Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Dine Brands Global, Inc. (49754) 10-Q published on May 01, 2019 at 8:00 am
Reporting Period: Mar 30, 2019
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.
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 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.
Cash provided by operating activities increased $12.4 million during the three months ended March 31, 2019 compared to the same period of the prior year. Our net income plus the non-cash reconciling items shown in our statements of cash flows (primarily depreciation, deferred taxes and stock-based compensation) increased $19.2 million from 2018. This change was primarily due to an increase in gross profit and a lower effective tax rate, each of which was discussed in preceding sections of the MD&A. Additionally, net changes in working capital used cash of $13.3 million during the three months ended March 31, 2019 compared to using cash of $6.6 million during the same period of the prior year. This unfavorable change of $6.7 million between years primarily resulted from an increase in payments for incentive compensation and income taxes, partially offset by the timing of payments of marketing accruals. The increase of $12.4 million in cash provided by operating activities for the three months ended March 31, 2019 was due to the favorability of $19.2 million in net income plus non-cash reconciling items offset by the unfavorable change of $6.7 million in cash used by working capital changes.
As discussed in Note 3, “Accounting Standards Adopted and Newly Issued Accounting Standards Not Yet Adopted,” in the Notes to Consolidated Financial Statements, we adopted the guidance as codified in ASC 842 with respect to accounting for leases. We adopted this change in accounting principle using the modified retrospective method as of the first day of our first fiscal quarter of 2019. Upon adoption of ASC 842, we recognized operating lease obligations of $453.0 million, which represents the present value of the remaining minimum lease payments, discounted using our incremental borrowing rate. We recognized operating lease right-of-use assets of $395.6 million and also 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 relates to the 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 our existing finance (capital) leases upon adoption of ASC 842 remained substantially unchanged. Adoption of ASC 842 had no significant impact on our cash flows from operations or our results of operations.