News Column

DINEEQUITY, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 1, 2014

Cautionary Statement Regarding Forward-Looking Statements

Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading "Risk Factors" in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. The forward-looking statements contained in this report are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.



You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report.

Overview

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



Key Performance Indicators

In evaluating the performance of each concept, we consider the key performance indicators to be net franchise restaurant development and the percentage change in domestic system-wide same-restaurant sales. Since we are a 99% franchised company, expanding the number of franchise restaurants is an important driver of revenue growth because we currently do not plan to open any new Applebee's or IHOP company-operated restaurants. Revenue from our rental and financing operations, legacies from the IHOP business model we operated under prior to 2003, is subject to a progressive decline over time as interest-earning balances are repaid. Growth in both the number of franchise restaurants and sales at those restaurants will drive franchise revenues in the form of higher royalty revenues, additional franchise fees and, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix. 17



--------------------------------------------------------------------------------

Table of Contents

An overview of these key performance indicators for the three months ended March 31, 2014 is as follows: Three Months Ended March 31, 2014 Applebee's IHOP



Percentage (decrease) increase in domestic system-wide same-restaurant sales

(0.5)%



3.9%

Net franchise restaurant development(1) -



10

___________________________________

(1) Franchise and area license openings, net of closings IHOP's increase of 3.9% in domestic system-wide restaurant sales for three months ended March 31, 2014 was the fourth consecutive quarterly increase in domestic system-wide restaurant sales. The increase resulted from a higher average customer check partially offset by a slight decrease in customer traffic. IHOP significantly outperformed the overall restaurant industry as well as the family dining segment in this metric for the three months ended March 31, 2014. Based on data from Black Box Intelligence, a restaurant sales reporting firm ("Black Box"), same-restaurant sales decreased for both the overall restaurant industry and the family dining segment during the first quarter of 2014. Applebee's domestic system-wide restaurant sales for three months ended March 31, 2014 decreased 0.5% as a decline in customer traffic was partially offset by an increase in average customer check. Applebee's performance was in line with that of the overall restaurant industry as well of as the casual dining segment, both of which decreased during the first quarter of 2014 based on data from Black Box. During the three months ended March 31, 2014, Applebee's opened eight new restaurants while IHOP franchisees and area licensees opened 14 new restaurants. Applebee's franchisees closed eight restaurants during that time period, resulting in no net franchise restaurant growth. The closures were unrelated as each restaurant was closed by a different Applebee's franchisee. In addition to the 14 IHOP franchise restaurant openings, three restaurants that had been temporarily operated by us were refranchised to new owners. IHOP franchisees closed seven restaurants, resulting in net growth of 10 franchise restaurants. Of the seven IHOP closures, two were closed by the same franchisee and the other five were closed by different franchisees. In 2014, we expect both IHOP and Applebee's franchisees to each open a total of between 40 to 50 new restaurants. The majority of openings for each brand are expected to be in domestic markets. The actual number of openings may differ from both our expectations and development commitments. Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be developed due to various factors, including economic conditions and franchisee noncompliance with development agreements. The timing of new restaurant openings also may be affected by various factors including weather-related and other construction delays, difficulties in obtaining timely regulatory approvals and the impact of currency fluctuations on our international franchisees. In evaluating the performance of the consolidated enterprise, we consider the key performance indicators to be consolidated cash flows from operating activities and consolidated free cash flow (cash from operations, plus receipts from notes, equipment contracts and other long-term receivables, minus capital expenditures, principal payments on capital leases and financing obligations and the mandatory annual repayment of 1% of the principal balance of our Term Loans).



Consolidated cash flows from operating activities and consolidated free cash flow for the three months ended March 31, 2014 and 2013 were as follows:

Three Months Ended March 31, 2014 2013 (In millions) Consolidated cash flows from operating activities $ 52.8$ 71.2 Consolidated free cash flow $ 50.3$ 69.8



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

18



--------------------------------------------------------------------------------

Table of Contents

Capital Allocation Strategy

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



Restaurant Development Activity

The following table summarizes Applebee's restaurant development activity during the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, 2014 2013 (Unaudited) Applebee's Restaurant Development Activity Summary - beginning of period: Franchise 1,988 2,011 Company restaurants 23 23



Total Applebee's restaurants, beginning of period 2,011 2,034 Franchise restaurants opened: Domestic

8 2 International - - Total franchise restaurants opened 8 2 Franchise restaurants closed: Domestic (5 ) (3 ) International (3 ) (2 ) Total franchise restaurants closed (8 ) (5 ) Net franchise restaurant additions (reductions) - (3 ) Summary - end of period: Franchise 1,988 2,008 Company restaurants 23 23 Total Applebee's restaurants, end of period 2,011 2,031 19



--------------------------------------------------------------------------------

Table of Contents

The following table summarizes IHOP restaurant development activity during the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, 2014 2013 (Unaudited) IHOP Restaurant Development Activity Summary - beginning of period: Franchise 1,439 1,404 Area license 168 165 Company 13 12



Total IHOP restaurants, beginning of period 1,620 1,581

Franchise/area license restaurants opened: Domestic franchise 9 8 Domestic area license 1 2 International franchise 4 2 Refranchised from Company 3 - Total franchise/area license restaurants opened 17 12 Franchise/area license restaurants closed: Domestic franchise (5 ) (4 ) International franchise (1 ) - International area license (1 ) -



Total franchise/area license restaurants closed (7 ) (4 ) Net franchise/area license restaurant additions 10

8 Summary - end of period: Franchise 1,449 1,410 Area license 168 167 Company 10 12 Total IHOP restaurants, end of period 1,627 1,589 20



--------------------------------------------------------------------------------

Table of Contents Restaurant Data The following table sets forth, for the three months ended March 31, 2014 and 2013, 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 - March 31, 2014 2013 (Unaudited) Applebee's Restaurant Data Effective Restaurants(a) Franchise 1,985 2,006 Company 23 23 Total 2,008 2,029 System-wide(b) Sales percentage change(c) (0.7 )%



(0.4 )% Domestic same-restaurant sales percentage change(d) (0.5 )% (1.3 )%

Franchise(b)

Sales percentage change(c) (e) (0.7 )% 7.2 % Domestic same-restaurant sales percentage change(d) (0.5 )% (1.2 )% Average weekly domestic unit sales (in thousands) $ 49.5$ 49.3 IHOP Restaurant Data Effective Restaurants(a) Franchise 1,439 1,408 Area license 169 167 Company 11 12 Total 1,619 1,587 System-wide(b) Sales percentage change(c) 6.5 % 2.4 % Domestic same-restaurant sales percentage change(d) 3.9 % (0.5 )% Franchise(b) Sales percentage change(c) 6.4 % 2.3 % Domestic same-restaurant sales percentage change(d) 3.9 % (0.5 )% Average weekly domestic unit sales (in thousands) $ 36.4$ 34.9 Area License(b) Sales percentage change(c) 8.0 % 4.1 % 21



--------------------------------------------------------------------------------

Table of Contents

(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 for the three months ended March 31, 2014 and 2013 were as follows: Three Months Ended March 31, 2014 2013 (In millions)



Reported sales (unaudited) Applebee's franchise restaurant sales $ 1,183.1$ 1,191.5 IHOP franchise restaurant sales $ 680.3$ 639.3 IHOP area license restaurant sales $ 70.1$ 64.9

(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 unit 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.



(e) The sales percentage change for the three months ended March 31, 2013 for Applebee's franchise restaurants was impacted by the refranchising of 154 company-operated restaurants during 2012.

22



--------------------------------------------------------------------------------

Table of Contents

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

Same-restaurant Sales Trends

[[Image Removed]] Applebee's domestic system-wide same-restaurant sales decreased 0.5% for the three months ended March 31, 2014 from the same period in 2013. A decline in customer traffic was partially offset by an increase in average customer check. Same-restaurant sales performance for the first three months of 2014 is not necessarily indicative of results expected for the full year. [[Image Removed]] IHOP's domestic system-wide same-restaurant sales increased 3.9% for the three months ended March 31, 2014 from the same period in 2013, the fourth consecutive quarterly increase in same-restaurant sales. The improvement resulted from a higher average customer check partially offset by a slight decrease in customer traffic. Same-restaurant sales performance for the first three months of 2014 is not necessarily indicative of results expected for the full year. Both of our brands experienced a decline in customer traffic during the three months ended March 31, 2014. Based on data from Black Box, customer traffic declined during that period for the restaurant industry overall, as well as for both the casual dining and family dining segments of the restaurant industry. We believe the inclement weather experienced by much of the country during the first quarter exacerbated the traffic decline of both our brands and the restaurant industry as a whole. In the short term, a decline in customer traffic may be offset by an increase in average customer check resulting from an increase 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. 23



--------------------------------------------------------------------------------

Table of Contents

We continue to evaluate opportunities to improve same-restaurant sales and traffic. We focus on differentiating our two brands through innovative advertising, enhancing our menus and bar offerings, achieving operational excellence each day, and keeping our restaurants contemporary. To drive each brand forward, we will leverage what has worked to improve sales, while remaining focused on generating sustainable positive traffic. A key element of our strategy includes updating the core menus of each brand several times per year. Our first IHOP update of 2014 added Sweet Cream Cheese Crepes, available with different fruit toppings, as well as the integration of spicy flavor into several menu items. Applebee's renowned "2 for $20" offering was updated with two new "Fresh Flavors of the Southwest" dishes, Citrus Lime Sirloin and Chicken & Shrimp Tequila Tango. Applebee's franchisees remodeled 64 restaurants in the first quarter of 2014. At the end of the quarter, 75% of the domestic Applebee's system had the new revitalized look and we project that the remodel program will be 95% complete by the end of this year. Franchisee Matters In February 2013, an IHOP franchisee and its affiliated entities which owned and operated 19 restaurants located in the states of Illinois, Wisconsin and Missouri filed for bankruptcy protection. As a result of an order issued by the bankruptcy court, two of the 19 restaurants were returned to us in the third quarter of 2013. A non-cash charge of $0.5 million was recorded in the Consolidated Statement of Comprehensive Income against deferred rental revenue associated with the leases for those two restaurants. During the third quarter of 2013, we received favorable rulings from the bankruptcy court which, if upheld, would allow us to transfer the remaining 17 restaurants to another franchisee. These rulings have been appealed by the current franchisee and are presently subject to a stay, pursuant to which the current franchisee is operating these restaurants only on a day-to-day basis and is continuing to make payments to us pursuant to the terms of the original franchise agreements. RESULTS OF OPERATIONS Comparison of the Three Months Ended March 31, 2014 and 2013

SUMMARY Three Months Ended March 31, Favorable 2014 2013 (Unfavorable) Variance (In millions) Revenue $ 167.2$ 163.2 $ 4.0 Segment profit 97.1 94.4 2.7 Segment profit as % of revenue 58.1 % 57.9 % 0.2 % General & administrative expenses 34.2 34.0 (0.2 ) Interest expense 25.0 25.3 0.3 Debt modification costs - 1.3 1.3 Other expenses, net (1) 4.2 3.6 (0.6 ) Income tax provision 12.9 12.0 (0.9 ) Effective tax rate 38.2 % 39.6 % 1.4 % Net income $ 20.8$ 18.2 $ 2.6



______________________________________________________________________________

(1) Amortization of intangible assets, closure and impairment charges, loss on extinguishment of debt and gain/loss on disposition of assets

Net income for three months ended March 31, 2014 increased 14.1% compared with the same period of the prior year. This was primarily due to an increase in franchise segment profit that resulted from a 3.9% increase in IHOP's domestic same-restaurant sales and a 2.1% increase in the weighted average number of IHOP franchise and area license restaurants open during the period. Additionally, we had incurred $1.3 million in debt modification costs during the three months ended March 31, 2013 with no similar costs in 2014. General and administrative ("G&A") and interest expenses were essentially consistent with the prior year period. 24



--------------------------------------------------------------------------------

Table of Contents

REVENUE Three Months Ended March 31, Favorable 2014 2013 (Unfavorable) Variance (In millions) Franchise $ 115.5$ 111.9 $ 3.6 Company 16.3 16.5 (0.2 ) Rental 30.7 31.0 (0.3 ) Financing 4.7 3.8 0.9 Total revenue $ 167.2$ 163.2 $ 4.0 Total revenue for the three months ended March 31, 2014 increased 2.5% compared to the prior year. The improvement was primarily due to higher franchise revenues that resulted from an increase in IHOP same-restaurant sales during the quarter and IHOP restaurant development over the past twelve months. Financing segment revenues increased due to fees of $1.4 million associated with the negotiated early termination of two leases. Early lease terminations such as these occur relatively infrequently and should not be considered indicative of any trend with respect to financing segment revenue. SEGMENT PROFIT (LOSS) Three Months Ended March 31, Favorable 2014 2013 (Unfavorable) Variance (In millions) Franchise operations $ 86.1$ 83.7 $ 2.4 Company restaurant operations (0.0 ) 0.2 (0.2 ) Rental operations 6.9 6.7 0.2 Financing operations 4.1 3.8 0.3 Total $ 97.1$ 94.4 $ 2.7 Segment profit for the three months ended March 31, 2014 increased 2.8% compared to the prior year, primarily due to the higher franchise revenues resulting from a 3.9% increase in IHOP's domestic same-restaurant sales during the quarter and IHOP restaurant development over the past twelve months. 25



--------------------------------------------------------------------------------

Table of Contents Franchise Operations Three Months Ended March 31, Favorable 2014 2013 (Unfavorable) Variance (In millions, except number of restaurants) Effective Franchise Restaurants:(1) Applebee's 1,985 2,006 (21 ) IHOP 1,608 1,575 33 Franchise Revenues: Applebee's $ 50.7$ 50.7 $ 0.0 IHOP 43.6 41.2 2.4 IHOP advertising 21.2 20.0 1.2 Total franchise revenues 115.5 111.9 3.6 Franchise Expenses: Applebee's 1.4 1.5 0.1 IHOP 6.8 6.7 (0.1 ) IHOP advertising 21.2 20.0 (1.2 ) Total franchise expenses 29.4 28.2 (1.2 ) Franchise Segment Profit: Applebee's 49.3 49.2 0.1 IHOP 36.8 34.5 2.3



Total franchise segment profit $ 86.1$ 83.7 $

2.4

Segment profit as % of revenue (2) 74.6 % 74.8 %

_____________________________________________________

(1) Effective Franchise Restaurants are the weighted average number of franchise and area license restaurants open in a given fiscal period, adjusted to account for restaurants open for only a portion of the period. (2) Percentages calculated on actual amounts, not rounded amounts presented above. Applebee's franchise revenue for the three months ended March 31, 2014 was consistent with the same period of the prior year. An increase in franchise fees associated with eight restaurant openings in the first quarter of 2014 was offset by a 1.0% decrease in Effective Franchise Restaurants and a 0.5% decrease in domestic same-restaurant sales. The $2.4 million increase in IHOP franchise revenue (other than advertising) for the three months ended March 31, 2014 was due to higher royalty revenues resulting from a 3.9% increase in domestic same-restaurant sales and a 2.1% increase in Effective Franchise Restaurants, as well as a $0.5 million increase in sales volumes of pancake and waffle dry mix. The increase in IHOP franchise expenses (other than advertising) for the three months ended March 31, 2014 was primarily due to higher purchase volumes of pancake and waffle dry mix, partially offset by lower bad debt expense. IHOP's franchise expenses are substantially higher than Applebee's due to advertising expenses. Franchise fees designated for IHOP's national advertising fund and local marketing and advertising cooperatives are recognized as revenue and expense of franchise operations. However, because we have less contractual control over Applebee's advertising expenditures, that activity is considered to be an agency relationship and therefore is not recognized as franchise revenue and expense. The increases in IHOP advertising revenue and expense for the three months ended March 31, 2014 were primarily due to the increase in domestic franchise same-restaurant sales and the increase in Effective Franchise Restaurants that also impacted IHOP franchise revenue as noted above. The $2.4 million increase in franchise segment profit for the three months ended March 31, 2014 was primarily due to a 3.9% increase in IHOP's domestic same-restaurant sales and an increase in IHOP's Effective Franchise Restaurants due to new restaurant development over the past twelve months. 26



--------------------------------------------------------------------------------

Table of Contents Company Restaurant Operations Three Months Ended March 31, Favorable 2014 2013 (Unfavorable) Variance (In millions, except number of restaurants) Effective Company Restaurants:(1) Applebee's 23 23 - IHOP 11 12 (1 ) Company restaurant sales $ 16.3$ 16.5 $ (0.2 ) Company restaurant expenses 16.3 16.3 -



Company restaurant segment profit $ (0.0 )$ 0.2 $

(0.2 ) Segment profit as % of revenue (2) (0.0 )% 1.1 %



_____________________________________________________

(1) Effective Company Restaurants are the weighted average number of company restaurants open in a given fiscal period, adjusted to account for company restaurants open for only a portion of the period. (2) Percentages calculated on actual amounts, not rounded amounts presented above.

As of March 31, 2014, company restaurant operations comprised 23 Applebee's company-operated restaurants and 10 IHOP company-operated restaurants. We operate these restaurants primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models and accordingly, we do not anticipate these restaurants will generate a significant amount of profit or loss in any given period. Additionally, from time to time we may also operate restaurants reacquired from IHOP franchisees on a temporary basis until the restaurants are refranchised. On a weighted average basis, there were several reacquired IHOP restaurants operated by us during the three months ended March 31, 2014 and 2013, but as of March 31, 2014 there were no such reacquired restaurants operated by us. Rental Operations Three Months Ended March 31, Favorable 2014 2013 (Unfavorable) Variance (In millions) Rental revenues $ 30.7$ 31.0 $ (0.3 ) Rental expenses 23.8 24.3 0.5



Rental operations segment profit $ 6.9$ 6.7 $

0.2

Segment profit as % of revenue (1) 22.4 % 21.7 %

_____________________________________________________

(1) Percentages calculated on actual amounts, not rounded amounts presented above

Rental operations relate primarily to IHOP franchise restaurants. Rental income includes revenue from operating leases and interest income from direct financing leases. Rental expenses are costs of prime operating leases and interest expense on prime capital leases on certain franchise restaurants. Rental revenue for the three months ended March 31, 2014 decreased primarily due to a decline in interest income as direct financing leases are repaid. The decrease in rental segment expenses during the three months ended March 31, 2014 was primarily due to progressive declines over time in interest expense on capital lease obligations and depreciation expense on capital lease assets. 27



--------------------------------------------------------------------------------

Table of Contents Financing Operations Three Months Ended Favorable March 31, (Unfavorable) 2014 2013 Variance (In millions) Financing revenues $ 4.7$ 3.8 $ 0.9 Financing expenses 0.6 - (0.6 ) Financing operations segment profit $ 4.1$ 3.8 $ 0.3 Segment profit as % of revenue (1) 87.4 %



100.0 %

_____________________________________________________

(1) Percentages calculated on actual amounts, not rounded amounts presented above

All financing operations relate to IHOP franchise restaurants. Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases, as well as sales of equipment associated with refranchised IHOP restaurants. Financing expenses are primarily the cost of restaurant equipment associated with refranchised IHOP restaurants. The increase in financing revenue for the three months ended March 31, 2014 was primarily due to fees of $1.4 million associated with the negotiated early termination of two leases. This increase was partially offset by a $0.4 million decrease in sales of equipment associated with IHOP restaurants reacquired from franchisees and a $0.2 million decrease in interest revenue resulting from the progressive decline in note balances due to repayments. Financing expenses for the three months ended March 31, 2014 were the cost of sales of equipment associated with IHOP restaurants reacquired from franchisees. There were no franchise segment expenses associated with refranchising activity in the first quarter of 2013.



OTHER EXPENSE AND INCOME ITEMS

Three Months Ended Favorable March 31, (Unfavorable) 2014 2013 Variance (In millions) General and administrative expenses $ 34.2$ 34.0 $ (0.2 ) Interest expense 25.0 25.3 0.3 Amortization of intangible assets 3.1 3.1 - Closure and impairment charges 0.2 0.8 0.6 Debt modification costs - 1.3 1.3 Loss (gain) on disposition of assets 0.9 (0.3 ) (1.2 ) Provision for income taxes 12.9 12.0 (0.9 )



General and Administrative Expenses

G&A expenses for the three months ended March 31, 2014 increased less than 1% compared to the same period of the prior year. Higher costs for severance and consumer research were offset by lower costs for professional services, lower bonus expenses and lower costs for liability-classified stock based compensation awards. Interest Expense Interest expense for the three months ended March 31, 2014 decreased by $0.3 million compared to the same period of the prior year. The interest rate on our Term Loans was 3.75% for three months ended March 31, 2014, whereas the interest rate on our Term Loans was 4.25% at the beginning of 2013 but was reduced to 3.75% after the debt modification noted below. Additionally, average interest-bearing debt outstanding (our Term Loans, Senior Notes and financing obligations) during the three months ended March 31, 2014 was approximately $5 million lower than the same period of the prior year. 28



--------------------------------------------------------------------------------

Table of Contents

Amortization of Intangible Assets

Amortization of intangible assets relates to intangible assets, primarily franchising rights, that arose from the November 2007 acquisition of Applebee's. Absent any impairment of the assets, the annual amount of amortization expense will decline by approximately $2 million on an annualized basis in 2015 as intangible assets with shorter lives become fully amortized.



Closure and Impairment Charges

Closure and impairment charges were $0.2 million and $0.8 million for the three months ended March 31, 2014 and 2013, respectively. There were no individually significant transactions in either period. During the quarter ended March 31, 2014, we performed an assessment of whether events or changes in circumstances have occurred that potentially indicate the carrying value of tangible long-lived assets may not be recoverable. No significant impairments were noted in performing that assessment. We also considered whether there were any indicators of potential impairment to our goodwill and indefinite-lived intangible assets. No such indicators were noted.



Debt Modification Costs

On February 4, 2013, we entered into Amendment No. 2 ("Amendment No. 2") to the Credit Agreement under our Senior Secured Credit Facility (the "Credit Agreement"). For a description of Amendment No. 2, refer to Note 7 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Fees paid to third parties of $1.3 million in connection with Amendment No. 2 were included as "Debt modification costs" in the Consolidated Statement of Comprehensive Income for the three months ended March 31, 2013.



Loss (Gain) on Disposition of Assets

We recognized a loss on disposition of assets of $0.9 million for the three months ended March 31, 2014 compared to a gain of $0.3 million for the three months ended March 31, 2013. There were no individually significant dispositions during either period. Provision for Income Taxes Our effective tax rate was 38.2% for the three months ended March 31, 2014 compared to 39.6% for the three months ended March 31, 2013. The effective tax rate in 2014 was lower compared to the same period of 2013 due to the tax provision in 2013 reflecting a higher amount of unrecognized tax benefits as a result of audits from taxing authorities.



Liquidity and Capital Resources

Credit Facilities

We have a $75.0 million revolving credit facility (the "Revolving Facility") under our Credit Agreement. During the three months ended March 31, 2014, we did not borrow from our Revolving Facility and there were no outstanding borrowings under the Revolving Facility at March 31, 2014. The Revolving Facility is also used to collateralize letters of credit we are required to maintain for insurance purposes. Our available borrowing capacity under the Revolving Facility is reduced by the outstanding letters of credit, which totaled $11.1 million at March 31, 2014. Restricted Payments The Credit Agreement contains provisions considered customary for similar types of facilities that limit certain permitted restricted payments, including those related to dividends on and repurchases of our common stock. The limitation on restricted payments under the Credit Agreement is calculated quarterly. Such restricted payments are limited to a cumulative amount comprised of (i) a general restricted payments allowance of $35.0 million, plus (ii) 50% of Excess Cash Flow (as defined in the Credit Agreement) for each fiscal quarter in which the consolidated leverage ratio is greater than or equal to 5.75:1; (iii) 75% of Excess Cash Flow for each fiscal quarter in which the consolidated leverage ratio is less than 5.75:1 and greater than or equal to 5.25:1; (iv) 100% of Excess Cash Flow for each fiscal quarter in which the consolidated leverage ratio is less than 5.25:1; and (v) proceeds from the exercise of stock options, less any restricted payments made. The permitted amount of future restricted payments under the Credit Agreement, calculated as of March 31, 2014, was approximately $120 million. 29



--------------------------------------------------------------------------------

Table of Contents

The Indenture under which the Senior Notes due October 2018 (the "Senior Notes") were issued (the "Indenture") also contains a limitation on restricted payments that is calculated on an annual basis. Such restricted payments are limited to a cumulative amount comprised of (i) 50% of consolidated net income (as defined in the Indenture), plus (ii) proceeds from exercise of stock options, less any restricted payments made. The permitted amount of future restricted payments under the Indenture, calculated as of December 31, 2013, was approximately $112 million. We estimate the net activity during the three months ended March 31, 2014 has reduced the permitted amount of future restricted payments under the Indenture by approximately $10 million. We made restricted payments of $29.3 million during the three months ended March 31, 2014, comprised of cash dividends on our common stock of $14.3 million and repurchases of common stock of $15.0 million.



Debt Covenants

Pursuant to our Credit Agreement, we are required to comply with a maximum consolidated leverage ratio and a minimum consolidated cash interest coverage ratio. Our current maximum consolidated leverage ratio of total debt (net of unrestricted cash not to exceed $75 million) to adjusted EBITDA is 6.75:1. Our current minimum ratio of adjusted EBITDA to consolidated cash interest is 1.75:1. Compliance with each of these ratios is required quarterly, calculated on a trailing four-quarter basis. The ratio thresholds become more rigorous over time. The maximum consolidated leverage ratio, which began at 7.5:1, declines in annual 25-basis-point decrements, beginning with the first quarter of 2012, to 6.5:1 by the first quarter of 2015, then to 6.0:1 for the first quarter of 2016 until the Credit Agreement expires in October 2017. The minimum consolidated cash interest coverage ratio began at 1.5:1, increased to 1.75:1 beginning with the first quarter of 2013, will increase to 2.0:1 beginning with the first quarter of 2016 and will remain at that level until the Credit Agreement expires in October 2017. There are no financial maintenance covenants associated with our Senior Notes. For the trailing four quarters ended March 31, 2014, our consolidated leverage ratio was 4.7:1 and our cash interest coverage ratio was 2.5:1 (see Exhibit 12.1). Our adjusted EBITDA for the trailing twelve months ended March 31, 2014 exceeded the amount necessary to remain in compliance with these ratios by 43% and 46%, respectively.



The adjusted EBITDA used in calculating these ratios is considered to be a non-U.S. GAAP measure. The reconciliation between our income before income taxes, as determined in accordance with U.S. GAAP, and adjusted EBITDA used for covenant compliance purposes is as follows:

Trailing Twelve Months Ended March 31, 2014 (In thousands)



U.S. GAAP income before income taxes $ 114,141 Interest charges

115,888 Depreciation and amortization 35,302 Non-cash stock-based compensation 9,318 Closure and impairment charges 974 Gain on sale of assets 1,022 Other 4,301 Adjusted EBITDA $ 280,946 We believe this non-U.S. GAAP measure is useful in evaluating our results of operations in reference to compliance with the debt covenants discussed above. This non-U.S. GAAP measure is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute for, the U.S. GAAP information contained within our financial statements. Our Senior Notes and our Credit Agreement are also subject to affirmative and negative covenants considered customary for similar types of facilities, including, but not limited to, covenants with respect to incremental indebtedness, liens, investments, affiliate transactions, and capital expenditures. These covenants are subject to a number of important limitations, qualifications and exceptions. Certain of these covenants will not be applicable to the Senior Notes during any time that the Senior Notes maintain investment grade ratings. 30



--------------------------------------------------------------------------------

Table of Contents

Potential Refinancing of Indebtedness

Our Credit Agreement expires in October 2017 and our Senior Notes are due in October 2018. We continually review all available options to efficiently manage our debt portfolio in light of, among other things, prevailing interest rates, the current and forecast economic climate and our overall business strategy. We anticipate refinancing some or all of our indebtedness in 2014 if financial market and economic conditions are favorable for us to do so. There can be no assurance regarding the timing of the refinancing transaction or that the transaction will be completed. In the event the Senior Notes are repaid prior to October 2018, we may be liable for certain make-whole payments. These make-whole payments, should they be required, will be determined in accordance with the terms of the Indenture under which the Senior Notes were issued. We estimate the make-whole payment was approximately $75.3 million at March 31, 2014. The make-whole payment will decline monthly from that amount to approximately $36.1 million as of October 30, 2014. The make-whole payment will then decline in two step-downs, first to $18.1 million on October 30, 2015, then to zero on October 30, 2016. The monthly decline between March 2014 and October 2014 will be relatively linear, although the actual calculation includes a number of unpredictable variables, including prevailing interest rates at the specific point in time a make-whole payment, should one be required, is calculated.



Dividends

Our Board of Directors approved payment of a first quarter 2014 cash dividend of $0.75 per share of our common stock to the stockholders of record as of the close of business on March 14, 2014. The cash dividend totaling $14.3 million was paid on March 28, 2014. As discussed under "Restricted Payments" above, payment of dividends is subject to limitations under both our Credit Agreement and Senior Notes. We evaluate dividend payments on common stock within the context of our overall capital allocation strategy with our Board of Directors on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements, the limitations on restricted payments and other factors. Share Repurchases In February 2013, our Board of Directors approved a stock repurchase authorization of up to $100 million of our common stock. During the three months ended March 31, 2014, we repurchased 178,528 shares of our common stock at a cost of $15.0 million. As of March 31, 2014, we have repurchased a cumulative total of 590,550 shares of our common stock under the current authorization at a total cost of $44.7 million. We may repurchase up to an additional $55.3 million of our common stock under the outstanding Board authorization. As discussed under "Restricted Payments" above, repurchases of common stock are subject to limitations under both our Credit Agreement and Senior Notes. We evaluate repurchases of common stock within the context of our overall capital allocation strategy with our Board of Directors on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements, the limitations on restricted payments and other factors. Cash Flows In summary, our cash flows for the three months ended March 31, 2014 and 2013 were as follows: Three Months Ended March 31, 2014 2013 Variance (In millions) Net cash provided by operating activities $ 52.8$ 71.2$ (18.4 ) Net cash provided by investing activities 2.0 2.4 (0.4 ) Net cash used in financing activities (27.6 ) (20.8 ) (6.8 ) Net increase in cash and cash equivalents $ 27.2$ 52.8$ (25.6 ) Operating Activities Cash provided by operating activities decreased $18.4 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to an unfavorable net change in working capital. Net changes in working capital provided cash of $28.7 million during the first three months of 2014 compared to $43.7 million of cash provided during the first three months of 2013, an unfavorable variance of $15.0 million. This variance was due primarily to changes in prepaid rent balances that arise solely from the variability of our non-calendar fiscal period ends and an increase in payments for bonuses accrued for fiscal 2013. 31



--------------------------------------------------------------------------------

Table of Contents

Additionally, for the first three months of 2014, our net income plus the non-cash reconciling items shown in our statements of cash flows (primarily depreciation, gains on asset sales, deferred taxes and stock-based compensation) decreased by $3.4 million compared to 2013. Net income for the three months ended March 31, 2014 increased $2.6 million compared to the same period of 2013, primarily due to higher franchise segment profit, but this was more than offset by an increase in excess tax benefits for stock-based compensation that reduce operating cash flows. Investing Activities Investing activities provided net cash of $2.0 million for the three months ended March 31, 2014. Principal receipts from notes, equipment contracts and other long-term receivables of $3.4 million and proceeds from asset sales of $0.7 million were partially offset by $2.0 million in capital expenditures. Capital expenditures are expected to be approximately $10 million for fiscal 2014. Financing Activities Financing activities used net cash of $27.6 million for the three months ended March 31, 2014. Cash used in financing activities primarily consisted of repurchases of our common stock totaling $15.0 million, cash dividends on our common stock totaling $14.3 million, repayments of capital lease, financing obligations and long-term debt of $3.9 million, and an increase in marketing fund restricted cash of $3.7 million. Cash provided by financing activities primarily consisted of a net cash inflow of $9.2 million related to equity awards.



At March 31, 2014, our cash and cash equivalents totaled $133.2 million, including approximately $65.1 million of cash held for gift card programs and advertising funds.

Based on our current level of operations, we believe that our cash flow from operations, available cash and available borrowing capacity under our Revolving Facility will be adequate to meet our liquidity needs for the next twelve months. We have not entered into hedging agreements to mitigate the effect of changes in variable interest rates charged on borrowings under the Credit Agreement.



Free Cash Flow

We define "free cash flow" for a given period as cash provided by operating activities, plus receipts from notes, equipment contracts and other long-term receivables (collectively, "long-term receivables"), less additions to property and equipment, principal payments on capital lease and financing obligations and the mandatory annual repayment of 1% of the principal balance of our borrowings under Amendment No. 2 of our Credit Agreement (the "Term Loans"). We believe this information is helpful to investors to determine our cash available for general corporate purposes and for the return of cash to stockholders pursuant to our capital allocation strategy.



Free cash flow is considered to be a non-U.S. GAAP measure. Reconciliation of the cash provided by operating activities to free cash flow is as follows:


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses