203.5

 

 

 

 
1,203.5

Financing obligations
 

 
48.8

 

 

 
48.8

Capital lease obligations
 

 
111.7

 

 

 
111.7

Deferred income taxes
 
(0.3
)
 
342.1

 
(0.3
)
 

 
341.6

Other liabilities
 
5.9

 
92.7

 
0.9

 

 
99.5

Total liabilities
 
1,224.2

 
1,060.4

 
0.6

 
(195.7
)
 
2,089.5

Total stockholders’ equity
 
315.3

 
1,690.0

 
7.4

 
(1,697.6
)
 
315.2

Total liabilities and stockholders’ equity
 
$
1,539.5

 
$
2,750.4

 
$
8.0

 
$
(1,893.3
)
 
$
2,404.6

(1) Supplemental condensed statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands.











14

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

12. Consolidating Financial Information (Continued)

Supplemental Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2014
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations  and
Reclassification
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Franchise and restaurant revenues
 
$
0.7

 
$
130.8

 
$
0.3

 
$

 
$
131.8

Rental revenues
 

 
30.8

 

 

 
30.7

Financing revenues
 

 
4.7

 

 

 
4.7

Total revenue
 
0.7

 
166.3

 
0.3

 

 
167.2

Franchise and restaurant expenses
 
0.7

 
45.0

 

 

 
45.7

Rental expenses
 

 
23.9

 

 

 
23.8

Financing expenses
 

 
0.6

 

 

 
0.6

General and administrative expenses
 
9.2

 
24.9

 
0.1

 

 
34.2

Interest expense
 
24.6

 
0.4

 

 

 
25.0

Amortization of intangible assets
 

 
3.1

 

 

 
3.1

Closure and impairment charges
 

 
0.1

 
0.1

 

 
0.2

Loss on disposition of assets
 

 
0.9

 

 

 
0.9

Intercompany dividend
 
(46.8
)
 

 

 
46.8

 

Income before income taxes
 
12.9

 
67.5

 
0.1

 
(46.8
)
 
33.7

Benefit (provision) for income taxes
 
7.9

 
(20.8
)
 

 

 
(12.9
)
Net income
 
$
20.8

 
$
46.8

 
$
0.1

 
$
(46.8
)
 
$
20.8

Total comprehensive income
 
$
20.8

 
$
46.8

 
$
0.1

 
$
(46.8
)
 
$
20.8

  (1) Supplemental condensed statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands.

Supplemental Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2013
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations  and
Reclassification
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Franchise and restaurant revenues
 
$
0.7

 
$
127.3

 
$
0.3

 
$

 
$
128.3

Rental revenues
 

 
31.0

 

 

 
31.0

Financing revenues
 

 
3.8

 

 

 
3.8

Total revenue
 
0.7

 
162.1

 
0.3

 

 
163.2

Franchise and restaurant expenses
 
0.8

 
43.6

 

 

 
44.5

Rental expenses
 

 
24.3

 

 

 
24.3

General and administrative expenses
 
9.2

 
24.5

 
0.3

 

 
34.0

Interest expense
 
25.0

 
0.3

 

 

 
25.3

Amortization of intangible assets
 

 
3.1

 

 

 
3.1

Closure and impairment charges
 

 
0.7

 
0.1

 

 
0.8

Gain on disposition of assets
 

 
(0.1
)
 
(0.3
)
 

 
(0.3
)
Debt modification costs
 
1.3

 

 

 

 
1.3

Intercompany dividend
 
(39.8
)
 

 

 
39.8

 

Income before income taxes
 
4.2

 
65.7

 
0.1

 
(39.8
)
 
30.2

Benefit (provision) for income taxes
 
14.1

 
(26.0
)
 

 

 
(12.0
)
Net income
 
$
18.2

 
$
39.7

 
$
0.1

 
$
(39.8
)
 
$
18.2

Total comprehensive income
 
$
18.2

 
$
39.7

 
$
0.1

 
$
(39.8
)
 
$
18.2

(1) Supplemental condensed statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands.

15

Table of Contents
DineEquity, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

12. Consolidating Financial Information (Continued)

 Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2014
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations  and
Reclassification
 
Consolidated
Cash flows provided by (used in) operating activities
 
$
(22.8
)
 
$
75.6

 
$

 
$

 
$
52.8

Investing cash flows:
 
 
 
 
 
 
 
 
 
 
Additions to property and equipment
 
(1.3
)
 
(0.7
)
 

 

 
(2.0
)
Principal receipts from long-term receivables
 

 
3.4

 

 

 
3.4

Proceeds from sale of assets
 

 
0.7

 

 

 
0.7

Other
 

 
(0.1
)
 

 

 
(0.1
)
Cash flows provided by (used in) investing activities
 
(1.3
)
 
3.3

 

 

 
2.0

Financing cash flows:
 
 
 
 
 
 
 
 
 
 
Payment of debt
 
(1.2
)
 
(2.7
)
 

 

 
(3.9
)
Repurchase of common stock
 
(15.0
)
 

 

 

 
(15.0
)
Dividends paid on common stock
 
(14.3
)
 

 

 

 
(14.3
)
Restricted cash
 

 
(3.7
)
 

 

 
(3.7
)
Other
 
9.2

 
0.1

 

 

 
9.2

Intercompany transfers
 
60.9

 
(60.5
)
 
(0.4
)
 

 

Cash flows provided by (used in) financing activities
 
39.6

 
(66.9
)
 
(0.4
)
 

 
(27.6
)
Net change
 
15.5

 
12.1

 
(0.4
)
 

 
27.2

Beginning cash and equivalents
 
50.3

 
54.7

 
1.0

 

 
106.0

Ending cash and equivalents
 
$
65.8

 
$
66.8

 
$
0.6

 
$

 
$
133.2

(1) Supplemental condensed statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands.

Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2013
(In millions(1))
 
 
Parent
 
Combined
Guarantor
Subsidiaries
 
Combined
Non-guarantor
Subsidiaries
 
Eliminations  and
Reclassification
 
Consolidated
Cash flows provided by (used in) operating activities
 
$
(14.5
)
 
$
85.5

 
$
0.2

 
$

 
$
71.2

Investing cash flows:
 
 
 
 
 
 
 
 
 
 
Additions to property and equipment
 
(0.9
)
 
(0.6
)
 

 

 
(1.5
)
Principal receipts from long-term receivables
 

 
3.8

 

 

 
3.8

Other
 

 
0.1

 

 

 
0.1

Cash flows provided by (used in) investing activities
 
(0.9
)
 
3.3

 

 

 
2.4

Financing cash flows:
 
 
 
 
 
 
 
 
 
 
Payment of debt
 
(1.2
)
 
(2.5
)
 

 

 
(3.7
)
Payment of debt modification costs
 
(1.3
)
 

 

 

 
(1.3
)
Dividends paid on common stock
 
(14.5
)
 

 

 

 
(14.5
)
Restricted cash
 

 
(2.7
)
 

 

 
(2.7
)
Other
 
1.3

 
0.1

 

 

 
1.4

Intercompany transfers
 
74.0

 
(74.0
)
 

 

 

Cash flows provided by (used in) financing activities
 
58.2

 
(79.0
)
 

 

 
(20.8
)
Net change
 
42.9

 
9.7

 
0.2

 

 
52.8

Beginning cash and equivalents
 
9.9

 
54.0

 
0.6

 

 
64.5

Ending cash and equivalents
 
$
52.8

 
$
63.7

 
$
0.9

 
$

 
$
117.4

(1) Supplemental condensed statements presented in millions may not foot/crossfoot due to rounding from Consolidated Statements presented in thousands.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements
 
Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in our most recent Annual Report on Form 10-K, 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 the Company assumes no obligation to update or supplement any forward-looking statements.

You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report.
 
Overview
 
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Except where the context indicates otherwise, the words “we,” “us,” “our” and the “Company” refer to DineEquity, Inc., together with its subsidiaries that are consolidated in accordance with United States generally accepted accounting principles (“U.S. GAAP”).
 
Through various subsidiaries we own, franchise and operate two restaurant concepts: Applebee's Neighborhood Grill & Bar® (“Applebee's®”), in the bar and grill segment within the casual dining category of the restaurant industry, and International House of Pancakes® (“IHOP®”), in the family dining category of the restaurant industry. References herein to Applebee's and IHOP restaurants are to these two restaurant concepts, whether operated by franchisees, area licensees or by us. Over 99% of our 3,638 restaurants are franchised. We have 33 company-operated restaurants primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models. In addition, from time to time we may also operate, on a temporary basis until refranchised, IHOP restaurants that we reacquire for a variety of reasons from IHOP franchisees. There were no such restaurants included as company-operated restaurants as of March 31, 2014.
 
Domestically, Applebee's restaurants are located in every state except Hawaii, while IHOP restaurants are located in all 50 states and the District of Columbia. Internationally, Applebee's restaurants are located in one United States territory and 14 foreign countries; IHOP restaurants are located in two United States territories and nine foreign countries. With over 3,600 restaurants combined, we believe we are one of the largest full-service restaurant companies in the world.

Key Performance Indicators

In evaluating the performance of each concept, we consider the key performance indicators to be net franchise restaurant development and the percentage change in domestic system-wide same-restaurant sales. Since we are a 99% franchised company, expanding the number of franchise restaurants is an important driver of revenue growth because we currently do not plan to open any new Applebee's or IHOP company-operated restaurants. Revenue from our rental and financing operations, legacies from the IHOP business model we operated under prior to 2003, is subject to a progressive decline over time as interest-earning balances are repaid. Growth in both the number of franchise restaurants and sales at those restaurants will drive franchise revenues in the form of higher royalty revenues, additional franchise fees and, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix.
   

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An overview of these key performance indicators for the three months ended March 31, 2014 is as follows:
 
 
Three Months Ended
 
 
March 31, 2014
 
 
Applebee's
 
IHOP
Percentage (decrease) increase in domestic system-wide same-restaurant sales
 
(0.5)%
 
3.9%
Net franchise restaurant development(1)
 
 
10
___________________________________
(1) Franchise and area license openings, net of closings
IHOP's increase of 3.9% in domestic system-wide restaurant sales for three months ended March 31, 2014 was the fourth consecutive quarterly increase in domestic system-wide restaurant sales. The increase resulted from a higher average customer check partially offset by a slight decrease in customer traffic. IHOP significantly outperformed the overall restaurant industry as well as the family dining segment in this metric for the three months ended March 31, 2014. Based on data from Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), same-restaurant sales decreased for both the overall restaurant industry and the family dining segment during the first quarter of 2014.
Applebee's domestic system-wide restaurant sales for three months ended March 31, 2014 decreased 0.5% as a decline in customer traffic was partially offset by an increase in average customer check. Applebee's performance was in line with that of the overall restaurant industry as well of as the casual dining segment, both of which decreased during the first quarter of 2014 based on data from Black Box.
During the three months ended March 31, 2014, Applebee's opened eight new restaurants while IHOP franchisees and area licensees opened 14 new restaurants. Applebee's franchisees closed eight restaurants during that time period, resulting in no net franchise restaurant growth. The closures were unrelated as each restaurant was closed by a different Applebee's franchisee. In addition to the 14 IHOP franchise restaurant openings, three restaurants that had been temporarily operated by us were refranchised to new owners. IHOP franchisees closed seven restaurants, resulting in net growth of 10 franchise restaurants. Of the seven IHOP closures, two were closed by the same franchisee and the other five were closed by different franchisees.
In 2014, we expect both IHOP and Applebee's franchisees to each open a total of between 40 to 50 new restaurants. The majority of openings for each brand are expected to be in domestic markets.
The actual number of openings may differ from both our expectations and development commitments. Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be developed due to various factors, including economic conditions and franchisee noncompliance with development agreements. The timing of new restaurant openings also may be affected by various factors including weather-related and other construction delays, difficulties in obtaining timely regulatory approvals and the impact of currency fluctuations on our international franchisees.

In evaluating the performance of the consolidated enterprise, we consider the key performance indicators to be
consolidated cash flows from operating activities and consolidated free cash flow (cash from operations, plus receipts from
notes, equipment contracts and other long-term receivables, minus capital expenditures, principal payments on capital leases
and financing obligations and the mandatory annual repayment of 1% of the principal balance of our Term Loans).

Consolidated cash flows from operating activities and consolidated free cash flow for the three months ended March 31, 2014 and 2013 were as follows:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Consolidated cash flows from operating activities
$
52.8

 
$
71.2

Consolidated free cash flow
$
50.3

 
$
69.8

Additional detail on each of our key performance indicators is presented under the captions “Restaurant Development Activity,” “Restaurant Data,” and “Liquidity and Capital Resources” that follow.

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Capital Allocation Strategy

In February 2013, our Board of Directors approved a capital allocation strategy that incorporates the return of a significant portion of our free cash flow to our stockholders. In conjunction therewith, the Board of Directors approved an authorization to repurchase up to $100 million of our common stock. Pursuant to that strategy, during the three months ended March 31, 2014 we declared and paid a quarterly cash dividend of $0.75 per share of our common stock totaling $14.3 million. We also repurchased 178,528 shares of our common stock at a total cost of $15.0 million during this period. As of March 31, 2014 we may repurchase up to an additional $55.3 million of common stock under the current authorization.