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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________ 
FORM 10-Q
 (Mark One)
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2019
 OR
      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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13032141&doc=24 Dine Brands Global, Inc. http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13032141&doc=27
(Exact name of registrant as specified in its charter)
Delaware
 
 
95-3038279
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
450 North Brand Boulevard,
 
 
91203-1903
Glendale,
CA
 
 
 
(Address of principal executive offices)
 
 
(Zip Code)
 
(818)
240-6055
(Registrant’s telephone number, including area code)
 ______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
 
 Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
 
DIN
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
 Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
 
 
 
 
 
Smaller reporting company 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 
  No  
 
As of July 25, 2019, the Registrant had 17,175,598 shares of Common Stock outstanding.


Table of Contents

Dine Brands Global, Inc. and Subsidiaries
Index
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cautionary Statement Regarding Forward-Looking Statements
 
Statements contained in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “goal” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. The forward-looking statements contained in this report are made as of the date hereof and Dine Brands Global, Inc. does not intend to, nor does it assume any obligation to, update or supplement any forward-looking statements after the date of this report to reflect actual results or future events or circumstances.

Factors that could cause actual results to differ materially from the projections, forecasts, estimates and expectations discussed in this Quarterly Report on Form 10-Q include, among other things: general economic conditions; our level of indebtedness; compliance with the terms of our securitized debt; our ability to refinance our current indebtedness or obtain additional financing; our dependence on information technology; potential cyber incidents; the implementation of restaurant development plans; our dependence on our franchisees; the concentration of our Applebee’s franchised restaurants in a limited number of franchisees; the financial health of our franchisees, including any insolvency or bankruptcy; credit risks from our IHOP franchisees operating under our Previous IHOP Business Model; insufficient insurance coverage to cover potential risks associated with the ownership and operation of restaurants; our franchisees’ and other licensees’ compliance with our quality standards and trademark usage; general risks associated with the restaurant industry; potential harm to our brands’ reputation; risks of food-borne illness or food tampering; possible future impairment charges; trading volatility and fluctuations in the price of our stock; our ability to achieve the financial guidance we provide to investors; successful implementation of our business strategy; the availability of suitable locations for new restaurants; shortages or interruptions in the supply or delivery of products from third parties or availability of utilities; the management and forecasting of appropriate inventory levels; development and implementation of innovative marketing and use of social media; changing health or dietary preference of consumers; risks associated with doing business in international markets; the results of litigation and other legal proceedings; third-party claims with respect to intellectual property assets; delivery initiatives and use of third-party delivery vendors; our

1

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allocation of human capital and our ability to attract and retain management and other key employees; compliance with federal, state and local governmental regulations; risks associated with our self-insurance; natural disasters or other serious incidents; our success with development initiatives outside of our core business; the adequacy of our internal controls over financial reporting and future changes in accounting standards; and other matters in the “Risk Factors” section of this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, many of which are beyond our control.


Fiscal Quarter End

The Company’s fiscal quarters end on the Sunday closest to the last day of each calendar quarter. For convenience, the fiscal quarters of each year are referred to as ending on March 31, June 30, September 30 and December 31. The first fiscal quarter of 2019 began on December 31, 2018 and ended on March 31, 2019; the second fiscal quarter of 2019 ended on June 30, 2019. The first fiscal quarter of 2018 began on January 1, 2018 and ended on April 1, 2018; the second fiscal quarter of 2018 ended on July 1, 2018.
 





2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.
Dine Brands Global, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
 
June 30, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
127,555

 
$
137,164

Receivables, net
 
98,786

 
137,504

Restricted cash
 
34,387

 
48,515

Prepaid gift card costs
 
29,411

 
38,195

Prepaid income taxes
 
7,123

 
17,402

Other current assets
 
7,016

 
3,410

Total current assets
 
304,278

 
382,190

Other intangible assets, net
 
580,197

 
585,889

Operating lease right-of-use assets
 
378,520

 

Goodwill
 
343,862

 
345,314

Property and equipment, net
 
222,818

 
240,264

Long-term receivables, net
 
93,607

 
103,102

Deferred rent receivable
 
74,075

 
77,069

Non-current restricted cash
 
15,700

 
14,700

Other non-current assets, net
 
27,601

 
26,152

Total assets
 
$
2,040,658

 
$
1,774,680

Liabilities and Stockholders’ Deficit
 
 

 
 

Current liabilities:
 
 

 
 

Current maturities of long-term debt
 
$

 
$
25,000

Accounts payable
 
43,982

 
43,468

Gift card liability
 
111,281

 
160,438

Current maturities of operating lease obligations
 
67,724

 

Current maturities of finance lease and financing obligations
 
13,563

 
14,031

Accrued employee compensation and benefits
 
17,607

 
27,479

Dividends payable
 
12,176

 
11,389

Deferred franchise revenue, short-term
 
10,244

 
10,138

Other accrued expenses
 
19,824

 
24,243

Total current liabilities
 
296,401

 
316,186

Long-term debt, less current maturities
 
1,287,227

 
1,274,087

Operating lease obligations, less current maturities
 
379,123

 

Finance lease obligations, less current maturities
 
84,344

 
87,762

Financing obligations, less current maturities
 
38,125

 
38,482

Deferred income taxes, net
 
98,294

 
105,816

Deferred franchise revenue, long-term
 
60,302

 
64,557

Other non-current liabilities
 
11,967

 
90,063

Total liabilities
 
2,255,783

 
1,976,953

Commitments and contingencies
 


 


Stockholders’ deficit:
 
 

 
 

Common stock, $0.01 par value; shares: 40,000,000 authorized; June 30, 2019 - 24,949,103 issued, 17,252,391 outstanding; December 31, 2018 - 24,984,898 issued, 17,644,267 outstanding
 
249

 
250

 Additional paid-in-capital
 
240,555

 
237,726

 Retained earnings
 
33,832

 
10,414

 Accumulated other comprehensive loss
 
(59
)
 
(60
)
Treasury stock, at cost; shares: June 30, 2019 - 7,696,712; December 31, 2018 - 7,340,631
 
(489,702
)
 
(450,603
)
Total stockholders’ deficit
 
(215,125
)
 
(202,273
)
Total liabilities and stockholders’ deficit
 
$
2,040,658

 
$
1,774,680


 See the accompanying Notes to Consolidated Financial Statements.

3

Table of Contents

Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 

 
 
 
 
 
 
Franchise revenues:
 
 
 
 
 
 
 
 
Royalties, franchise fees and other
 
90,930

 
93,236

 
$
187,226

 
$
184,713

Advertising revenue
 
71,738

 
58,705

 
144,368

 
122,541

Total franchise revenues
 
162,668

 
151,941

 
331,594

 
307,254

Company restaurant sales
 
33,751

 

 
69,486

 

Rental revenues
 
29,878

 
30,324

 
60,589

 
61,165

Financing revenues
 
1,783

 
2,206

 
3,593

 
4,215

Total revenues
 
228,080

 
184,471

 
465,262

 
372,634

Cost of revenues:
 
 

 
 

 
 
 
 
Franchise expenses:
 
 
 
 
 
 
 
 
Advertising expenses
 
71,738

 
58,705

 
144,368

 
122,541

Other franchise expenses
 
7,169

 
24,239

 
14,842

 
42,275

Total franchise expenses
 
78,907

 
82,944

 
159,210

 
164,816

Company restaurant expenses
 
31,232

 

 
62,770

 

Rental expenses:
 
 
 
 
 
 
 
 
Interest expense from finance leases
 
1,445

 
1,770

 
2,974

 
3,647

Other rental expenses
 
21,495

 
21,018

 
42,590

 
41,782

Total rental expenses
 
22,940

 
22,788

 
45,564

 
45,429

Financing expenses
 
146

 
149

 
292

 
299

Total cost of revenues
 
133,225

 
105,881

 
267,836

 
210,544

Gross profit
 
94,855

 
78,590

 
197,426

 
162,090

General and administrative expenses
 
39,364

 
38,759

 
82,183

 
80,670

Interest expense, net
 
14,602

 
15,481

 
29,995

 
30,680

Amortization of intangible assets
 
2,925

 
2,506

 
5,849

 
5,008

Closure and impairment charges (credits)
 
289

 
(2,702
)
 
483

 
(98
)
Loss on extinguishment of debt
 
8,276

 

 
8,276

 

Loss (gain) on disposition of assets
 
332

 
(50
)
 
441

 
(1,477
)
Income before income tax provision
 
29,067

 
24,596

 
70,199

 
47,307

Income tax provision
 
(7,677
)
 
(11,883
)
 
(17,166
)
 
(17,521
)
Net income
 
21,390

 
12,713

 
53,033

 
29,786

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

 

 

 
50

Foreign currency translation adjustment
 
2

 
(3
)
 
1

 
(6
)
Total comprehensive income
 
$
21,392

 
$
12,710

 
$
53,034

 
$
29,830

Net income available to common stockholders:
 
 
 
 

 
 
 
 
Net income
 
$
21,390

 
$
12,713

 
$
53,033

 
$
29,786

Less: Net income allocated to unvested participating restricted stock
 
(719
)
 
(428
)
 
(1,827
)
 
(1,000
)
Net income available to common stockholders
 
$
20,671

 
$
12,285

 
$
51,206

 
$
28,786

Net income available to common stockholders per share:
 
 

 
 

 
 
 
 
Basic
 
$
1.20

 
$
0.70

 
$
2.97

 
$
1.63

Diluted
 
$
1.18

 
$
0.69

 
$
2.91

 
$
1.61

Weighted average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
17,181

 
17,544

 
17,262

 
17,623

Diluted
 
17,563

 
17,803

 
17,626

 
17,827

 
See the accompanying Notes to Consolidated Financial Statements.

4

Table of Contents

Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Three and Six Months ended June 30, 2019
(In thousands)
(Unaudited)

 
 
Three Months ended June 30, 2019
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
 
 
 
Shares
Outstanding
 
Amount
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Shares
 
Cost
 
Total
Balance at March 31, 2019
 
17,651

 
$
250

 
$
239,585

 
$
24,588

 
$
(61
)
 
7,324

 
$
(455,183
)
 
$
(190,821
)
Net income
 

 

 

 
21,390

 

 

 

 
21,390

Other comprehensive gain
 

 

 

 

 
2

 

 

 
2

Purchase of Company common stock
 
(392
)
 

 

 

 

 
392

 
(35,341
)
 
(35,341
)
Reissuance of treasury stock
 
19

 
(1
)
 
(651
)
 

 

 
(19
)
 
822

 
170

Net issuance of shares for stock plans
 
(21
)
 

 

 

 

 

 

 

Repurchase of restricted shares for taxes
 
(5
)
 

 
(425
)
 

 

 

 

 
(425
)
Stock-based compensation
 

 

 
1,787

 

 

 

 

 
1,787

Dividends on common stock
 

 

 
259

 
(12,146
)
 

 

 

 
(11,887
)
Balance at June 30, 2019
 
17,252

 
$
249

 
$
240,555

 
$
33,832

 
$
(59
)
 
7,697

 
$
(489,702
)
 
$
(215,125
)


 
 
Six Months ended June 30, 2019
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
 
 
 
Shares
Outstanding
 
Amount
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Shares
 
Cost
 
Total
Balance at December 31, 2018
 
17,644

 
$
250

 
$
237,726

 
$
10,414

 
$
(60
)
 
7,341

 
$
(450,603
)
 
$
(202,273
)
Adoption of ASC 842 (Note 3)
 

 

 

 
(5,030
)
 

 

 

 
(5,030
)
Net income
 

 

 

 
53,033

 

 

 

 
53,033

Other comprehensive gain
 

 

 

 

 
1

 

 

 
1

Purchase of Company common stock
 
(543
)
 

 

 

 

 
543

 
(47,356
)
 
(47,356
)
Reissuance of treasury stock
 
187

 
(1
)
 
(1,318
)
 

 

 
(187
)
 
8,257

 
6,938

Net issuance of shares for stock plans
 
(12
)
 

 

 

 

 

 

 

Repurchase of restricted shares for taxes
 
(24
)
 

 
(2,242
)
 

 

 

 

 
(2,242
)
Stock-based compensation
 

 

 
5,894

 

 

 

 

 
5,894

Dividends on common stock
 

 

 
495

 
(24,585
)
 

 

 

 
(24,090
)
Balance at June 30, 2019
 
17,252

 
$
249

 
$
240,555

 
$
33,832

 
$
(59
)
 
7,697

 
$
(489,702
)
 
$
(215,125
)

See the accompanying Notes to Consolidated Financial Statements.















5

Table of Contents

Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
Three and Six Months ended June 30, 2018
(In thousands)
(Unaudited)


 
 
Three Months ended June 30, 2018
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
 
 
 
Shares
Outstanding
 
Amount
 
Additional
Paid-in
Capital
 
Retained Earnings (Accumulated Deficit)
 
Shares
 
Cost
 
Total
Balance at March 31, 2018
 
17,922

 
$
250

 
$
264,994

 
$
(52,867
)
 
$
(58
)
 
7,091

 
$
(429,205
)
 
$
(216,886
)
Net income
 

 

 

 
12,713

 

 

 

 
12,713

Other comprehensive loss
 

 

 

 

 
(3
)
 

 

 
(3
)
Purchase of Company common stock
 
(137
)
 

 

 

 

 
137

 
(10,000
)
 
(10,000
)
Reissuance of treasury stock
 
26

 

 
(843
)
 

 

 
(26
)
 
1,007

 
164

Net issuance of shares for stock plans
 
(3
)
 

 

 

 

 

 

 

Repurchase of restricted shares for taxes
 
(5
)
 

 
(317
)
 

 

 

 

 
(317
)
Stock-based compensation
 

 

 
2,273

 

 

 

 

 
2,273

Dividends on common stock
 

 

 
(295
)
 

 

 

 

 
(295
)
Dividends on common stock in excess of retained earnings
 

 

 
(10,900
)
 

 

 

 

 
(10,900
)
Balance at June 30, 2018
 
17,803


$
250


$
254,912


$
(40,154
)

$
(61
)

7,202


$
(438,198
)

$
(223,251
)

 
 
Six Months ended June 30, 2018
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
 
 
 
Shares
Outstanding
 
Amount
 
Additional
Paid-in
Capital
 
Retained Earnings (Accumulated Deficit)
 
Shares
 
Cost
 
Total
Balance at December 31, 2017
 
17,993

 
$
250

 
$
276,408

 
$
(69,940
)
 
$
(105
)
 
7,029

 
$
(422,153
)
 
$
(215,540
)
Net income
 

 

 

 
29,786

 

 

 

 
29,786

Other comprehensive gain
 

 

 

 

 
44

 

 

 
44

Purchase of Company common stock
 
(276
)
 

 

 

 

 
276

 
(20,003
)
 
(20,003
)
Reissuance of treasury stock
 
103

 

 
(3,338
)
 

 

 
(103
)
 
3,958

 
620

Net issuance of shares for stock plans
 
3

 

 

 

 

 

 

 

Repurchase of restricted shares for taxes
 
(20
)
 

 
(1,400
)
 

 

 

 

 
(1,400
)
Stock-based compensation
 

 

 
5,641

 

 

 

 

 
5,641

Dividends on common stock
 

 

 

 

 

 

 

 

Dividends on common stock in excess of retained earnings
 

 

 
(22,399
)
 

 

 

 

 
(22,399
)
Balance at June 30, 2018
 
17,803

 
$
250

 
$
254,912

 
$
(40,154
)
 
$
(61
)
 
7,202

 
$
(438,198
)
 
$
(223,251
)


See the accompanying Notes to Consolidated Financial Statements.


6

Table of Contents

Dine Brands Global, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 
Net income
 
$
53,033

 
$
29,786

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

Depreciation and amortization
 
20,800

 
15,842

Non-cash stock-based compensation expense
 
5,894

 
5,641

Non-cash interest expense
 
2,083

 
1,744

Closure and impairment charges (credits)
 
483

 
(114
)
Loss on extinguishment of debt
 
8,276

 

Deferred income taxes
 
(3,186
)
 
(3,606
)
Loss (gain) on disposition of assets
 
441

 
(1,477
)
Other
 
(7,678
)
 
(8,438
)
Changes in operating assets and liabilities:
 
 
 
 

Accounts receivable, net
 
(1,976
)
 
(10,924
)
Current income tax receivables and payables
 
9,442

 
2,776

Gift card receivables and payables
 
(7,444
)
 
(10,334
)
Other current assets
 
(3,607
)
 
5,851

Accounts payable
 
8,995

 
3,816

Accrued employee compensation and benefits
 
(9,872
)
 
(1,411
)
Other current liabilities
 
(6,355
)
 
(3,360
)
Cash flows provided by operating activities
 
69,329

 
25,792

Cash flows from investing activities:
 
 

 
 

Principal receipts from notes, equipment contracts and other long-term receivables
 
11,386

 
14,923

Additions to property and equipment
 
(9,175
)
 
(7,339
)
Proceeds from sale of property and equipment
 
400

 
655

Additions to long-term receivables
 
(1,555
)
 
(3,030
)
Other
 
(186
)
 
(246
)
Cash flows provided by investing activities
 
870

 
4,963

Cash flows from financing activities:
 
 
 
 

Borrowings under revolving financing facility
 

 
20,000

Repayment of revolving financing facility
 
(25,000
)
 

Proceeds from issuance of long-term debt
 
1,300,000

 

Repayment of long-term debt
 
(1,283,750
)
 
(6,500
)
Payment of debt issuance costs
 
(12,189
)
 

Dividends paid on common stock
 
(23,346
)
 
(28,757
)
Repurchase of common stock
 
(46,383
)
 
(20,003
)
Principal payments on finance lease obligations
 
(6,964
)
 
(8,013
)
Proceeds from stock options exercised
 
6,938

 
620

Tax payments for restricted stock upon vesting
 
(2,242
)
 
(1,400
)
Cash flows used in financing activities
 
(92,936
)
 
(44,053
)
Net change in cash, cash equivalents and restricted cash
 
(22,737
)
 
(13,298
)
Cash, cash equivalents and restricted cash at beginning of period
 
200,379

 
163,146

Cash, cash equivalents and restricted cash at end of period
 
$
177,642

 
$
149,848

Supplemental disclosures:
 
 

 
 

Interest paid in cash
 
$
32,954

 
$
33,199

Income taxes paid in cash
 
$
24,205

 
$
18,267

Non-cash conversion of accounts receivable to notes receivable
 
$

 
$
5,856


See the accompanying Notes to Consolidated Financial Statements.

7

Table of Contents

Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

1. General
 
The accompanying unaudited consolidated financial statements of Dine Brands Global, Inc. (the “Company” or “Dine Brands Global”) have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2019.
 
The consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of information and footnotes required by U.S. GAAP for complete financial statements.
 
These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
2. Basis of Presentation
 
The Company’s fiscal quarters end on the Sunday closest to the last day of each calendar quarter. For convenience, the fiscal quarters of each year are referred to as ending on March 31, June 30, September 30 and December 31. The first fiscal quarter of 2019 began on December 31, 2018 and ended on March 31, 2019; the second fiscal quarter of 2019 ended on June 30, 2019. The first fiscal quarter of 2018 began on January 1, 2018 and ended on April 1, 2018; the second fiscal quarter of 2018 ended on July 1, 2018.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
 
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates are made in the calculation and assessment of the following: impairment of goodwill, other intangible assets and tangible assets; income taxes; allowance for doubtful accounts and notes receivables; lease accounting estimates; contingencies; and stock-based compensation. On an ongoing basis, the Company evaluates its estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
 
3. Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted
 
Accounting Standards Adopted
 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance with respect to the accounting for leases, as codified in Accounting Standards Topic 842 (“ASC 842”). The guidance is intended to improve financial reporting of leasing transactions by requiring entities that lease assets to recognize assets and liabilities for the rights and obligations created by leases, as well as requiring additional disclosures related to an entity's leasing activities. The Company adopted this change in accounting principle using the modified retrospective method as of the first day of the first fiscal quarter of 2019. Accordingly, financial information for periods prior to the date of initial application has not been adjusted. The Company has elected the package of practical expedients for adoption that permitted the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs. The Company did not elect to use an allowable expedient that permitted the use of hindsight in performing evaluations of its leases.

Upon adoption of ASC 842, the Company recognized operating lease obligations of $453.0 million, which represented the present value of the remaining minimum lease payments, discounted using the Company's incremental borrowing rate. The Company recognized operating lease right-of-use assets of $395.6 million. The Company recognized an adjustment to retained earnings upon adoption of $5.0 million, net of tax of $1.7 million, primarily related to an impairment resulting from an unfavorable differential between lease payments to be made and sublease rentals to be received on certain leases. The remaining difference of $50.7 million between the recognized operating lease obligation and right-of-use assets related to the

8

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

3. Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted (Continued)

derecognition of certain liabilities and assets that had been recorded in accordance with U.S. GAAP that had been applied prior to the adoption of ASC 842, primarily $43.3 million of accrued rent payments. Lease-related reserves for lease incentives, closed restaurants and unfavorable leaseholds were also derecognized.

The accounting for the Company's existing finance (capital) leases upon adoption of ASC 842 remained substantially unchanged. Adoption of ASC 842 had no significant impact on the Company's cash flows from operations or its results of operations and did not impact any covenant related to the Company's long-term debt. The Company implemented internal controls necessary to ensure compliance with the accounting and disclosure requirements of ASC 842.

Additional new accounting guidance became effective for the Company as of the beginning of fiscal 2019 that the Company reviewed and concluded was either not applicable to its operations or had no material effect on its consolidated financial statements in the current or future fiscal years.

Newly Issued Accounting Standards Not Yet Adopted

In June 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. The new guidance will replace the incurred loss methodology of recognizing credit losses on financial instruments that is currently required with a methodology that estimates the expected credit loss on financial instruments and reflects the net amount expected to be collected on the financial instrument. Application of the new guidance may result in the earlier recognition of credit losses as the new methodology will require entities to consider forward-looking information in addition to historical and current information used in assessing incurred losses. The Company will be required to adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2020, with early adoption permitted in its first fiscal quarter of 2019. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued guidance designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. The Company will be required to adopt the new guidance beginning with its first fiscal quarter of 2020; early adoption in any interim period after issuance of the new guidance is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.
In August 2018, the FASB issued new guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with existing guidance for capitalizing implementation cost incurred to develop or obtain internal-use software. The guidance also provides presentation and disclosure requirements for such capitalized costs. The Company will be required to adopt the new guidance beginning with its first fiscal quarter of 2020; early adoption in any interim period after issuance of the new guidance is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.
The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements because of future adoption.
 
4. Revenue Disclosures

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

Franchising Activities

The Company owns and franchises the Applebee’s and IHOP restaurant concepts. The franchise arrangement for both brands is documented in the form of a franchise agreement and, in most cases, a development agreement. The franchise arrangement between the Company as the franchisor and the franchisee as the customer requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the brand’s symbolic intellectual property over the term of the

9

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

4. Revenue Disclosures (Continued)

license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.

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

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

Franchise and development fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the restaurant opening date. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;
The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's reported sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or, once billed, accounts receivable, on the balance sheet.
Revenue from the sale of proprietary pancake and waffle dry mix is recognized in the period in which distributors ship the franchisee's order; recognition of revenue results in accounts receivable on the balance sheet.

Company Restaurant Revenue

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

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

The following table disaggregates franchise revenue by major type for the three and six months ended June 30, 2019 and 2018:
 
 
Three Months Ended
 
Six Months Ended
 
 
 June 30,
 
 June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands)
Franchise Revenue:
 
 

 
 

 
 
 
 
Royalties
 
$
75,747

 
$
78,102

 
$
154,382

 
$
153,199

Advertising fees
 
71,738

 
58,705

 
144,368

 
122,541

Pancake and waffle dry mix sales and other
 
12,526

 
12,172

 
26,957

 
25,269

Franchise and development fees
 
2,657

 
2,962

 
5,887

 
6,245

Total franchise revenue
 
$
162,668

 
$
151,941

 
$
331,594

 
$
307,254



Accounts receivable from franchisees as of June 30, 2019 and December 31, 2018 were $65.9 million (net of allowance of $2.1 million) and $62.6 million (net of allowance of $4.6 million), respectively, and were included in receivables, net in the Consolidated Balance Sheets.


10

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

4. Revenue Disclosures (Continued)

Changes in the Company's contract liability for deferred franchise and development fees during the six months ended June 30, 2019 are as follows:
 
 
Deferred Franchise Revenue (short- and long-term)
 
 
(In thousands)
Balance at December 31, 2018
 
$
74,695

Recognized as revenue during the six months ended June 30, 2019
 
(5,515
)
Fees deferred during the six months ended June 30, 2019
 
1,366

Balance at June 30, 2019
 
$
70,546


 
The balance of deferred revenue as of June 30, 2019 is expected to be recognized as follows:

(In thousands)
Remainder of 2019
$
6,582

2020
7,887

2021
7,798

2022
7,269

2023
6,693

2024
6,005

Thereafter
28,312

Total
$
70,546




5. Lease Disclosures

The Company engages in leasing activity as both a lessee and a lessor. The majority of the Company's lease portfolio originated when the Company was actively involved in the development and financing of IHOP restaurants prior to the franchising of the restaurant to the franchisee. This activity included the Company's leasing or purchase of the site on which the restaurant was located and subsequently leasing/subleasing the site to the franchisee. With a few exceptions, the Company ended this practice in 2003 and the Company's current lease activity is predominantly comprised of renewals of existing lease arrangements and exercises of options on existing lease arrangements.
      
The Company currently leases from third parties the real property on which approximately 610 IHOP franchisee-operated restaurants and one Applebee's franchisee-operated restaurant are located; the Company (as lessor) subleases the property to the franchisees that operate those restaurants. The Company also leases property it owns to the franchisees that operate approximately 60 IHOP restaurants and one Applebee's restaurant. The Company leases from third parties the real property on which 69 Applebee's company-operated restaurants are located. The Company also leases office space for its principal corporate office in Glendale, California and restaurant support centers in Kansas City, Missouri and Raleigh, North Carolina. The Company does not have a significant amount of non-real estate leases.

The Company's existing leases related to IHOP restaurants generally provided for an initial term of 20 to 25 years with most having one or more five-year renewal options. Option periods were not included in determining liabilities and right-of-use assets related to operating leases. Approximately 240 of the Company's leases contain provisions requiring additional rent payments to the Company (as lessor) based on a percentage of restaurant sales. Approximately 260 of the Company's leases contain provisions requiring additional rent payments by the Company (as lessee) based on a percentage of restaurant sales.

The individual lease agreements do not provide information to determine the implicit rate in the agreements. The Company made significant judgments in determining the incremental borrowing rates that were used in calculating operating lease liabilities as of the adoption date. Due to the large number of leases, the Company applied a portfolio approach by grouping the leases based on the original lease term. The Company estimated the rate for each grouping primarily by reference to yield rates on debt issuances by companies of a similar credit rating as the Company, U.S. Treasury rates as of the adoption date and adjustments for differences in years to maturity.


11


Dine Brands Global, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

5. Lease Disclosures (Continued)

The Company's lease cost for the three and six months ended June 30, 2019 was as follows:
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
Finance lease cost:
 (In millions)
Amortization of right-of-use assets
$
1.3

 
$
2.6

Interest on lease liabilities
2.0

 
4.1

Operating lease cost
26.8

 
53.2

Variable lease cost
0.6