10-Q
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 September 30, 2015
 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 (Address of principal executive offices)
 
91203-1903 (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 October 23, 2015
Common Stock, $0.01 par value
 
18,633,603
 


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)
Assets
 
September 30,
2015
 
December 31, 2014
 
 
(Unaudited)
 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
105,886

 
$
104,004

Receivables, net
 
91,085

 
153,498

Restricted cash
 
42,226

 
52,262

Prepaid gift card costs
 
41,140

 
51,268

Deferred income taxes
 
35,488

 
30,860

Prepaid income taxes
 
2,805

 
11,753

Other current assets
 
5,548

 
9,239

Total current assets
 
324,178

 
412,884

Long-term receivables, net
 
164,910

 
180,856

Property and equipment, net
 
226,234

 
241,229

Goodwill
 
697,470

 
697,470

Other intangible assets, net
 
775,128

 
782,336

Deferred rent receivable
 
90,531

 
91,117

Other non-current assets, net
 
39,835

 
42,216

Total assets
 
$
2,318,286

 
$
2,448,108

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
32,226

 
$
41,771

Gift card liability
 
105,559

 
179,760

Accrued employee compensation and benefits
 
20,767

 
25,722

Dividends payable
 
16,408

 
16,635

Current maturities of capital lease and financing obligations
 
15,386

 
14,852

Accrued advertising
 
8,495

 
10,150

Accrued interest payable
 
3,851

 
14,126

Other accrued expenses
 
7,168

 
10,033

Total current liabilities
 
209,860

 
313,049

Long-term debt
 
1,300,000

 
1,300,000

Capital lease obligations, less current maturities
 
88,384

 
98,119

Financing obligations, less current maturities
 
42,428

 
42,524

Deferred income taxes
 
307,562

 
319,111

Deferred rent payable
 
73,387

 
75,375

Other non-current liabilities
 
21,355

 
20,857

Total liabilities
 
2,042,976

 
2,169,035

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value, shares: 40,000,000 authorized; September 30, 2015 - 25,194,889 issued, 18,735,014 outstanding; December 31, 2014 - 25,240,055 issued, 18,953,567 outstanding
 
252

 
252

 Additional paid-in-capital
 
284,787

 
279,946

 Retained earnings
 
343,621

 
313,644

 Accumulated other comprehensive loss
 
(99
)
 
(73
)
Treasury stock, at cost; shares: September 30, 2015 - 6,459,875; December 31, 2014 - 6,286,488
 
(353,251
)
 
(314,696
)
Total stockholders’ equity
 
275,310

 
279,073

Total liabilities and stockholders’ equity
 
$
2,318,286

 
$
2,448,108


 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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 

 
 

 
 
 
 
Franchise and restaurant revenues
 
$
128,188

 
$
129,334

 
$
407,774

 
$
387,573

Rental revenues
 
31,221

 
30,761

 
93,755

 
92,223

Financing revenues
 
3,028

 
2,758

 
8,271

 
10,779

Total revenues
 
162,437

 
162,853

 
509,800

 
490,575

Cost of revenues:
 
 

 
 

 
 
 
 
Franchise and restaurant expenses
 
41,984

 
47,570

 
145,433

 
135,403

Rental expenses
 
23,264

 
23,654

 
70,073

 
71,173

Financing expenses
 
504

 

 
516

 
825

Total cost of revenues
 
65,752

 
71,224

 
216,022

 
207,401

Gross profit
 
96,685

 
91,629

 
293,778

 
283,174

General and administrative expenses
 
41,577

 
33,835

 
110,384

 
102,836

Interest expense
 
15,434

 
24,984

 
46,757

 
74,895

Amortization of intangible assets
 
2,500

 
3,071

 
7,500

 
9,212

Closure and impairment charges, net
 
(72
)
 
192

 
2,230

 
1,029

Loss on extinguishment of debt
 

 
1

 

 
13

(Gain) loss on disposition of assets
 
(2,351
)
 
(205
)
 
(2,294
)
 
592

Income before income tax provision
 
39,597

 
29,751

 
129,201

 
94,597

Income tax provision
 
(15,340
)
 
(10,864
)
 
(49,635
)
 
(35,719
)
Net income
 
24,257

 
18,887

 
79,566

 
58,878

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Adjustment to unrealized loss on available-for-sale investments
 

 

 

 
107

Foreign currency translation adjustment
 
(14
)
 
(9
)
 
(26
)
 
(8
)
Total comprehensive income
 
$
24,243

 
$
18,878

 
$
79,540

 
$
58,977

Net income available to common stockholders:
 
 
 
 

 
 
 
 
Net income
 
$
24,257

 
$
18,887

 
$
79,566

 
$
58,878

Less: Net income allocated to unvested participating restricted stock
 
(316
)
 
(279
)
 
(1,042
)
 
(927
)
Net income available to common stockholders
 
$
23,941

 
$
18,608

 
$
78,524

 
$
57,951

Net income available to common stockholders per share:
 
 

 
 

 
 
 
 
Basic
 
$
1.29

 
$
0.99

 
$
4.19

 
$
3.09

Diluted
 
$
1.28

 
$
0.99

 
$
4.16

 
$
3.06

Weighted average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
18,573

 
18,703

 
18,737

 
18,757

Diluted
 
18,706

 
18,890

 
18,874

 
18,964

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.875

 
$
0.75

 
$
2.625

 
$
2.25

Dividends paid per common share
 
$
0.875

 
$
0.75

 
$
2.625

 
$
2.25

 


See the accompanying Notes to Consolidated Financial Statements.

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Table of Contents

DineEquity, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net income
 
$
79,566

 
$
58,878

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

 
 

Depreciation and amortization
 
24,134

 
26,237

Non-cash interest expense
 
2,292

 
5,021

Deferred income taxes
 
(15,388
)
 
(21,947
)
Non-cash stock-based compensation expense
 
6,312

 
7,432

Tax benefit from stock-based compensation
 
4,850

 
4,008

Excess tax benefit from stock-based compensation
 
(4,577
)
 
(4,635
)
Closure and impairment charges
 
2,230

 
1,029

(Gain) loss on disposition of assets
 
(2,294
)
 
592

Other
 
(1,303
)
 
(2,184
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable, net
 
(95
)
 
(7,085
)
Current income tax receivables and payables
 
8,579

 
19,975

Gift card receivables and payables
 
(11,816
)
 
(14,353
)
Prepaid expenses and other current assets
 
(3,304
)
 
(2,189
)
Accounts payable
 
2,147

 
6,848

Accrued employee compensation and benefits
 
(4,915
)
 
(7,674
)
Accrued interest payable
 
(10,275
)
 
18,043

Other current liabilities
 
(5,554
)
 
14,431

Cash flows provided by operating activities
 
70,589

 
102,427

Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(5,765
)
 
(5,530
)
Proceeds from sale of property and equipment
 
10,782

 
681

Principal receipts from notes, equipment contracts and other long-term receivables
 
16,498

 
10,252

Other
 
(274
)
 
1

Cash flows provided by investing activities
 
21,241

 
5,404

Cash flows from financing activities:
 
 
 
 

Repayment of long-term debt
 

 
(3,600
)
Principal payments on capital lease and financing obligations
 
(9,711
)
 
(8,484
)
Repurchase of DineEquity common stock
 
(50,010
)
 
(30,006
)
Dividends paid on common stock
 
(49,786
)
 
(42,733
)
Tax payments for restricted stock upon vesting
 
(3,389
)
 
(2,931
)
Proceeds from stock options exercised
 
8,426

 
7,392

Excess tax benefit from stock-based compensation
 
4,577

 
4,635

Change in restricted cash
 
10,036

 
(4,948
)
Other
 
(91
)
 
(308
)
Cash flows used in financing activities
 
(89,948
)
 
(80,983
)
Net change in cash and cash equivalents
 
1,882

 
26,848

Cash and cash equivalents at beginning of period
 
104,004

 
106,011

Cash and cash equivalents at end of period
 
$
105,886

 
$
132,859

Supplemental disclosures:
 
 

 
 

Interest paid in cash
 
$
64,094

 
$
62,369

Income taxes paid in cash
 
$
51,794

 
$
34,372

 
See the accompanying Notes to Consolidated Financial Statements.

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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” or “DineEquity”) 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 nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2015.
 
The consolidated balance sheet at December 31, 2014 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, 2014.
 
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 2015 began on December 29, 2014 and ended on March 29, 2015; the second and third quarters of fiscal 2015 ended on June 28, 2015 and September 27, 2015, respectively. The first quarter of fiscal 2014 began on December 30, 2013 and ended on March 30, 2014; the second and third quarters of fiscal 2014 ended on June 29, 2014 and September 28, 2014, respectively.
 
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
 
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates in the calculation and assessment of reported or disclosed amounts include: (a) impairment of tangible assets, goodwill and other intangible assets, (b) income taxes, (c) allowance for doubtful accounts and notes receivables, (d) lease accounting estimates, (e) stock-based compensation and (f) contingencies. On an ongoing basis, the Company evaluates its estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
 
3. Accounting Policies
 
Accounting Standards Adopted in the Current Fiscal Year
 
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance on the reporting of discontinued operations. The amendment changed the criteria for the reporting of discontinued operations such that 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. The amendment also removed the requirement 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 adopted the amendment as of January 1, 2015 and adoption did not have an impact on the Company’s consolidated financial statements.

Newly Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued new accounting guidance on revenue recognition, which provides for a single, five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. In August 2015, the FASB deferred the effective date of the new guidance by one year such that the Company will be required to adopt the guidance beginning with its first fiscal quarter of 2018.


5

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

3. Accounting Policies (Continued)

This new guidance supersedes nearly all of the existing general revenue recognition guidance under U.S. GAAP as well as most industry-specific revenue recognition guidance, including guidance with respect to revenue recognition by franchisors. The Company believes the recognition of the majority of its revenues, including franchise royalty revenues, sales of IHOP pancake and waffle dry mix and retail sales at company-operated restaurants will not be affected by the new guidance. Additionally, lease rental revenues are not within the scope of the new guidance. The Company is currently evaluating the impact of the new guidance on its financial statements and related disclosures and which method of adoption will be used.
 
In April 2015, the FASB issued an amendment that modifies the presentation of debt issuance costs. The amendment requires debt issuance costs be presented in the balance sheet as a direct reduction of the related debt liability rather than as an asset. The amendment is effective commencing with the Company's first fiscal quarter of 2016 and is required to be applied on a retrospective basis. As the amendment does not change the underlying accounting for debt issuance costs, adoption of this standard is not expected to have a material effect on the Company's consolidated financial statements.

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. Stockholders' Equity

Dividends
 
During the nine months ended September 30, 2015, the Company paid dividends on common stock of $49.8 million, representing the dividends declared in the fourth quarter of 2014 and the first and second quarters of 2015. On July 30, 2015, the Company's Board of Directors declared a third quarter 2015 cash dividend of $0.875 per share of common stock. This dividend was paid on October 9, 2015 to the Company's stockholders of record at the close of business on September 11, 2015. The Company reported a payable for this dividend of $16.4 million at September 30, 2015.

On October 1, 2015, the Company's Board of Directors approved a 5% increase in the Company's quarterly cash dividend to $0.92 per share of common stock. This fourth quarter 2015 dividend will be paid on January 8, 2016 to stockholders of record at the close of business on December 11, 2015.

Stock Repurchase Program

In October 2014, the Company's Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $100 million of DineEquity common stock (the “$100MM Repurchase Program”) 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 $100MM Repurchase Program, as approved by the Board of Directors, did not require the repurchase of a specific number of shares and could be terminated at any time. During the nine months ended September 30, 2015, the Company repurchased 489,504 shares of common stock at a cost of $50.0 million under the $100MM Repurchase Program. As of September 30, 2015, the Company has repurchased a cumulative total of 509,839 shares of common stock under the $100MM Repurchase Program at a total cost of $52.0 million. As of September 30, 2015, a total of $48.0 million was remaining under the $100MM Repurchase Program.

On October 1, 2015, the Company's Board of Directors terminated the $100MM Repurchase Program and approved a new stock repurchase program authorizing the Company to repurchase up to $150 million of DineEquity common stock.

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 nine months ended September 30, 2015, the Company re-issued 316,117 treasury shares at a total FIFO cost of $11.5 million.


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

5. Income Taxes
 
The Company's effective tax rate was 38.4% for the nine months ended September 30, 2015 as compared to 37.8% for the nine months ended September 30, 2014. The effective tax rate in 2014 was lower due to the timing of a favorable state return-to-provision adjustment which was recorded in the third quarter of 2014.

 The total gross unrecognized tax benefit as of September 30, 2015 and December 31, 2014 was $3.8 million and $3.4 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 $1.2 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.

As of September 30, 2015, accrued interest was $4.7 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. As of December 31, 2014, accrued interest was $3.9 million and accrued penalties were less than $0.1 million, excluding any related income tax benefits. 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 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. The appeal process is ongoing. The Company continues to believe that adequate reserves have been provided relating to all matters contained in the tax periods open to examination.

6. Stock-Based Compensation
 
The following table summarizes the components of stock-based compensation expense included in general and administrative expenses in the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Total stock-based compensation expense:
 
 
 
 
 
 
 
Equity classified awards expense
$
1.8

 
$
1.9

 
$
6.4

 
$
7.5

Liability classified awards expense (credit)
0.3

 
0.7

 
(0.5
)
 
1.2

Total pre-tax stock-based compensation expense
2.1

 
2.6

 
5.9

 
8.7

Book income tax benefit
(0.8
)
 
(1.0
)
 
(2.2
)
 
(3.3
)
Total stock-based compensation expense, net of tax
$
1.3

 
$
1.6

 
$
3.7

 
$
5.4

 
As of September 30, 2015, total unrecognized compensation expense of $14.3 million related to restricted stock and restricted stock units and $4.1 million related to stock options are expected to be recognized over a weighted average period of 1.72 years for restricted stock and restricted stock units and 1.51 years for stock options.
 
Equity Classified Awards - Stock Options

The estimated fair value of the stock options granted during the nine months ended September 30, 2015 was calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model:
Risk-free interest rate
1.54
%
Weighted average historical volatility
36.8
%
Dividend yield
3.17
%
Expected years until exercise
4.5

Weighted average fair value of options granted
$27.20

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

6. Stock-Based Compensation (Continued)



Stock option balances as of September 30, 2015 and related activity for the nine months ended September 30, 2015 were as follows:
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
Aggregate
Intrinsic
Value (in Millions)
Outstanding at December 31, 2014
 
618,115

 
$
53.10

 
 
 
 
Granted
 
133,814

 
111.54

 
 
 
 
Exercised
 
(198,221
)
 
42.51

 
 
 
 
Forfeited
 
(26,386
)
 
100.45

 
 
 
 
Outstanding at September 30, 2015
 
527,322

 
69.55

 
6.8
 
$14.5
Vested at September 30, 2015 and Expected to Vest
 
502,780

 
67.97

 
6.7
 
$14.4
Exercisable at September 30, 2015
 
330,734

 
$
52.71

 
5.6
 
$13.4
 
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 third quarter of 2015 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 September 30, 2015. 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 September 30, 2015 and activity related to restricted stock and restricted stock units for the nine months ended September 30, 2015 were as follows:
 
 
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
 
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2014
 
233,818

 
$
70.14

 
41,622

 
$
66.92

Granted
 
117,896

 
105.55

 
10,294

 
113.72

Released
 
(73,595
)
 
53.77

 
(16,567
)
 
52.19

Forfeited
 
(30,132
)
 
85.25

 
(72
)
 
113.72

Outstanding at September 30, 2015
 
247,987

 
$
90.01

 
35,277

 
$
86.49


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 stockholder return of DineEquity, Inc. common stock compared to the total stockholder returns of a peer group of companies. Although LTIP awards are both denominated and paid only in cash, the awards are considered stock-based compensation in accordance with U.S. GAAP because the multiplier is based on the price of the Company's common stock. For the three months ended September 30, 2015 and 2014, expenses of $0.3 million and $0.7 million, respectively, were included in total stock-based compensation expense related to the LTIP awards. For the nine months ended September 30, 2015 and 2014, a credit of $0.5 million and an expense of $1.2 million, respectively, were included in total stock-based compensation expense related to the LTIP awards. At September 30, 2015 and December 31, 2014, liabilities of $1.5 million and $4.0 million, respectively, related to LTIP awards were included as part of accrued employee compensation and benefits in the Consolidated Balance Sheets.

7. Segments
 
The Company has two reportable segments: franchise operations (an aggregation of Applebee’s and IHOP franchise operations) and rental operations. The Company also has company-operated restaurant operations and financing operations, but neither of these operations exceeded 10% of consolidated revenues, income before income tax provision or total assets.
 

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

7. Segments (Continued)

As of September 30, 2015, the franchise operations segment consisted of (i) 2,018 restaurants operated by Applebee’s franchisees in the United States, two U.S. territories and 15 countries outside the United States and (ii) 1,656 restaurants operated by IHOP franchisees and area licensees in the United States, three U.S. territories and eight 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 franchise fees.  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.

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. 

At September 30, 2015, the company restaurant operations segment consisted of 11 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.
 
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.
 
Information on segments and a reconciliation to income before income tax provision for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In millions)
Revenues from external customers:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Franchise operations
 
$
120.1

 
$
114.3

 
$
364.9

 
$
340.6

Rental operations
 
31.2

 
30.8

 
93.8

 
92.2

Company restaurants
 
8.1

 
15.0

 
42.8

 
47.0

Financing operations
 
3.0

 
2.8

 
8.3

 
10.8

Total
 
$
162.4

 
$
162.9

 
$
509.8

 
$
490.6

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Rental operations
 
$
3.3

 
$
3.6

 
$
10.1

 
$
11.2

Company restaurants
 
0.1

 
0.1

 
0.3

 
0.3

Corporate
 
15.4

 
25.0

 
46.8

 
74.9

Total
 
$
18.8

 
$
28.7

 
$
57.2

 
$
86.4

 
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Franchise operations
 
$
2.6

 
$
2.6

 
$
7.8

 
$
7.8

Rental operations
 
3.2

 
3.3

 
9.6

 
9.9

Company restaurants
 
0.1

 
0.5

 
0.5

 
1.6

Corporate
 
2.4

 
2.3

 
6.2

 
6.9

Total
 
$
8.3

 
$
8.7

 
$
24.1

 
$
26.2

 
 
 
 
 
 
 
 
 
Income before income tax provision:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Franchise operations
 
$
86.8

 
$
82.1

 
$
262.0

 
$
252.3

Rental operations
 
8.0

 
7.1

 
23.7

 
21.1

Company restaurants
 
(0.6
)
 
(0.3
)
 
0.3

 
(0.2
)
Financing operations
 
2.5

 
2.8

 
7.8

 
10.0

Corporate
 
(57.1
)
 
(61.9
)
 
(164.6
)
 
(188.6
)
Total
 
$
39.6

 
$
29.8

 
$
129.2

 
$
94.6



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


8. Net Income per Share

The computation of the Company's basic and diluted net income per share for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Numerator for basic and dilutive income per common share:
 

 
 

 
 
 
 
Net income
$
24,257

 
$
18,887

 
$
79,566

 
$
58,878

Less: Net income allocated to unvested participating restricted stock
(316
)
 
(279
)
 
(1,042
)
 
(927
)
Net income available to common stockholders - basic
23,941

 
18,608

 
78,524

 
57,951

Effect of unvested participating restricted stock in two-class calculation
1

 
1

 
3

 
3

Net income available to common stockholders - diluted
$
23,942

 
$
18,609

 
$
78,527

 
$
57,954

Denominator:
 

 
 

 
 
 
 
Weighted average outstanding shares of common stock - basic
18,573

 
18,703

 
18,737

 
18,757

Dilutive effect of stock options
133

 
187

 
137

 
207

Weighted average outstanding shares of common stock - diluted
18,706

 
18,890

 
18,874

 
18,964

Net income per common share:
 

 
 

 
 
 
 
Basic
$
1.29

 
$
0.99

 
$
4.19

 
$
3.09

Diluted
$
1.28

 
$
0.99

 
$
4.16

 
$
3.06


9. 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 and accounts payable approximate their carrying amounts due to their short duration.
 
The fair values of the Company's Series 2014-1 Class A-2 Notes (the “Class A-2 Notes”) at September 30, 2015 and December 31, 2014 were as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
(In millions)
Long-term debt
 
$
1,300.0

 
$
1,329.6

 
$
1,300.0

 
$
1,302.0


 The fair values were determined based on Level 2 inputs, including information gathered from brokers who trade in the Company’s Class A-2 Notes and information on notes that are similar to those of the Company.


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

10. 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 $406.5 million as of September 30, 2015. 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 2015 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 lease payment guarantee liabilities have been recorded as of September 30, 2015.

11. Facility Consolidation Costs

In September 2015, the Company approved a plan to consolidate many core restaurant and franchisee support functions at its headquarters in Glendale, California. In conjunction with this action, the Company will exit a significant portion of the Applebee's restaurant support center in Kansas City, Missouri. The Company communicated the plan to employees and incurred employee termination costs, primarily severance and stock-based compensation adjustments, of $3.3 million during the three months ended September 30, 2015. These charges are included in general and administrative expenses in the Consolidated Statement of Comprehensive Income. No employee termination costs were paid during the three months ended September 30, 2015.



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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 which 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, 2014. Except where the context indicates otherwise, the words “we,” “us,” “our,” “DineEquity” 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. With over 3,600 restaurants combined, 99% of which are franchised, we believe we are one of the largest full-service restaurant companies in the world. The June 15, 2015 issue of Nation's Restaurant News reported that IHOP and Applebee's were the largest restaurant systems in their respective categories in terms of United States system-wide sales during 2014. This marks the eighth consecutive year our two brands have achieved the number one ranking in Nation's Restaurant News.

Summary Results of Operations
 
 
Three Months Ended
 
Favorable
(Unfavorable) Variance
 
Nine Months Ended
 
Favorable
(Unfavorable) Variance
 
 
September 30,
 
 
September 30,
 
 
 
2015
 
2014
 
 
2015
 
2014
 
 
 
(In millions, except per share information)
Revenue
 
$
162.4

 
$
162.9

 
$
(0.5
)
 
$
509.8

 
$
490.6

 
$
19.2

Gross profit
 
$
96.7

 
$
91.7

 
$
5.0

 
$
293.8

 
$
283.2

 
$
10.6

General and administrative expenses
 
41.6

 
33.8

 
(7.7
)
 
110.4

 
102.8

 
(7.5
)
Interest expense
 
15.4

 
25.0

 
9.6

 
46.8

 
74.9

 
28.1

(Gain) loss on disposition of assets
 
(2.3
)
 
(0.2
)
 
2.1

 
(2.3
)
 
0.6

 
2.9

Other expenses, net (1)
 
2.4

 
3.3

 
0.9

 
9.7

 
10.3

 
0.6

Income tax provision
 
15.3

 
10.9

 
(4.5
)
 
49.6

 
35.7

 
(13.9
)
Net income
 
$
24.3

 
$
18.9

 
$
5.4

 
$
79.6

 
$
58.9

 
$
20.7

Net income per diluted share
 
$
1.28

 
$
0.99

 
$
0.29

 
$
4.16

 
$
3.06

 
$
1.10

___________________________________
(1) Amortization of intangible assets, closure and impairment charges and loss on extinguishment of debt.

Net income for the three and nine months ended September 30, 2015 increased 28.4% and 35.1%, respectively, compared with the same periods of the prior year. In each case, the improvement was primarily due to (i) significantly lower interest expense resulting from the refinancing of our long-term debt in the fourth quarter of 2014 at a fixed interest rate approximately 3% lower than prior to the refinancing, (ii) growth in gross profit, primarily stemming from an increase in

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IHOP domestic same-restaurant sales, IHOP restaurant development over the past twelve months and, with respect to the nine months ended September 30, 2015, an increase in Applebee's domestic same-restaurant sales, and (iii) a gain of approximately $2.0 million from the refranchising and sale of related restaurant assets of 23 Applebee's company-operated restaurants in the Kansas City area.

These favorable items were partially offset by increases in general and administrative (“G&A”) expenses for the three and nine months ended September 30, 2015, compared to the respective periods of the prior year. In September 2015, we announced a strategic decision to consolidate many core restaurant and franchisee support functions at our Glendale, California headquarters and to exit a significant portion of our Applebee's restaurant support center in Kansas City, Missouri. We recorded a net charge of approximately $3.6 million in the third quarter of 2015, consisting primarily of severance and other personnel-related costs for employees impacted by the consolidation. Additionally, costs of professional services increased for the three and nine months ended September 30, 2015, compared to the respective periods of the prior year.

Net income per diluted share for the three and nine months ended September 30, 2015 increased 29.3% and 35.9%, respectively, compared with the same periods of the prior year. These increases were greater than the increases in net income due to the impact on weighted shares outstanding of repurchases of our common stock.

Key Performance Indicators

In evaluating the performance of each restaurant 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 Applebee's and IHOP franchise restaurants is an important driver of revenue growth because we currently do not plan to open any new company-operated restaurants. Further, while refranchising or renewals may result in new rental and financing agreements, we currently do not plan to significantly expand our rental and financing operations, both of which are legacies from the IHOP business model we operated under prior to 2003. 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.
   
An overview of these key performance indicators for the three and nine months ended September 30, 2015 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2015
 
Applebee's
 
IHOP
 
Applebee's
 
IHOP
% (decrease) increase in domestic system-wide same-restaurant sales
(0.5)%
 
5.8%
 
1.2%
 
5.6%
Net franchise restaurant development (1)
2
 
9
 
1
 
17
___________________________________
(1) Franchise and area license restaurant openings, net of closings and the refranchising of 23 Applebee's company-operated restaurants in July, 2015.
IHOP domestic system-wide same-restaurant sales increased 5.8% for the three months ended September 30, 2015. Coupled with increases in the first two quarters of 2015 of 4.8% and 6.2%, respectively, IHOP domestic system-wide same-restaurant sales increased 5.6% for the nine months ended September 30, 2015. The increases for both the three and nine months ended September 30, 2015 resulted from a higher average customer check and an increase in customer traffic. According to industry data, IHOP outperformed the family dining segment as well as the overall restaurant industry in domestic system-wide same-restaurant sales during the first nine months of 2015. Based on data from Black Box Intelligence (“Black Box”), a restaurant sales reporting firm , during the nine months ended September 30, 2015, both the family dining segment and the overall restaurant industry experienced increases in average customer check that were partially offset by a decrease in customer traffic.
The 0.5% decrease in Applebee's domestic system-wide same-restaurant sales for the three months ended September 30, 2015 was the first decrease in same-restaurant sales for Applebee's since the first quarter of 2014. Applebee's same-restaurant sales increased 2.9% and 1.0%, respectively, in the first and second quarters of 2015, and as a result, for the nine months ended September 30, 2015, Applebee's domestic system-wide same-restaurant sales increased 1.2%. The decrease in Applebee's same-restaurant sales for the three months ended September 30, 2015 was due to a decline in customer traffic that was only partially offset by a higher average customer check. The increase in Applebee's same-restaurant sales for the nine months ended September 30, 2015 was due to a higher average customer check partially offset by a decline in customer traffic. Based on data from Black Box, Applebee's increase in domestic system-wide same-restaurant sales during the nine months ended September 30, 2015 was lower than that of the casual dining segment, which, compared to Applebee's, experienced a larger increase in average customer check and a smaller decrease in customer traffic.

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Table of Contents

During the nine months ended September 30, 2015, Applebee's franchisees opened 23 new restaurants and closed 22 restaurants, resulting in net franchise development of one Applebee's franchise restaurant. We also refranchised 23 Applebee's company-operated restaurants in July 2015, and as a result, the total number of Applebee's franchise restaurants increased by 24 since the beginning of 2015. IHOP franchisees opened 31 new restaurants and closed 14 restaurants, resulting in net IHOP franchise restaurant development of 17 restaurants during the first nine months of 2015.
Franchise restaurant closures take place each year for a variety of reasons. The number of Applebee's and IHOP restaurants that were closed during the first nine months of 2015 is less than the number that were closed during the first nine months of 2014, but that is not considered to be indicative of any trend.
For the full year of 2015, we expect IHOP franchisees to open between 50 to 60 new restaurants and Applebee's franchisees to open between 35 to 45 new restaurants. The majority of openings for each brand is expected to be in domestic markets. Typically, the majority of gross and net franchise restaurant development for each brand takes place in the latter part of any given year. The actual number of openings in 2015 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 restaurant opening commitments in development agreements. The timing of new restaurant openings also may be affected by other factors including weather-related and other construction delays, difficulties in obtaining timely regulatory approvals and the impact of currency fluctuations on our international franchisees.
Additional detail on each of these key performance indicators is presented under the captions “Restaurant Development Activity” and “Restaurant Data” that follow.
In evaluating the performance of the consolidated enterprise, we consider the key performance indicators to be cash flows from operating activities and free cash flow (cash from operations, plus net receipts from notes and equipment contract receivables, less capital expenditures).

Our cash flows from operating activities and free cash flow for the nine months ended September 30, 2015 and 2014 were as follows:
 
Nine Months Ended
 
 
 
September 30,
 
Increase
 
2015
 
2014
 
(Decrease)
 
(In millions)
Cash flows from operating activities
$
70.6

 
$
102.4

 
$
(31.8
)
Free cash flow
$
75.6

 
$
102.0

 
$
(26.4
)

The decrease in cash flows from operating activities and free cash flow was primarily due to the impact on working capital of the timing of interest payments and marketing accruals, partially offset by an increase in net income. Additional detail is presented under the caption “Liquidity and Capital Resources.”


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Table of Contents

Restaurant Development Activity
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
Applebee's Restaurant Development Activity

 
 
 
 
 
Summary - beginning of period:
 
 
 
 
 
 
 
Franchise
1,993

 
1,986

 
1,994

 
1,988

Company restaurants
23

 
23

 
23

 
23

Total Applebee's restaurants, beginning of period
2,016

 
2,009

 
2,017

 
2,011

Franchise restaurants opened:
 

 
 

 
 
 
 
Domestic
7

 
7

 
17

 
20

International
2

 
3

 
6

 
4

Total franchise restaurants opened
9

 
10

 
23

 
24

Franchise restaurants closed:
 

 
 

 
 
 
 
Domestic
(6
)
 
(7
)
 
(14
)
 
(17
)
International
(1
)
 
(3
)
 
(8
)
 
(9
)
Total franchise restaurants closed
(7
)
 
(10
)
 
(22
)
 
(26
)
Net franchise restaurant development (reduction)
2

 

 
1

 
(2
)
Refranchised from Company restaurants
23

 

 
23

 

Net franchise restaurant additions (reductions)
25

 

 
24

 
(2
)
 
 
 
 
 
 
 
 
Summary - end of period:
 
 
 
 
 
 
 
Franchise
2,018

 
1,986

 
2,018

 
1,986

Company restaurants

 
23

 

 
23

Total Applebee's restaurants, end of period
2,018

 
2,009

 
2,018

 
2,009

IHOP Restaurant Development Activity
 

 
 

 
 
 
 
Summary - beginning of period:
 
 
 
 
 
 
 
Franchise
1,479

 
1,455

 
1,472

 
1,439

Area license
166

 
167

 
167

 
168

Company
13

 
10

 
11

 
13

Total IHOP restaurants, beginning of period
1,658

 
1,632

 
1,650

 
1,620

 
 
 
 
 
 
 
 
Franchise/area license restaurants opened:
 
 
 
 
 
 
 
Domestic franchise
11

 
11

 
24

 
27

Domestic area license

 
1

 
2

 
3

International franchise
2

 
6

 
5

 
15

Total franchise/area license restaurants opened
13

 
18

 
31

 
45

Franchise/area license restaurants closed:
 

 
 

 
 
 
 
Domestic franchise
(4
)
 
(5
)
 
(11
)
 
(16
)
Domestic area license

 

 
(3
)
 
(2
)
International franchise

 
(1
)
 

 
(2
)
International area license

 

 

 
(1
)
Total franchise/area license restaurants closed
(4
)
 
(6
)
 
(14
)
 
(21
)
Net franchise/area license restaurant development
9

 
12

 
17

 
24

Refranchised from Company restaurants
2

 

 
3

 
4

Franchise restaurants reacquired by the Company

 

 
(3
)
 
(1
)
Net franchise/area license restaurant additions
11

 
12

 
17

 
27

 
 
 
 
 
 
 
 
Summary - end of period:
 
 
 
 
 
 
 
Franchise
1,490

 
1,466

 
1,490

 
1,466

Area license
166

 
168

 
166

 
168

Company
11

 
10

 
11

 
10

Total IHOP restaurants, end of period
1,667

 
1,644

 
1,667

 
1,644

 


15

Table of Contents

Restaurant Data
 
The following table sets forth the number of “Effective Restaurants” in the Applebee’s and IHOP systems and information regarding the percentage change in sales at those restaurants compared to the same periods in the prior year. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. However, we believe that presentation of this information is useful in analyzing our revenues because franchisees and area licensees pay us royalties and advertising fees that are generally based on a percentage of their sales, and, where applicable, rental payments under leases that partially may be based on a percentage of their sales. Management also uses this information to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations.
 
 
Three Months Ended
 
Nine Months Ended

 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Unaudited)
Applebee's Restaurant Data
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Effective Restaurants(a)
 
 

 
 

 
 

 
 

Franchise
 
2,011

 
1,985

 
1,998

 
1,985

Company
 
5

 
23

 
17

 
23

Total
 
2,016

 
2,008

 
2,015

 
2,008

 
 
 
 
 
 
 
 
 
System-wide(b)
 
 

 
 

 
 

 
 

Sales percentage change(c)
 
0.4
 %
 
2.5
%
 
2.1
%
 
0.7
%
Domestic same-restaurant sales percentage change(d)
 
(0.5
)%
 
1.7
%
 
1.2
%
 
0.6
%
 
 
 
 
 
 
 
 
 
Franchise(b)
 
 

 
 

 
 

 
 

Sales percentage change(c)
 
1.2
 %
 
2.5
%
 
2.3
%
 
0.7
%
Domestic same-restaurant sales percentage change(d)
 
0.5
 %
 
1.7
%
 
1.2
%
 
0.6
%
Average weekly domestic unit sales (in thousands)
 
$
45.9

 
$
46.0

 
$
48.6

 
$
47.9

 
 
 
 
 
 
 
 
 
IHOP Restaurant Data
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Effective Restaurants(a)
 
 

 
 

 
 

 
 

Franchise
 
1,482

 
1,459

 
1,474

 
1,449

Area license
 
166

 
168

 
167

 
167

Company
 
12

 
10

 
13

 
10

Total
 
1,660

 
1,637

 
1,654

 
1,626

 
 
 
 
 
 
 
 
 
System-wide(b)
 
 

 
 

 
 

 
 

Sales percentage change(c)
 
7.0
 %
 
5.3
%
 
6.8
%
 
5.9
%
Domestic same-restaurant sales percentage change(d)
 
5.8
 %
 
2.4
%
 
5.6
%
 
3.2
%
 
 
 
 
 
 
 
 
 
Franchise(b)
 
 

 
 

 
 

 
 

Sales percentage change(c)
 
6.8
 %
 
5.6
%
 
6.5
%
 
6.0
%
Domestic same-restaurant sales percentage change(d)
 
5.8
 %
 
2.4
%
 
5.6
%
 
3.2
%
Average weekly domestic unit sales (in thousands)
 
$
37.6

 
$
35.8

 
$
37.6

 
$
35.9

 
 
 
 
 
 
 
 
 
Area License(b)
 
 

 
 

 
 

 
 

Sales percentage change(c)
 
8.0
 %
 
4.0
%
 
7.6
%
 
5.9
%
 


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(a)   “Effective Restaurants” are the weighted average number of restaurants open in a given fiscal period, adjusted to account for restaurants open for only a portion of the period. Information is presented for all Effective Restaurants in the Applebee’s and IHOP systems, which includes restaurants owned by franchisees and area licensees as well as those owned by the Company.
 
(b)   “System-wide sales” are retail sales at Applebee’s restaurants operated by franchisees and IHOP restaurants operated by franchisees and area licensees, as reported to the Company, in addition to retail sales at company-operated restaurants.  Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. Unaudited reported sales for Applebee's domestic franchise restaurants, IHOP franchise restaurants and IHOP area license restaurants were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Reported sales (unaudited)
(In millions)
 
 

 
 

 
 
 
 
Applebee's domestic franchise restaurant sales
$
1,113.2

 
$
1,100.3

 
$
3,513.8

 
$
3,434.1

IHOP franchise restaurant sales
724.5

 
678.3

 
2,160.9

 
2,028.1

IHOP area license restaurant sales
69.4

 
64.3

 
214.2

 
199.2

Total
$
1,907.1

 
$
1,842.9

 
$
5,888.9

 
$
5,661.4


 
(c)   “Sales percentage change” reflects, for each category of restaurants, the percentage change in sales in any given fiscal period compared to the prior fiscal period for all restaurants in that category.
 
(d)   “Domestic same-restaurant sales percentage change” reflects the percentage change in sales in any given fiscal period, compared to the same weeks in the prior fiscal period, for domestic restaurants that have been operated throughout both fiscal periods that are being compared and have been open for at least 18 months. Because of new restaurant openings and restaurant closures, the domestic restaurants open throughout both fiscal periods being compared may be different from period to period. Domestic same-restaurant sales percentage change does not include data on IHOP area license restaurants.  







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Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons of Reported or Future Results

Same-restaurant Sales Trends
 
Applebee’s domestic system-wide same-restaurant sales decreased 0.5% for the three months ended September 30, 2015 from the same period in 2014. The decrease resulted from a decline in customer traffic that was only partially offset by a higher average customer check. The decline in Applebee's customer traffic grew progressively larger from the first quarter of 2015 to the third quarter. Same-restaurant sales for the third quarter of 2015 are not necessarily indicative of results expected for the full year.
IHOP’s domestic system-wide same-restaurant sales increased 5.8% for the three months ended September 30, 2015 from the same period in 2014, the tenth consecutive quarter of positive same-restaurant sales for IHOP. The increase resulted from a higher average customer check and an increase in customer traffic. IHOP customer traffic has increased for five consecutive quarters. We believe the higher annual contribution percentage of restaurant gross sales to the IHOP National Advertising Fund, increased by a large majority of IHOP franchisees commencing in the third quarter of 2014, continues to have a positive impact on sales and traffic. Same-restaurant sales for the third quarter of 2015 are not necessarily indicative of results expected for the full year.

Based on data from Black Box, during the nine months ended September 30, 2015, customer traffic declined for the overall restaurant industry as well as for both the casual dining and family dining segments of the restaurant industry. During the third quarter of 2015, we experienced an increase in IHOP customer traffic and a decline in Applebee's customer traffic. In the short term, a decline in customer traffic may be offset by an increase in average customer check resulting from an increase

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in menu prices, a favorable change in product sales mix, or a combination thereof. A sustained decline in same-restaurant customer traffic that cannot be offset by an increase in average customer check could have an adverse effect on our business, results of operations and financial condition.

We strive to identify and create opportunities for growth in customer traffic and frequency, average check and same-restaurant sales. We focus on building our brands with a long-term view through a strategic combination of menu, media, remodel and development initiatives to continually innovate and evolve both brands. To drive each brand forward, we seek to innovate and remain actively focused on driving sustainable sales and traffic.

Consolidation of Kansas City Restaurant Support Center

In September 2015, we announced a strategic decision to consolidate many core restaurant and franchisee support functions at our Glendale, California headquarters and to exit a significant portion of our Applebee's restaurant support center in Kansas City, Missouri. We estimate we will incur approximately $8 million in costs related to the exit of the facility and $5 million in employee termination benefits and other personnel-related costs associated with this consolidation.

We recorded a net charge of $3.3 million in the third quarter of 2015 related to severance and other personnel-related costs for employees impacted by the consolidation action, and increased depreciation of $0.3 million due to the shortening of the estimated useful life of facility assets. The majority of the facility exit costs will be incurred as of the date we stop using the portion of the facility we will be exiting, estimated to be in the first half of fiscal 2016.

53rd Week in Fiscal 2015

We have a 52/53 week fiscal year that ends on the Sunday nearest to December 31 of each year. In a 52-week fiscal year, each fiscal quarter contains 13 weeks, comprised of two, four-week fiscal months followed by a five-week fiscal month. In a 53-week fiscal year, the last month of the fourth fiscal quarter contains six weeks. Our fiscal 2015, which began on December 29, 2014 and will end on January 3, 2016, will contain 53 weeks.


CONSOLIDATED RESULTS OF OPERATIONS
Comparison of the Three and Nine Months Ended September 30, 2015 and 2014

REVENUE
 
Three Months Ended
 
Favorable
(Unfavorable) Variance
 
Nine Months Ended
 
Favorable
(Unfavorable) Variance
 
 
September 30,
 
September 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
 
 
(In millions)
Franchise operations
 
$
120.1

 
$
114.3

 
$
5.8

 
$
364.9

 
$
340.6

 
$
24.3

Rental operations
 
31.2

 
30.8

 
0.4

 
93.8

 
92.2

 
1.6

Company restaurant operations
 
8.1

 
15.0

 
(6.9
)
 
42.8

 
47.0

 
(4.2
)
Financing operations
 
3.0

 
2.8

 
0.2

 
8.3

 
10.8

 
(2.5
)
Total revenue
 
$
162.4

 
$
162.9

 
$
(0.5
)
 
$
509.8

 
$
490.6

 
$
19.2

Change vs. prior period
 
(0.3
)%
 
 
 
 
 
3.9
%
 
 
 
 

 Total revenue for the three months ended September 30, 2015 declined slightly compared with the same period of the prior year, due to the refranchising and sale of related restaurant assets of 23 Applebee's company-operated restaurants in the Kansas City area in July 2015, and, to a lesser degree, the expected progressive decline in interest revenue from rental and financing operations and a 0.5% decrease in Applebee's domestic same-restaurant sales. These declines were partially offset by (i) higher franchise royalty and rental revenues that resulted from a 5.8% increase in IHOP domestic same-restaurant sales, (ii) higher IHOP advertising revenues resulting from an agreement with a large majority of franchisees to increase the advertising contribution as a percentage of gross sales and (iii) IHOP restaurant development over the past twelve months.

The improvement in total revenue for the nine months ended September 30, 2015 compared with the same period of the prior year was primarily due to (i) higher IHOP advertising revenues resulting from an agreement with a large majority of franchisees to increase the advertising contribution as a percentage of gross sales, (ii) higher franchise royalty and rental revenues that resulted from a 5.6% increase in IHOP domestic same-restaurant sales, (iii) higher franchise royalty revenues resulting from a 1.2% increase in Applebee's domestic same-restaurant sales and (iv) IHOP restaurant development over the past twelve months. These favorable items were partially offset by (i) a decline in company-operated restaurant revenues due to

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the refranchising and sale of related restaurant assets of 23 Applebee's company-operated restaurants noted above, (ii) a decline in financing revenues of $1.4 million associated with the early termination of two leases in the first quarter of 2014 that did not recur in 2015, and (iii) the expected progressive decline in interest revenue from rental and financing operations.

 
GROSS PROFIT (LOSS)
 
Three Months Ended
 
Favorable
(Unfavorable) Variance
 
Nine Months Ended
 
Favorable
(Unfavorable) Variance
 
 
September 30,
 
 
September 30,
 
 
 
2015
 
2014
 
 
2015
 
2014
 
 
 
(In millions)
Franchise operations
 
$
86.8

 
$
82.1

 
$
4.7

 
$
262.0

 
$
252.3

 
$
9.7

Rental operations
 
8.0

 
7.1

 
0.9

 
23.7

 
21.1

 
2.6

Company restaurant operations
 
(0.6
)
 
(0.3
)
 
(0.3
)
 
0.3

 
(0.2
)
 
0.5

Financing operations
 
2.5

 
2.8

 
(0.3
)
 
7.8

 
10.0

 
(2.2
)
Total gross profit
 
$
96.7

 
$
91.7

 
$
5.0

 
$
293.8

 
$
283.2

 
$
10.6

Change vs. prior period
 
5.5
%
 
 
 
 
 
3.7
%
 
 
 
 

The improvement in total gross profit for the three months ended September 30, 2015 compared with the same period of the prior year was primarily due to higher franchise royalty and rental revenues that resulted from the 5.8% increase in IHOP domestic same-restaurant sales and IHOP restaurant development over the past twelve months, partially offset by the expected progressive decline in interest revenue from rental and financing operations and lower franchise royalty revenues resulting from the 0.5% decrease in Applebee's domestic same-restaurant sales.
 
The improvement in total gross profit for the nine months ended September 30, 2015 compared with the same period of the prior year was due to higher franchise royalty and rental revenues that resulted from the 5.6% increase in IHOP domestic same-restaurant sales, higher franchise royalty revenues resulting from a 1.2% increase in Applebee's domestic same-restaurant sales and IHOP restaurant development over the past twelve months, offset in part by the decline in financing revenues of $1.4 million associated with the early termination of two leases as discussed under “Revenue” above and the expected progressive decline in interest revenue from rental and financing operations.
 
FRANCHISE OPERATIONS
 
Three Months Ended
 
Favorable
(Unfavorable) Variance
 
Nine Months Ended
 
Favorable
(Unfavorable) Variance
 
 
September 30,
 
 
September 30,
 
 
 
2015
 
2014
 
 
2015