IHOP Reports Q3 Loss
IHOP Corp. Reports Third Quarter 2007 Financial Results
IHOP Corp. (NYSE:IHP) today announced financial results for the third quarter and nine months ended September 30, 2007, which included the following performance highlights:
• IHOP produced its 19th consecutive quarter of same-store sales growth with an increase of 2.0% for the third quarter 2007. This growth was driven by higher guest check averages, partially offset by declines in guest traffic during the quarter.
• IHOP franchisees developed and opened 14 new restaurants during the third quarter 2007. System-wide restaurants grew 3.9% year-over-year for a total of 1,328 IHOP restaurants.
• The Company recognized a non-cash, pre-tax expense of $35.6 million related to a previously disclosed interest rate swap transaction entered into during the third quarter 2007 in connection with the financing of IHOP's pending acquisition of Applebee's International, Inc.
• Excluding interest rate swap expense, net income per diluted share decreased 3.2% in the third quarter 2007 to $0.60, while net income per diluted share for the first nine months of 2007 increased 14.5% to $2.13 primarily due to a lower effective tax rate, growth in the profitability in IHOP's core franchising business, and a decrease in diluted weighted average shares outstanding due to share repurchases during the past 12 months.
• Cash Flows from Operating Activities for the first nine months of 2007 totaled $46.3 million. Additionally, $12.0 million of cash was provided by the collection of the Company's long-term receivables for the first nine months of 2007.
Julia A. Stewart, IHOP's Chairman and Chief Executive Officer, said, "We are pleased with our third quarter and year-to-date 2007 pro forma financial performance exclusive of acquisition related non-cash expenses. The IHOP brand continues to perform well as we work to optimize our franchise model, moderate annual G&A expense growth and experience the annualized benefit of past share repurchase activities."
Third Quarter and Year-to-Date 2007 Financial Performance
IHOP's financial performance for the third quarter and nine months ended September 30, 2007 was materially impacted by required accounting methodologies related to a previously disclosed interest rate swap transaction (swap) entered into during the third quarter 2007 in connection with the financing of IHOP's pending acquisition of Applebee's International, Inc. The swap is intended to hedge IHOP's exposure to interest rate fluctuations on its planned securitizations associated with the acquisition of Applebee's. The hedge enabled the Company to secure a fixed interest rate of 5.694%, setting a ceiling for the base interest rate on the securitizations at the outset of IHOP's primarily debt-financed acquisition of Applebee's. Accounting for the swap calls for a quarterly measurement between the fixed interest swap and fair market interest swap rates. Such measurements resulted in a $70.3 million spread liability between the fixed interest rate and the fair market interest rate as of September 30, 2007, $35.6 million of which was required to be reported as a mark-to-market, non-cash expense on the Company's Consolidated Statement of Income. The remaining $34.7 million would be amortized into interest expense over the life of the debt, after the planned issuance of securitized notes.
IHOP reported a decrease in net income to a loss of $11.6 million, and a decrease in diluted net income per share to a loss of $0.69 for the third quarter 2007 compared with the same quarter in fiscal 2006. The decreases resulted from the recognition of a $21.8 million non-cash expense (net of tax) related to the swap entered into during the third quarter 2007. Excluding the swap expense, IHOP reported a decrease of 10.1% in net income to $10.2 million, and a 3.2% decrease in diluted net income per share to $0.60 in the third quarter 2007 as compared with the same quarter in fiscal 2006. The change in net income resulted primarily from a 7.6% increase in IHOP's core franchising business offset by a 46.2% increase in Financing Operations expenses related to the Company's refinancing in March 2007 as well as a 9.9% increase in G&A expenses primarily due to higher costs related to the Company's performance share plans for its executive management team in line with IHOP's stock price performance. Additionally, a 6.6% reduction in diluted weighted average shares outstanding due to share repurchases by the Company made over the past 12 months contributed to IHOP's diluted net income per share performance for the third quarter 2007.
For the nine months ended September 30, 2007, IHOP reported a decrease of 59.6% in net income to $13.8 million, and a decrease of 57.0% in diluted net income per share to $0.80. The decreases resulted from the recognition of a $21.8 million non-cash expense (net of tax) related to the swap entered into during the third quarter 2007 and a $1.4 million expense (net of tax) related to the early extinguishment of debt in the first quarter 2007. Excluding the swap expense and debt extinguishment costs, IHOP reported an increase of 8.1% in net income to $37.0 million, and a 14.5% increase in diluted net income per share to $2.13 for the first nine months of fiscal 2007 compared to the same period in fiscal 2006. The increases in net income and diluted net income per share resulted primarily from a 7.2% increase in IHOP's core franchising business, a 3.3% increase in G&A expenses, and a 10.1 percentage point decrease in the Company's effective tax rate primarily due to a one-time reduction of certain tax contingency reserves. IHOP's effective tax rate decreased to 28.5% in the first nine months of 2007 as compared to 38.6% in the same period last year. Additionally, a 5.6% reduction in diluted weighted average shares outstanding due to share repurchases by the Company made over the past 12 months contributed to IHOP's year-to-date diluted net income per share performance.
Cash Flows from Operating Activities decreased 14.0% for the first nine months of fiscal 2007 to $46.3 million compared with $53.9 million for the same period in fiscal 2006. This decrease was primarily due to lower tax payables and other accrued liabilities. Principal receipts from notes and equipment contracts receivable, which are an additional source of cash generation for the Company, amounted to $12.0 million for the nine months of fiscal 2007. Capital expenditures decreased to $2.2 million for the first nine months of fiscal 2007 compared with $7.4 million for the same period in fiscal 2006. The decrease in capital expenditures primarily reflects a reduction in restaurant development costs consistent with the Company's plan not to open any IHOPs in its dedicated Company market in Cincinnati, Ohio, in 2007.
For the three months ended September 30, 2007, system-wide same-store sales increased 2.0%, which reflected continued growth given an ongoing difficult economic environment and increased competition at the breakfast daypart. During the third quarter 2007, IHOP experienced an increase in guest check average primarily due to the cumulative effect of menu price increases taken by franchisees in 2006, while guest traffic declined during the quarter.
Update on Acquisition of Applebee's International
On July 16, 2007, IHOP Corp. announced it had reached a definitive agreement to acquire Applebee's International, Inc. for $25.50 per share in cash, representing a total transaction value of approximately $2.3 billion. With the Applebee's shareholder vote regarding the acquisition scheduled for Tuesday, October 30, 2007, IHOP is moving ahead as planned with the necessary steps to complete a whole-business securitization of Applebee's, as well as additional debt expected to be raised from the existing IHOP securitization structure, which will be the primary sources of funding for the acquisition.
The Company expects to close the transaction through a securitization in a timely manner. However, the Company recognizes the recent weakening of the credit markets and, specifically, conditions in the monoline insured asset-backed securities market which have become more challenging due to a reduction in the overall buyer universe and a widening of risk spreads. While these conditions could potentially increase the difficulty of successfully placing the securitized notes, IHOP believes that it can successfully fund the acquisition through the planned securitizations in the fourth quarter 2007. In the event it becomes necessary, the Company has a commitment for bridge financing from Lehman Brothers to finance the transaction until the securitization can be completed.
IHOP also reports that the integration plan for the combined companies designed to support the franchising of the majority of Applebee's company-operated markets is largely complete. The Company is aggressively working to arrange for the sale-leaseback of nearly all Applebee's owned real estate, or approximately 200 locations. Additionally, executives for both companies have developed a plan for the franchising of Applebee's company-operated markets and have already begun a dialogue with prospective franchisees for these markets.
IHOP's acquisition of Applebee's is planned to close by November 29, 2007.
2007 Performance Guidance
While the Company remains comfortable with its existing performance guidance for 2007 as it relates to its IHOP business, IHOP previously suspended its fiscal 2007 earnings guidance as current guidance does not take into account the effect of the Applebee's acquisition on full year results. The acquisition notwithstanding, IHOP reiterated its key performance assumptions for fiscal 2007. The Company expects same-store sales growth between 2% and 4%, the addition of 61 to 66 new franchise restaurants to the IHOP system, moderate G&A spending in the range of $65 million to $67 million, and the effect of share repurchases executed in the first half of fiscal 2007 to contribute to its per share earnings performance for fiscal 2007.
Cash from Operations is expected to range between $60 million and $65 million in 2007, and principal receipts from note and equipment contracts receivable are expected to be within the range of $16 million to $18 million. Capital expenditures are expected to range between $6 million and $8 million in 2007. This primarily reflects investment in the Company's Information Technology infrastructure and construction related to the opening of additional restaurants in IHOP's Company market in Cincinnati, Ohio, in fiscal 2008.
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2007 2006 2007 2006
--------- ---------- ---------- ----------
Revenues
Franchise revenues $ 48,782 $ 45,961 $ 142,766 $ 133,706
Rental income 33,242 33,428 99,310 99,032
Company restaurant sales 4,546 3,492 13,155 9,649
Financing revenues 4,785 5,156 15,735 19,241
--------- ---------- ---------- ----------
Total revenues 91,355 88,037 270,966 261,628
--------- ---------- ---------- ----------
Costs and Expenses
Franchise expenses 22,478 21,520 65,068 61,244
Rental expenses 24,678 24,371 73,853 73,526
Company restaurant expenses 5,109 4,054 14,984 10,941
Financing expenses 38,676 2,092 43,627 9,961
General and administrative
expenses 17,842 16,230 48,066 46,508
Other expense, net 1,315 1,567 3,800 3,718
Early debt extinguishment costs -- -- 2,223 --
--------- ---------- ---------- ----------
Total costs and expenses 110,098 69,834 251,621 205,898
--------- ---------- ---------- ----------
Income (loss) before income
taxes (18,743) 18,203 19,345 55,730
Provision (benefit) for income
taxes (7,127) 6,880 5,518 21,507
--------- ---------- ---------- ----------
Net (loss) income $ (11,616) $ 11,323 $ 13,827 $ 34,223
========= ========== ========== ==========
Net (Loss) Income Per Share
Basic $ (0.69) $ 0.63 $ 0.80 $ 1.88
========= ========== ========== ==========
Diluted $ (0.69) $ 0.62 $ 0.80 $ 1.86
========= ========== ========== ==========
Weighted Average Shares
Outstanding
Basic 16,935 17,921 17,310 18,168
========= ========== ========== ==========
Diluted 16,935 18,123 17,351 18,381
========= ========== ========== ==========
Dividends Declared Per Share $ 0.25 $ 0.25 $ 0.75 $ 0.75
========= ========== ========== ==========
Dividends Paid Per Share $ 0.25 $ 0.25 $ 0.75 $ 0.75
========= ========== ========== ==========
IHOP CORP. AND SUBSIDIARIES
RESTAURANT DATA
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2007 2006 2007 2006
--------- -------- --------- --------
Restaurant Data
Effective restaurants (a)
Franchise 1,151 1,099 1,139 1,088
Company 12 8 12 7
Area license 158 156 159 155
--------- -------- --------- --------
Total 1,321 1,263 1,310 1,250
========= ======== ========= ========
System-wide (b)
Sales percentage change (c) 7.2% 6.2% 6.6% 7.8%
Same-store sales percentage
change (d) 2.0% 1.3% 1.8% 3.1%
Franchise (b)
Sales percentage change (c) 7.3% 6.3% 6.7% 8.1%
Same-store sales percentage
change (d) 2.0% 1.3% 1.8% 3.1%
Company
Sales percentage change (c) 30.2% (2.3)% 36.3% (15.1)%
Area License (b)
Sales percentage change (c) 3.9% 5.5% 4.3% 6.7%
(a) "Effective restaurants" are the number of restaurants 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 IHOP system, which includes IHOP restaurants owned by the Company
as well as those owned by franchisees and area licensees.
(b) "System-wide sales" are retail sales at IHOP restaurants operated by
franchisees, area licensees and the Company, as reported to the
Company. Franchise restaurant sales were $525.2 million and $1,535.0
million for the third quarter and nine months ended September 30,
2007, respectively, and sales at area license restaurants were $51.6
million and $159.9 million for the third quarter and nine months ended
September 30, 2007, respectively. Sales at restaurants that are owned
by franchisees and area licensees are not attributable to the Company.
(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) "Same-store sales percentage change" reflects the percentage change
in sales, in any given fiscal period compared to the prior fiscal
period, for 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 store closures, the
restaurants open throughout both fiscal periods being compared will be
different from period to period. Same-store sales percentage change
does not include data on restaurants located in Florida.
IHOP CORP. AND SUBSIDIARIES
RESTAURANT DEVELOPMENT AND FRANCHISING ACTIVITY
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Restaurant Development Activity
Beginning of period 1,319 1,264 1,302 1,242
New openings
Company-developed -- 2 -- 3
Franchisee-developed 14 12 35 35
International
franchisee-developed -- -- 2 --
Area license -- 3 -- 6
--------- --------- --------- ---------
Total new openings 14 17 37 44
Closings
Company and franchise (2) (3) (7) (7)
Area license (3) -- (4) (1)
--------- --------- --------- ---------
End of period 1,328 1,278 1,328 1,278
========= ========= ========= =========
Summary-end of period
Franchise 1,161 1,111 1,161 1,111
Company 11 9 11 9
Area license 156 158 156 158
--------- --------- --------- ---------
Total 1,328 1,278 1,328 1,278
========= ========= ========= =========
Restaurant Franchising
Activity
Company-developed -- -- -- --
Franchisee-developed 14 12 35 35
International
franchisee-developed -- -- 2 --
Rehabilitated and refranchised 2 -- 4 8
--------- --------- --------- ---------
Total restaurants
franchised 16 12 41 43
Reacquired by the Company -- -- (6) (7)
Closed (2) (3) (6) (7)
--------- --------- --------- ---------
Net addition 14 9 29 29
========= ========= ========= =========
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2007 2006
------------ ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 33,838 $ 19,516
Receivables, net 42,761 45,571
Reacquired franchises and equipment held for
sale, net 137 --
Inventories 322 396
Prepaid expenses 8,686 7,493
Deferred income taxes 6,209 5,417
------------ ------------
Total current assets 91,953 78,393
------------ ------------
Long-term receivables 291,282 302,088
Property and equipment, net 296,522 309,737
Goodwill 10,767 10,767
Deferred rent 69,392 61,763
Deferred income taxes 13,279 --
Other assets 27,938 6,122
------------ ------------
Total assets $ 801,133 $ 768,870
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ -- $ 19,738
Accounts payable 14,109 14,689
Accrued employee compensation and benefits 12,351 13,359
Derivative financial instrument 70,306 --
Other accrued expenses 10,708 11,317
Capital lease obligations 5,500 5,002
------------ ------------
Total current liabilities 112,974 64,105
------------ ------------
Long-term debt, less current maturities 175,000 94,468
Deferred income taxes 61,474 76,017
Capital lease obligations 166,253 170,412
Other liabilities 77,554 74,655
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value, 10,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, September 30, 2007: 23,249,424
shares issued and 16,995,229 shares
outstanding, December 31, 2006: 22,818,007
shares issued and 17,873,548 shares
outstanding 229 227
Additional paid-in capital 147,442 131,748
Retained earnings 359,269 358,975
Accumulated other comprehensive loss (21,408) (133)
Treasury stock, at cost (6,254,195 shares and
4,944,459 shares at September 30, 2007 and
December 31, 2006, respectively) (277,654) (201,604)
------------ ------------
Total stockholders' equity 207,878 289,213
------------ ------------
Total liabilities and stockholders' equity $ 801,133 $ 768,870
============ ============
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2007 2006
------------ ------------
Cash flows from operating activities
Net income $ 13,827 $ 34,223
Adjustments to reconcile net income to cash
flows provided by operating activities
Depreciation and amortization 16,461 15,042
Debt extinguishment costs 2,223 --
Loss on derivative financial instrument 35,618 --
Deferred income taxes (15,690) 7,358
Stock-based compensation expense 3,820 2,902
Tax benefit from stock-based compensation 2,991 594
Excess tax benefit from stock-based
compensation (2,689) (594)
Gain on sale of land (98) --
Changes in operating assets and
liabilities
Receivables 961 2,020
Inventories 74 178
Prepaid expenses (1,193) (315)
Accounts payable (6,718) (6,886)
Accrued employee compensation and
benefits (1,008) (210)
Other accrued expenses 2,480 2,794
Deferred rent (4,304) (4,201)
Other (444) 973
------------ ------------
Cash flows provided by operating
activities 46,311 53,878
------------ ------------
Cash flows from investing activities
Additions to property and equipment (2,246) (7,373)
Business acquisition costs (6,512) --
Additions and reductions to long-term
receivables 611 255
Principal receipts from notes and equipment
contracts receivable 12,044 13,129
Additions to reacquired franchises held for
sale (169) (581)
Property insurance proceeds, net (415) 2,034
Proceeds from sale of land 795 --
------------ ------------
Cash flows provided by investing activities 4,108 7,464
------------ ------------
Cash flows from financing activities
Proceeds from issuance of long-term debt,
including revolving line of credit 208,000 --
Repayment of long-term debt (147,206) (1,566)
Payment of debt issuance costs (14,491) --
Prepayment penalties on early debt
extinguishment (1,219) --
Principal payments on capital lease obligations (3,661) (3,252)
Dividends paid (13,044) (13,681)
Purchase of treasury stock (77,020) (42,695)
Reissuance of treasury stock 970 --
Proceeds from stock options exercised 8,885 2,557
Excess tax benefit from stock-based
compensation 2,689 594
------------ ------------
Cash flows used in financing activities (36,097) (58,043)
------------ ------------
Net change in cash and cash equivalents 14,322 3,299
Cash and cash equivalents at beginning of
period 19,516 23,111
------------ ------------
Cash and cash equivalents at end of period $ 33,838 $ 26,410
============ ============
IHOP CORP. AND SUBSIDIARIES
NON-GAAP FINANCIAL MEASURES
(In thousands, except per share amounts)
(Unaudited)
Reconciliation of net (loss) income to net income excluding impact of early
debt extinguishment costs and mark-to-market swap expense:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2007 2006 2007 2006
--------- ---------- --------- ----------
Net (loss) income, as reported $ (11,616) $ 11,323 $ 13,827 $ 34,223
Early debt extinguishment
costs -- -- 2,223 --
Mark-to-market swap expense 35,618 -- 35,618 --
Income tax benefit (13,820) -- (14,682) --
--------- ---------- --------- ----------
Net income excluding early
debt extinguishment costs
and mark-to-market swap
expense $ 10,182 $ 11,323 $ 36,986 $ 34,223
========= ========== ========= ==========
Basic net income per share:
Net (loss) income, as reported
per share $ (0.69) $ 0.63 $ 0.80 $ 1.88
Early debt extinguishment costs
per share -- -- 0.13 --
Mark-to-market swap expense per
share 2.10 -- 2.06 --
Income tax benefit per share (0.81) -- (0.85) --
--------- ---------- --------- ----------
Net income excluding early
debt extinguishment costs
and mark-to-market swap
expense per share $ 0.60 $ 0.63 $ 2.14 $ 1.88
========= ========== ========= ==========
Diluted net income per share:
Net (loss) income, as reported
per share $ (0.69) $ 0.62 $ 0.80 $ 1.86
Early debt extinguishment costs
per share -- -- 0.13 --
Mark-to-market swap expense per
share 2.10 -- 2.05 --
Income tax benefit per share (0.81) -- (0.85) --
--------- ---------- --------- ----------
Net income excluding early
debt extinguishment costs
and mark-to-market swap
expense per share $ 0.60 $ 0.62 $ 2.13 $ 1.86
========= ========== ========= ==========
Logos, product and company names mentioned are the property of their respective owners.
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