# Dine Brands Global, Inc. (DIN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Dine Brands Global, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/49754/000004975422000008/din-20211231.htm
Accession: 0000049754-22-000008
Filing date: 2022-03-02
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DIN/
All MD&A years: /company/DIN/mda/
Next year: /company/DIN/mda/fy2022/ (FY 2022)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion provides analyses of our results of operations and reasons for material changes for 2021 as compared to 2020 and as compared to 2019 and should be read together with the financial statements included in this Annual Report on Form 10-K. For a detailed discussion of year-to-year comparisons between fiscal 2020 and fiscal 2019, please refer to the applicable portion of “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 2, 2021, which is hereby incorporated by reference.

The financial tables appearing in Management's Discussion and Analysis present amounts in millions of dollars that are rounded from our consolidated financial statements presented in thousands of dollars. As a result, the tables may not foot or cross foot due to rounding.

The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter, the Company's predecessor began developing and franchising additional restaurants. The Company was incorporated under the laws of the State of Delaware in 1976 with the name IHOP Corp. In November 2007, the Company completed the acquisition of Applebee's International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the Company was changed to DineEquity, Inc. and on February 20, 2018, the name of the Company was changed to Dine Brands Global, Inc.® (“Dine Brands Global,” “we” or “our”). Through various subsidiaries (see Exhibit 21, Subsidiaries of Dine Brands Global, Inc.), we own, franchise and operate the Applebee's Neighborhood Grill + Bar® (“Applebee's”) concept in the bar and grill segment within the casual dining category of the restaurant industry and we own and franchise the International House of Pancakes® (“IHOP”) concept in the family dining category of the restaurant industry. References herein to Applebee's® and IHOP® restaurants are to these two concepts, whether operated by franchisees, area licensees or us.

Domestically, IHOP restaurants are in all 50 states and the District of Columbia, while Applebee's restaurants are located in every state except Hawaii. Internationally, IHOP restaurants are in two United States territories and seven countries, while Applebee's restaurants are in two United States territories and 11 countries. With over 3,400 restaurants combined, 98% of which are franchised, we believe we are one of the largest full-service restaurant companies in the world. The June 2021 issue of Nation's Restaurant News reported that IHOP was the largest restaurant system in the family dining category and Applebee's was the fourth largest restaurant system in the casual dining category, in terms of United States system-wide sales during 2020.

We have a 52/53 week fiscal year ending on the Sunday nearest to December 31 of each year. For convenience, in this annual report on Form 10-K, we refer to all fiscal years as ending on December 31 and all interim fiscal quarters as ending on March 31, June 30 and September 30 of the respective fiscal year. There were 52 calendar weeks in our 2021 fiscal year ended January 2, 2022. There were 53 calendar weeks in our 2020 fiscal year ended on January 3, 2021 and our fiscal 2020 fourth quarter contained 14 calendar weeks. There were 52 calendar weeks in our 2019 fiscal year ended December 29, 2019.

Events Impacting Comparability of Financial Information

COVID-19 Pandemic

In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a novel strain of coronavirus, designated “COVID-19.” Initially, federal, state, local and international governments reacted to the COVID-19 pandemic by encouraging or requiring social distancing, instituting shelter-in-place orders, and requiring, in varying degrees, reduced operating hours, restaurant dine-in and/or indoor dining limitations, capacity limitations or other restrictions that largely limited most restaurants to off-premise sales (take-out and delivery) in the early stages of the pandemic, particularly from the second week of March 2020 until May 2020.

As infection rates from the initial outbreak declined, domestic governmental entities slowly began to relax restrictions, with the degree of relaxation varying by individual geographic area. In general, restaurants opened for dining were largely limited to occupancy of 50% or less of capacity during the period from May 2020 to March 2021. As vaccines became available and incidents of infection continued to decrease, many restrictions on domestic restaurant operations were removed, such that by June 2021, 98% of domestic IHOP and Applebee's restaurants and 8% of international restaurants were operating without government-mandated restrictions. As of December 31, 2021, 99% of domestic IHOP and Applebee's restaurants and 32% of international restaurants were operating without government-mandated restrictions.

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At the onset of the pandemic in March 2020, we took several actions to mitigate the effects of the COVID-19 pandemic on the Company, its operations and its franchisees, including the temporary suspension of dividends and stock repurchases as well as giving IHOP and Applebee's franchisees the opportunity to defer payment of amounts due to us for royalty, advertising and other items. See “Liquidity and Capital Resources of the Company,” for further discussion of these actions.

We and our franchisees continue to monitor developing governmental and health authority recommendations and regulatory requirements. The operating status of our restaurants will remain subject to uncertainty as governmental authorities modify existing restrictions or implement new restrictions on restaurant operations in response to changes in the number of COVID-19 infections or emergence of new variants of the virus in their respective jurisdictions.

Impairments Recognized in Fiscal 2020

The significance of the impacts of the COVID-19 pandemic resulted in our performing impairment assessments of our long-lived assets, goodwill and other intangible assets. As a result of these assessments, we recorded impairment charges of $129.6 million during the twelve months ended December 31, 2020. See “Consolidated Results of Operations - Fiscal 2021, 2020 and 2019 - Closure and Impairment Charges” for further discussion of the impairments.

53rd week in Fiscal 2020

Our fiscal year ends on the Sunday nearest to December 31 of each year. Every five or six years, our fiscal year contains 53 calendar weeks. Our 2020 fiscal year contained 53 calendar weeks, whereas fiscal 2021 and 2019 each contained 52 calendar weeks. The estimated impact of the 53rd week on results of operations for the year ended December 31, 2020 was additional revenue of $14.4 million, additional gross profit of $4.7 million and a decrease in loss before income taxes of $2.2 million.

Overview of 2021 Performance

In light of the significant impact the measures taken by governmental entities in response to the COVID-19 pandemic have had on our restaurant operations, many comparisons of financial and statistical information between fiscal years 2021 and 2020 result in extreme variances that could impact analysis of the comparisons. We believe a more complete perspective on our 2021 performance can be obtained also by comparing the fiscal year 2021 results to the pre-pandemic results of fiscal year 2019. Accordingly, in addition to the required discussion and analysis of the results of the current fiscal year with those of the prior fiscal year, the Company is also presenting a discussion and analysis comparing of the results of the 2021 fiscal year with the results of the 2019 fiscal year.

[[GREPCENT_TABLE]]
[["Financial Summary","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In thousands, except per share amounts)"],["Income (loss) before income taxes","","121,923","","","(108,562)","","","$","230,485","","","138,473","","","$","(16,550)"],["Income tax (provision) benefit","","(24,059)","","","4,568","","","(28,627)","","","(34,127)","","","10,068"],["Net income (loss)","","97,864","","","(103,994)","","","$","201,858","","","104,346","","","$","(6,482)"],["","","","","","","Variance 2021 vs 2020","","","","Variance 2021 vs 2019"],["Effective tax rate","","19.7","%","","4.2","%","","(15.5)","%","","24.6","%","","4.9","%"],["Net income (loss) per diluted share","","$","5.66","","","$","(6.43)","","","$","12.09","","","$","5.85","","","$","(0.19)"],["Weighted average diluted shares (millions)","","16.9","","","16.2","","","0.7","","","17.2","","","(0.3)"]]
[[/GREPCENT_TABLE]]

The primary reasons for the variances in income (loss) before income taxes are summarized as follows:

[[GREPCENT_TABLE]]
[["","2021 vs. 2020","","2021 vs. 2019"],["","(In millions)"],["Increase (decrease) in gross profit:"],["Franchise operations","$","105.5","","","$","(2.4)"],["Company operations","12.8","","","1.3"],["Rental and Financing operations","8.2","","","(6.5)"],["Total gross profit increase (decrease)","126.5","","","(7.6)"],["Decrease (increase) in closure and impairment charges","127.2","","","(3.9)"],["Increase in General & Administrative (\u201cG&A\u201d) expenses","(27.0)","","","(9.0)"],["All other","3.8","","","3.9"],["Increase (decrease) in income before income taxes","$","230.5","","","$","(16.6)"]]
[[/GREPCENT_TABLE]]

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The significant increase in gross profit in 2021 compared to 2020 primarily was due to the relaxation and removal during 2021 of government-mandated restrictions that had adversely impacted our restaurants during 2020. The significant increase in in income before income taxes in 2021 compared to 2020 was due to the increase in gross profit and the absence of significant impairment charges taken in 2020 that did not recur, partially offset by higher G&A expenses.

The decrease in gross profit in 2021 compared to 2019 primarily was due to the impact of permanent restaurant closures on franchise and rental operations, as well as the progressive decline in Rental and Financing interest income over the two-year period of comparison. The decrease in income before income taxes in 2021 compared to 2019 primarily was due to the decrease in gross profit and higher G&A expenses.

Our 2021 effective tax rate of 19.7% applied to pretax book income was different than the statutory Federal income tax rate of 21% primarily due to the recognition of excess tax benefits on stock-based compensation, offset by non-deductibility of executive compensation and state and local income taxes. Our 2020 effective tax rate of 4.2% applied to pretax book loss was significantly different than the statutory Federal income tax rate of 21% primarily because a $92.2 million impairment of goodwill was not deductible for income tax purposes and therefore had no associated tax benefit. Our 2019 overall effective tax rate applied to pretax book income was different than the U.S. statutory rate of 21% primarily because of state taxes and unrecognized tax benefits offset by benefits associated with an increase in general business credits. See Note 16 - Income Taxes, of the Notes to the Consolidated Financial Statements for reconciliations between our effective rates and the statutory Federal income tax rate for each of the years ended December 31, 2021, 2020 and 2019.

Key Performance Indicators

In evaluating the performance of each restaurant concept, we consider the key performance indicators to be the system-wide sales percentage change, the percentage change in domestic system-wide same-restaurant sales (“domestic same-restaurant sales”), net franchise restaurant development/reduction and the change in total effective restaurants. Changes in both domestic same-restaurant sales and in the number of Applebee's and IHOP restaurants will impact our reported retail sales that drive franchise royalty revenues and, where applicable, rental payments under leases that partially may be based on a percentage of their sales. Net franchise restaurant development/reduction also impacts franchise revenues in the form of initial franchise fees and, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix.

Our key performance indicators for the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","Applebee's","","IHOP"],["Percentage increase (decrease) in reported retail sales:"],["2021 vs 2020","34.4","%","","38.5","%"],["2021 vs 2019","2.0","%","","(9.9)","%"],["Domestic system-wide same-restaurant sales percentage increase (decrease):"],["2021 vs 2020","38.2","%","","40.2","%"],["2021 vs 2019","6.2","%","","(7.0)","%"],["Net global franchise restaurant reduction:"],["Reductions during the year ended December 31, 2021","(29)","","","(21)"],["Reductions during the two-year period ended December 31, 2021","(107)","","","(90)"],["Net (decrease) increase in global effective restaurants: (1)"],["2021 vs 2020","(2)","","","40"],["2021 vs 2019","(124)","","","(93)"]]
[[/GREPCENT_TABLE]]

________________________________________

(1) Change in the weighted average number of franchise, area license and company-operated restaurants open during the year ended December 31, 2021, compared to the weighted average number of those open during the prior year referenced.

The change in total effective restaurants for each brand reflects both a net reduction in franchise restaurants due to permanent closures, net of openings, and the weighted effect of restaurants temporarily closed during the course of the years being compared.

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In light of the distortion caused by the pandemic and a 53rd week in fiscal 2020 on the percentage changes in reported retail sales and domestic same-restaurant sales, we believe a comparison of average weekly unit sales, a function of reported retail sales and the number of effective restaurants, for the individual months of 2021, 2020 and 2019, provides additional insight into each brand's performance during the year ended December 31, 2021 as compared to the same periods of 2020 and 2019:

Average Weekly Unit Sales, by Month - Applebee's

[[GREPCENT_TABLE]]
[["","Jan","Feb","Mar","Apr","May","June","July","Aug","Sept","Oct","Nov","Dec"],["Year ended December 31,","(in thousands)"],["2021","$","39.6","","$","43.5","","$","54.3","","$","53.9","","$","53.1","","$","52.9","","$","52.7","","$","50.3","","$","49.7","","$","52.5","","$","50.3","","$","51.5"],["2020","49.8","","49.7","","35.1","","14.5","","22.5","","33.8","","37.6","","38.4","","40.0","","44.6","","39.9","","33.2"],["2019","48.2","","47.9","","51.1","","48.2","","48.4","","47.5","","45.9","","45.1","","42.9","","45.1","","46.7","","45.3"]]
[[/GREPCENT_TABLE]]

After governmental authorities began to relax restrictions on dining in our restaurants towards the end of the first quarter of 2021, Applebee's average weekly unit sales volumes in 2021 consistently exceeded those of the comparable month of 2019, beginning in March 2021.

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Average Weekly Unit Sales, by Month - IHOP

[[GREPCENT_TABLE]]
[["","Jan","Feb","Mar","Apr","May","Jun","July","Aug","Sept","Oct","Nov","Dec"],["Year ended December 31,","(in thousands)"],["2021","$","24.8","","$","27.4","","$","35.1","","$","35.5","","$","35.8","","$","37.6","","$","38.3","","$","36.0","","$","34.4","","$","36.6","","$","37.9","","$","38.0"],["2020","36.1","","35.0","","25.3","","8.7","","13.7","","22.1","","23.8","","25.7","","26.8","","28.7","","27.6","","24.7"],["2019","35.9","","35.8","","39.2","","36.9","","36.2","","37.2","","37.0","","36.1","","34.4","","36.8","","36.1","","38.7"]]
[[/GREPCENT_TABLE]]

After governmental authorities began to relax restrictions on dining in our restaurants towards the end of the first quarter of 2021, IHOP's average weekly unit sales volumes in 2021 essentially matched those of the comparable month of 2019, beginning in April 2021.

Domestic Same-Restaurant Sales

Restaurant Data - System-wide Sales and Domestic Same-Restaurant Sales

The following table sets forth for each of the past three years the number of Global 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 two years. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company and, as such, the percentage changes in sales presented below are based on non-GAAP internal sales data. 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.

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[[GREPCENT_TABLE]]
[["Applebee's"],["","Year Ended December 31,"],["Global Effective Restaurants:(a)","2021","","2020","","2019"],["Franchise","1,621","","","1,624","","","1,745"],["Company","69","","","68","","","69"],["Total","1,690","","","1,692","","","1,814"],["System-wide:(b)"],["Domestic sales percentage change(c)","34.4","%","","(24.1)","%","","(3.0)","%"],["Domestic same-restaurant sales percentage change(d)","38.2","%","","(22.4)","%","","(0.7)","%"],["Franchise:(b)"],["Domestic sales percentage change(c) (e)","34.4","%","","(24.3)","%","","(5.9)","%"],["Domestic same-restaurant sales percentage change(d)","38.2","%","","(22.6)","%","","(0.7)","%"],["Domestic average weekly unit sales (in thousands)","$","50.9","","","$","37.1","","","$","47.3"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["IHOP"],["Global Effective Restaurants:(a)"],["Franchise","1,571","","","1,532","","","1,663"],["Area license","156","","","155","","","157"],["Total","1,727","","","1,687","","","1,820"],["System-wide:(b)"],["Sales percentage change(c)","38.5","%","","(34.9)","%","","2.2","%"],["Domestic same-restaurant sales percentage change(d)","40.2","%","","(32.8)","%","","1.1","%"],["Franchise:(b)"],["Sales percentage change(c)","38.1","%","","(35.0)","%","","2.2","%"],["Domestic same-restaurant sales percentage change(d)","39.7","%","","(32.8)","%","","1.0","%"],["Average weekly unit sales (in thousands)","$","34.9","","","$","25.4","","","$","36.7"],["Area License:(b)"],["IHOP sales percentage change(c)","42.4","%","","(34.2)","%","","2.7","%"]]
[[/GREPCENT_TABLE]]

_________________________________

(a)“Global 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, domestic and international, 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 domestic 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. An increase or decrease in franchisees' reported sales will result in a corresponding increase or decrease in our royalty revenue. Sales at company-operated restaurants and unaudited reported sales for Applebee's domestic franchise restaurants, IHOP franchise restaurants and IHOP area license restaurants for the years ended December 31, 2021, 2020 and 2019 were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Reported retail sales","2021","","2020","","2019"],["","(In millions)"],["Applebee's domestic franchise restaurant sales","$","4,021.7","","","$","2,993.0","","","$","3,954.3"],["Applebee's company-operated restaurants","146.0","","","108.0","","","131.2"],["IHOP franchise restaurant sales","2,850.3","","","2,063.6","","","3,174.2"],["IHOP area license restaurant sales","271.3","","","190.5","","","289.5"],["Total","$","7,289.3","","","$","5,355.1","","","$","7,549.2"]]
[[/GREPCENT_TABLE]]

(c)“Sales percentage change” reflects, for each category of restaurants, the percentage change in sales in any given fiscal year compared to the prior fiscal year for all restaurants in that category.

(d)“Domestic same-restaurant sales change” reflects the percentage change in sales in any given fiscal year, compared to the same weeks in the prior year, for domestic restaurants that have been operated throughout both fiscal years that are being compared and have been open for at least 18 months. Because of new restaurant openings and restaurant closures, the domestic restaurants open throughout the fiscal years being compared may be different from year to year.

(e)The Applebee's franchise sales percentage change for 2019 was impacted by the acquisition of 69 franchise restaurants in December 2018 now reported as company-operated.

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Domestic Same-Restaurant Sales Trends

Applebee’s system-wide domestic same-restaurant sales increased 34.8% for the three months ended December 31, 2021 and increased 38.2% for the year ended December 31, 2021 as compared to the comparable periods of 2020. The increase in both periods was due to a significant increase in customer traffic as well as an increase in customer check. The increase in customer traffic primarily was due to the relaxation or removal over the course of 2021 of government-mandated restrictions on restaurant operating capacity that had been in place during 2020, as well as increased consumer desire to patronize restaurants after the relaxation of pandemic restrictions. The increase in average check was primarily due to favorable mix shifts related to a reduction in core menu items, successful promotional food and beverage offerings and a larger number of items purchased with off-premise orders, as well as menu price increases by franchisees.

 Applebee’s system-wide domestic same-restaurant sales increased 9.1% for the three months ended December 31, 2021 and increased 6.2% for the year ended December 31, 2021 as compared to the same respective periods of 2019. The increase in both periods was due to a significant increase in average check, partially offset by a decline in customer traffic. The increase in average check was primarily due to favorable mix shifts related to a reduction in core menu items, successful promotional food and beverage offerings and a larger number of items purchased with off-premise orders, as well as menu price increases by franchisees.

38

Based on data from Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), the casual dining segment of the restaurant industry experienced an increase in same-restaurant sales during the three and twelve months ended December 31, 2021 as compared to the comparable periods of 2019, resulting from an increase in average customer check, partially offset by a decline in customer traffic. During the three and twelve months ended December 31, 2021, Applebee's outperformed the casual dining segment. During the last two weeks of December 2021, we experienced a decrease in domestic same-restaurant sales due to the resurgence of COVID infections due to new variants, as cases started to spike again around the holidays.

[[GREPCENT_TABLE]]
[["Applebee's Off-premise Sales Data","Three months ended December 31,","","Twelve months ended December 31,"],["","2021","","2020","","2019","","2021","","2020","","2019"],["Off-premise sales (in millions) (1)","$","280.5","","","$","314.2","","","$","126.5","","","$","1,241.0","","","$","1,037.2","","","$","513.1"],["% sales mix","26.8","%","","36.8","%","","13.0","%","","30.1","%","","33.7","%","","12.7","%"]]
[[/GREPCENT_TABLE]]

(1)   Primarily to-go, delivery and catering sales.

Applebee's off-premise sales dollars and percentage of sales mix for the three months ended December 31, 2021 decreased compared to the same period of 2020 due to guests returning to dine-in. However, both off-premise sales dollars and percentage of sales mix for the three months ended December 31, 2021 increased significantly compared to the pre-pandemic levels from the fourth quarter of 2019. Applebee's off-premise sales dollars for the twelve months ended December 31, 2021 increased compared to the same period of 2020. While Applebee's off-premise sales as a percentage of sales mix for the twelve months ended December 31, 2021 declined compared to the same period of 2020, both off-premise sales dollars and percentage of sales mix and peak have increased significantly compared to the pre-pandemic levels of 2019.

IHOP’s domestic same-restaurant sales increased 39.2% for the three months ended December 31, 2021 and increased 40.2% for the year ended December 31, 2021, as compared to the same respective periods of 2020. Most of the improvement in both periods was due to a significant increase in customer traffic as well an increase in average check. The increase in customer traffic primarily was due to the relaxation or removal over the course of 2021 of government-mandated restrictions on restaurant operating capacity that had been in place during 2020, as well as increased consumer desire to patronize restaurants after the relaxation of pandemic restrictions. The increase in average check was primarily due to an increase in menu prices, as well as a general increase in consumer spending due to larger party sizes and greater spending per person.

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IHOP’s domestic same-restaurant sales decreased 3.0% for the three months ended December 31, 2021 and decreased 7.0% for the year ended December 31, 2021 as compared to the same respective periods of 2019. The decrease in both periods primarily was due to a decline in customer traffic as a result of the lingering effects of COVID-19, partially mitigated by a significant increase in average check. A contributing factor to the overall traffic decline was a decrease in late-night traffic as more than half of IHOP restaurants that operated 24 hours a day for all or parts of a week prior to the pandemic are currently closed during overnight hours. Late evening/overnight operating hours remain affected by varying dine-in restrictions mandated by federal, state, local and international jurisdictions in which the restaurants are located, as well as by labor challenges experienced by franchisees. The increase in average check was primarily due to an increase in menu prices, as well as a general increase in consumer spending due to larger party sizes and greater spending per person.

IHOP's domestic same-restaurant sales for the three and twelve months ended December 31, 2021 underperformed the family dining segment of the restaurant industry as compared to the respective periods of 2019. Based on data from Black Box, the family dining segment also experienced decreases in same-restaurant sales resulting from a large decline in customer traffic that was partially offset by an increase in average customer check. However, the decreases in same-restaurant sales experienced by the family dining segment were smaller than IHOP's decreases in each period. The primary reason for the performance differential was that IHOP experienced a larger decrease in traffic, partially offset by IHOP's increase in average customer check that was larger than the family dining segment. Additionally, during the fourth quarter of 2021, IHOP was comparing against its successful Addams' Family promotion from the fourth quarter of 2019, as well as a mismatch of the timing of menu price increases. The breakfast category, in general, continues to experience larger transaction declines than other day-parts, although the impact diminished during 2021, as working remotely decreased across the country.

[[GREPCENT_TABLE]]
[["IHOP Off-premise Sales Data","Three months ended December 31,","","Twelve months ended December 31,"],["","2021","","2020","","2019","","2021","","2020","","2019"],["Off-premise sales (in millions) (1)","$","169.8","","","$","167.8","","","$","74.1","","","$","690.0","","","$","559.9","","","$","272.0"],["% sales mix","23.3","%","","33.5","%","","10.1","%","","26.1","%","","31.0","%","","9.6","%"]]
[[/GREPCENT_TABLE]]

(1)   Primarily to-go, delivery and catering sales.

IHOP's off-premise sales dollars for the three and twelve months ended December 31, 2021 increased compared to the same periods of 2020. While IHOP's off-premise sales as a percentage of sales mix for the three and twelve months ended December 31, 2021 declined compared to the same period of 2020, both off-premise sales dollars and percentage of sales mix and peak have increased significantly compared to the pre-pandemic levels of 2019.

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Net Franchise Restaurant Development

Summary

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Total Restaurant Development Activity"],["Restaurants opened","46","","","31","","","54"],["Restaurants closed","(96)","","","(178)","","","(94)"],["Net restaurant reductions","(50)","","","(147)","","","(40)"]]
[[/GREPCENT_TABLE]]

In response to the impact of the COVID-19 pandemic on our franchisees, in March 2020, we allowed our franchisees to defer their development obligations for up to 15 months. Additionally, in 2020, we and certain of our IHOP franchisees evaluated the long-term viability of certain IHOP restaurants in light of individual restaurant-level economics impacted by the COVID-19 pandemic. The evaluation resulted in the closure of 41 IHOP restaurants.

Restaurant closures can occur for a variety of reasons that may differ for each restaurant and for each franchisee. Closures generally fall into one of two categories: restaurants in older locations whose retail, residential and traffic demographics have changed unfavorably over time, and restaurants with non-viable unit economics. Our franchisees are independent businesses and their decisions to close restaurants, both temporarily and permanently, can be impacted by numerous factors that are outside of our control, including but not limited to, the impact of COVID-19 on individual franchisees as well as franchisees' agreements with their lenders and landlords.

The total number of Applebee's restaurants (domestic and international) open at December 31, 2021 declined 1.7% from the number open at December 31, 2020 and declined 6.0% from the number open at December 31, 2019. The total number of IHOP restaurants (domestic and international) open at December 31, 2021 decreased 1.2% from the number open at December 31, 2020 and decreased 4.9% from the number open at December 31, 2019. Internationally, the number of restaurants of both brands declined 8.0% from the number open at December 31, 2020 and declined 22.5% from the number open at December 31, 2019.

The following tables present Applebee's and IHOP net restaurant development activity over the past three years:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Applebee's Restaurant Development Activity"],["Summary - beginning of period:"],["Franchise","1,640","","","1,718","","","1,768"],["Company restaurants","69","","","69","","","69"],["Total Applebee's restaurants, beginning of period","1,709","","","1,787","","","1,837"],["Domestic","1,598","","","1,665","","","1,693"],["International","111","","","122","","","144"],["Franchise restaurants opened:"],["Domestic","5","","","1","","","1"],["International","1","","","3","","","2"],["Total franchise restaurants opened","6","","","4","","","3"],["Franchise restaurants closed:"],["Domestic","(25)","","","(68)","","","(29)"],["International","(10)","","","(14)","","","(24)"],["Total franchise restaurants closed","(35)","","","(82)","","","(53)"],["Net franchise restaurant reduction","(29)","","","(78)","","","(50)"],["Summary - end of period:"],["Franchise","1,611","","","1,640","","","1,718"],["Company restaurants","69","","","69","","","69"],["Total Applebee's restaurants, end of period","1,680","","","1,709","","","1,787"],["Domestic","1,578","","","1,598","","","1,665"],["International","102","","","111","","","122"],["% Decrease in total Applebee's restaurants from prior year","(1.7)","%","","(4.4)","%","","(2.7)","%"]]
[[/GREPCENT_TABLE]]

41

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["IHOP Restaurant Development Activity"],["Summary - beginning of period:"],["Franchise","1,611","","","1,680","","","1,669"],["Area license","158","","","161","","","162"],["Company","3","","","\u2014","","","\u2014"],["Total IHOP restaurants, beginning of period","1,772","","","1,841","","","1,831"],["Domestic","1,670","","","1,710","","","1,705"],["International","102","","","131","","","126"],["Franchise/area license restaurants opened:"],["Domestic franchise","35","","","16","","","33"],["Domestic area license","2","","","3","","","5"],["International franchise","3","","","8","","","13"],["Total franchise/area license restaurants opened","40","","","27","","","51"],["Franchise/area license restaurants closed:"],["Domestic franchise","(47)","","","(56)","","","(27)"],["Domestic area license","(3)","","","(3)","","","(6)"],["International franchise","(10)","","","(34)","","","(8)"],["International area license","(1)","","","(3)","","","\u2014"],["Total franchise/area license restaurants closed","(61)","","","(96)","","","(41)"],["Net franchise/area license restaurant (reduction) development","(21)","","","(69)","","","10"],["Refranchised from Company restaurants","4","","","\u2014","","","\u2014"],["Franchise restaurants reacquired by the Company","(1)","","","(3)","","","\u2014"],["Net franchise/area license restaurant (reductions) additions","(18)","","","(72)","","","10"],["Summary - end of period:"],["Franchise","1,595","","","1,611","","","1,680"],["Area license","156","","","158","","","161"],["Company","\u2014","","","3","","","\u2014"],["Total IHOP restaurants, end of period","1,751","","","1,772","","","1,841"],["Domestic","1,657","","","1,670","","","1,710"],["International","94","","","102","","","131"],["% (Decrease) increase in total IHOP restaurants from prior year","(1.2)","%","","(3.7)","%","","0.5","%"]]
[[/GREPCENT_TABLE]]

The restaurant counts and activity presented above do not include two domestic Applebee's ghost kitchens (small kitchens with no store-front presence, used to fill off-premise orders), eight international Applebee's ghost kitchens and 13 international IHOP ghost kitchens. The Applebee's franchise restaurant count of 1,642 restaurants originally reported at the end of the year ended December 2020 was adjusted downward by two restaurants, representing two ghost kitchens that had been included in the total reported count as of December 31, 2020.

The closures presented in the tables above represent permanent closures of restaurants. Temporary closures, which can occur for a variety of reasons, are not reflected as reductions in these tables and temporarily closed restaurants are included in the summary counts at the beginning and end of each period shown. However, temporary closures are reflected in the weighted calculation of Global Effective Restaurants presented in the preceding Restaurant Data tables.

Closures of Applebee's and IHOP restaurants adversely impact our system-wide retail sales that drive our franchise royalty revenues as well as, in the case of IHOP restaurants, sales of proprietary pancake and waffle dry mix. Further, with certain restaurants, we own or lease the underlying property and sublease it to the applicable franchisee. Thus, our rental income also could be adversely affected due to our obligation to make rental or other payments for such properties.

42

Consolidated Results of Operations - Fiscal 2021, 2020 and 2019

The tables in the following section of this Form 10-K present information from our Consolidated Statements of Comprehensive Income (Loss) for our 2021, 2020 and 2019 fiscal years. The discussion of year-to-year comparisons between fiscal 2021 and fiscal 2020 can be found below. Additionally, as discussed above under Overview of 2021 Performance, in light of the significant impact the measures taken by governmental entities in response to the COVID-19 pandemic have had on our restaurant operations, particularly in 2020, the Company is also presenting a discussion comparing the results of the 2021 fiscal year with the results of the 2019 fiscal year.

For a detailed discussion of year-to-year comparisons between fiscal 2020 and fiscal 2019, please refer to the applicable portion of “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which is hereby incorporated by reference.

Financial Review

[[GREPCENT_TABLE]]
[["","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["Revenue","","2021","","2020","","","2019"],["","","(In millions)"],["Franchise operations","","$","631.9","","","$","469.5","","","$","162.4","","","$","651.2","","","$","(19.3)"],["Company restaurant operations","","146.0","","","108.1","","","37.9","","","131.2","","","14.8"],["Rental operations","","114.0","","","105.9","","","8.1","","","120.7","","","(6.7)"],["Financing operations","","4.3","","","5.8","","","(1.5)","","","7.1","","","(2.8)"],["Total revenue","","$","896.2","","","$","689.3","","","$","206.9","","206900000","$","910.2","","","$","(14.0)"],["% Increase (decrease)","","","","","","30.0","%","","","","(1.5)","%"]]
[[/GREPCENT_TABLE]]

Our 2021 total revenue increased $206.9 million compared to 2020. The increase primarily was due to the relaxation or removal over the course of 2021 of government-mandated restrictions on restaurant operations that had been in place during 2020, as well as changes in consumer behavior resulting therefrom. Total revenue in 2020 was favorably impacted by approximately $14.4 million due to a 53rd week in fiscal 2020 that did not recur in 2021.

Our 2021 total revenue decreased $14.0 million compared to 2019. The decrease primarily was due to a 7.0% decrease in IHOP domestic same-restaurant sales and permanent restaurant closures of both IHOP and Applebee's restaurants. Additionally, the progressive decline in Rental and Financing interest income reduced revenue by $5.4 million over the two-year period of comparison.

[[GREPCENT_TABLE]]
[["","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["Gross Profit (Loss)","","2021","","2020","","","2019"],["","","(In millions)"],["Franchise operations","","$","336.0","","","$","230.5","","","$","105.5","","","$","338.4","","","$","(2.4)"],["Company restaurant operations","","9.3","","","(3.5)","","","12.8","","","8.0","","","1.3"],["Rental operations","","26.1","","","16.4","","","9.7","","","29.9","","","(3.8)"],["Financing operations","","3.8","","","5.3","","","(1.5)","","","6.5","","","(2.7)"],["Total gross profit","","$","375.2","","","$","248.7","","","$","126.5","","","$","382.8","","","$","(7.6)"],["% Increase (decrease)","","","","","","50.9","%","","","","(2.0)","%"]]
[[/GREPCENT_TABLE]]

Our 2021 total gross profit increased $126.5 million compared to 2020, primarily due to the revenue increase cited above as well a $17.7 million decrease in bad debt expense. We recorded a bad debt recovery of $4.9 million in 2021 compared to bad debt expense of $12.8 million in 2020. Total gross profit in 2020 was favorably impacted by approximately $4.7 million due to a 53rd week in fiscal 2020 that did not recur in 2021.

Our 2021 total gross profit decreased $7.6 million compared to 2019, primarily due to the revenue decreases cited above, partially offset by a $4.5 million decrease in bad debt expense. We recorded a bad debt recovery of $4.9 million in 2021 compared to bad debt recovery of $0.4 million in 2019.

43

[[GREPCENT_TABLE]]
[["Franchise Operations","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions, except number of restaurants)"],["Global Effective Franchise Restaurants:(1)"],["Applebee\u2019s","","1,621","","1,624","","(3)","","1,745","","(124)"],["IHOP","","1,727","","1,687","","40","","1,820","","(93)"],["Franchise Revenues:"],["Applebee's","","$","167.6","","","$","124.8","","","$","42.8","","","$","163.6","","","$","4.0"],["IHOP","","189.5","","","143.2","","","46.3","","","204.6","","","(15.1)"],["Advertising","","274.8","","","201.5","","","73.3","","","283.0","","","(8.2)"],["Total franchise revenues","","631.9","","","469.5","","","162.4","","","651.2","","","(19.3)"],["Franchise Expenses:"],["Applebee\u2019s","","2.9","","","7.0","","","4.1","","","4.3","","","1.4"],["IHOP","","20.7","","","30.0","","","9.3","","","26.7","","","6.0"],["Advertising","","272.3","","","202.0","","","(70.3)","","","281.8","","","9.5"],["Total franchise expenses","","295.9","","","239.0","","","(56.9)","","","312.8","","","16.9"],["Franchise Segment Profit:"],["Applebee\u2019s","","164.7","","","117.8","","","46.9","","","159.3","","","5.4"],["IHOP","","168.8","","","113.2","","","55.6","","","177.9","","","(9.1)"],["Advertising","","2.5","","","(0.5)","","","3.0","","","1.2","","","1.3"],["Total franchise segment profit","","$","336.0","","","$","230.5","","","$","105.5","","","$","338.4","","","$","(2.4)"],["Gross profit as % of total revenue","","53.2","%","","49.1","%","","","","52.0","%"],["Gross profit as % of franchise fees (2)","","93.4","%","","86.2","%","","","","91.6","%"]]
[[/GREPCENT_TABLE]]

______________________________________________________________________________________________________

(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 franchise and area license restaurants open for only a portion of the period.

(2) Total franchise revenue excluding advertising.

Our total franchise revenue increased $162.4 million in 2021 compared to 2020, due to the following changes:

•Applebee's franchise revenue increased 34.4% compared to 2020. Approximately $42 million of the improvement was due to an increase of 38.2% in domestic franchise same-restaurant sales. Additionally, revenue increased $2.6 million due to the reopening of domestic restaurants temporarily closed due to the pandemic and $2.0 million due to improved collectibility. These favorable changes were partially offset by 53rd week revenue of $2.4 million in 2020 that did not recur in 2021, a decrease of $1.7 million due to permanent restaurant closures and an increase in domestic delivery credits that reduce royalty revenue. Applebee's international revenues increased $0.8 million, primarily due to an improvement in same-restaurant sales, partially offset by permanent restaurant closures and a decrease in franchise fees. The recovery in international revenues compared to domestic revenues was dampened because roughly two-thirds of international restaurants remained subject to government-mandated operating restrictions during 2021.

•IHOP franchise revenue increased 32.3% compared to 2020, primarily due to higher royalty and pancake and waffle dry mix revenues resulting from a 40.2% increase in domestic franchise same-restaurant sales. These favorable changes were partially offset by additional revenue from the 53rd week of approximately $3.0 million that did not recur in 2021, a $1.5 million decrease in franchise fees, a decrease of $1.1 million due to permanent restaurant closures and an increase in domestic delivery credits that reduce royalty revenue. IHOP's international revenues increased $1.2 million, due primarily to an $1.4 million increase in termination fees and an improvement in same-restaurant sales, partially offset by a decrease of $1.2 million due to permanent restaurant closures and a decrease in other franchise fees. The recovery in international revenue compared to domestic revenues was dampened because roughly two-thirds of international restaurants remain subject to government-mandated operating restrictions during 2021.

•Advertising revenue increased $73.3 million, compared to 2020, as discussed by brand below.

44

Our 2021 total franchise expenses increased $56.9 million compared to 2020, due to changes in the following components:

•Applebee's franchise expenses decreased $4.1 million, primarily due to a $4.2 million decrease in bad debt expense. We had bad debt recovery of $0.9 million in 2021 as compared to a bad debt expense of $3.3 million in 2020.

•IHOP franchise expenses decreased $9.3 million, primarily due to a $13.5 million decrease in bad debt expense, partially offset by an increase in purchases of pancake and waffle dry mix. IHOP had a bad debt recovery of $4.1 million in 2021 compared to a bad debt expense of $9.4 million in 2020.

•Advertising expenses increased $70.3 million, due to a corresponding increase in advertising revenue, partially offset by the net change in advertising deficit between 2021 and 2020, as discussed below.

Gross profit as a percentage of total revenue increased in 2021 compared to 2020, primarily because of the $17.7 million decrease in bad debt expense.

Our total franchise revenue decreased $19.3 million in 2021 compared to 2019, due to changes in the following components:

•Applebee's franchise revenue increased 2.5% compared to 2019. Approximately $9 million of the improvement was due to an increase of 6.1% in domestic franchise same-restaurant sales. Additionally, revenue increased $2.5 million due to improved collectibility and $1.1 million from higher franchise fees. These favorable changes were partially offset by a $6.0 million decrease due to permanent restaurant closures, as well as an increase in domestic delivery credits that reduce royalty revenue. Applebee's international revenues decreased $2.0 million compared to 2019, due to continuing government-mandated operating restrictions impacting roughly two-thirds of international restaurants during 2021 as well as a $0.5 million due to permanent restaurant closures since December 31, 2019.

•IHOP franchise revenue decreased 7.4% compared to 2019, primarily due to lower royalty and pancake and waffle dry mix revenues resulting from a 7.0% decrease in domestic franchise same-restaurant sales. A contributing factor to the decline was more than half of IHOP restaurants that operated 24 hours a day for all or parts of a week prior to the pandemic are currently closed during overnight hours. Additionally, revenue was unfavorably impacted $2.2 million due to permanent restaurant closures and by an increase in domestic delivery credits that reduce royalty revenue. These unfavorable changes were partially offset by a $2.2 million increase in termination and other franchise fees. IHOP's international revenues declined $1.9 million, due to a $2.5 million decrease related to permanent restaurants closures since December 31, 2019 and continuing government-mandated operating restrictions impacting roughly two-thirds of international restaurants during, partially offset by an increase in international termination fees of $1.4 million.

•Advertising revenue decreased $8.2 million, compared to 2019, as discussed by brand below.

Our 2021 total franchise expenses decreased $16.9 million compared to 2019, due to changes in the following components:

•Applebee's franchise expenses decreased $1.4 million, primarily due to lower help desk costs and a $0.7 million increase in bad debt recovery. We had bad debt recovery of $0.9 million in 2021 as compared to bad debt recovery of $0.2 million in 2019.

•IHOP franchise expenses decreased $6.0 million, primarily due to a $3.9 million decrease in bad debt expense, as well as a decrease in purchases of pancake and waffle dry mix. IHOP had bad debt recovery of $4.1 million in 2021 compared to a bad debt recovery of $0.2 million in 2019.

•Advertising expenses decreased $9.5 million, due to a corresponding decrease in advertising revenue, as well as the net change in advertising deficit between 2021 and 2019, as discussed below.

Gross profit as a percentage of total revenue increased in 2021 compared to 2019, primarily because of the $4.2 million decrease in bad debt expense.

45

Advertising revenue and expense by brand for fiscal 2021, 2020 and 2019 were as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Advertising Revenues:"],["Applebee's","","$","169.6","","","$","124.8","","","$","44.8","","","165.5","","","4.1"],["IHOP","","105.2","","","76.7","","","28.5","","","117.5","","","(12.3)"],["Total advertising revenues","","$","274.8","","","$","201.5","","","$","73.3","","","$","283.0","","","$","(8.2)"],["Advertising Expenses:"],["Applebee\u2019s","","$","166.9","","","$","124.8","","","$","(42.1)","","","$","165.6","","","$","(1.3)"],["IHOP","","105.4","","","77.2","","","(28.2)","","","116.2","","","10.8"],["Total advertising expenses","","$","272.3","","","$","202.0","","","$","(70.3)","","","$","281.8","","","$","9.5"]]
[[/GREPCENT_TABLE]]

Applebee's advertising revenue for 2021 increased 35.9% compared to 2020, primarily due to the increase of 38.2% in domestic franchise same-restaurant sales. Additionally, advertising revenue increased $3.1 million due to improved collectibility and $2.8 million due to the reopening of domestic restaurants temporarily closed due to the pandemic. These favorable changes were partially offset by 53rd week revenue of approximately $2.6 million in 2020 that did not recur, a decrease of $1.9 million due to permanent restaurant closures and an increase in domestic delivery credits that reduce advertising revenue. The increase in Applebee's advertising expenses was less than the increase in advertising revenue primarily because of a recovery in 2021 of an advertising fund deficit that had been recognized in prior years. IHOP's advertising revenue for 2021 increased by 37.1%, compared to 2020, primarily due to the increase of 40.2% in domestic franchise same-restaurant sales, partially offset by the 53rd week revenue in 2020 of approximately $1.6 million that did not recur in 2021, a $0.9 million decrease due to permanent restaurant closures and an increase in domestic delivery credits that reduce advertising revenue. The increase in IHOP advertising expenses was greater than the increase in advertising revenue due to recognition of a deficit in the international advertising fund.

Applebee's advertising revenue for 2021 increased 2.5% compared to 2019. Approximately $9 million of the increase was due to the increase of 6.1% in domestic franchise same-restaurant sales and a $2.6 million increase due to improved collectibility. These favorable changes were partially offset by a decrease of $6.7 million due to permanent restaurant closures and an increase in domestic delivery credits that reduce advertising revenue. The increase in Applebee's advertising expenses was less than the increase in advertising revenue because of a recovery of an advertising fund deficit that had been recognized in prior years. IHOP's advertising revenue for 2021 decreased by 10.5% compared to 2019, primarily due to the decrease of 7.0% in domestic franchise same-restaurant sales, a $1.9 million decrease due to permanent restaurant closures and an increase in domestic delivery credits that reduce advertising revenue. The decrease in IHOP advertising expenses was $1.5 million less than the decrease in advertising revenue because of the recovery in 2019 of an advertising fund deficit that had been recognized in prior years.

It is our accounting policy to recognize any deficiency in advertising fee revenue compared to advertising expenditure, or recovery of a previously recognized deficiency in advertising fee revenue compared to advertising expenditures, in the fourth quarter of our fiscal year.

[[GREPCENT_TABLE]]
[["Rental Operations","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Rental revenues","","$","114.0","","","$","105.9","","","$","8.1","","","$","120.7","","","$","(6.7)"],["Rental expenses","","87.9","","","89.5","","","1.6","","","90.8","","","2.9"],["Rental operations segment profit","","$","26.1","","","$","16.4","","","$","9.7","","","$","29.9","","","$","(3.8)"],["Gross profit as % of revenue (1)","","22.9","%","","15.5","%","","","","24.8","%"]]
[[/GREPCENT_TABLE]]

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

Rental operations relate primarily to IHOP franchise restaurants that were developed under the Previous IHOP Business Model described under Item 1. - Business. 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 finance leases on certain franchise restaurants.

46

Rental segment revenue for the year ended December 31, 2021 increased as compared to the same period of 2020, primarily due to a $5.6 million increase in rental income based on a percentage of franchisees' retail sales and a $5.2 million decline in level rent adjustments, partially offset by $6.5 million decrease due to restaurant closures, lease buy-outs and the scheduled expiration of leases, as well as a progressive decline of $1.3 million in interest income as direct financing leases are repaid. Additionally, rental revenue increased $4.8 million due to the gross presentation of certain elements of variable sublease income, such as common area maintenance payments received from franchisees and remitted to landlords, which previously were reported on a net basis.

Rental segment expenses for the year ended December 31, 2021 decreased compared to the same period of the prior year due to a $2.8 million decrease in base rent, primarily due to restaurant closures, lease buy-outs and expirations, a $1.4 million decrease in interest expense as finance lease obligations are repaid and a $1.2 million decrease in depreciation expense; additionally, a $2.1 million provision for rent losses on closures recorded in 2020 did not recur in 2021. These favorable items were partially offset by a $4.8 million increase in expense offsetting the revenue increase noted above from the gross presentation of certain elements of variable subleases and a $1.0 million increase in rent paid based on a percentage of franchisees' retail sales.

Rental segment revenue for the year ended December 31, 2021 decreased as compared to the same period of 2019, primarily due to a $6.8 million decrease due to restaurant closures, lease buy-outs and the scheduled expiration of leases, a progressive decline of $2.9 million in interest income as direct financing leases are repaid and a $1.8 million decrease in rental income based on a percentage of franchisees' retail sales. These unfavorable items were partially offset by an increase in rental revenue of $4.8 million due to the gross presentation of certain elements of variable sublease income, such as common area maintenance payments received from franchisees and remitted to landlords, which previously were reported on a net basis.

Rental segment expenses for the year ended December 31, 2021 decreased compared to the same period of 2019 due to a $2.8 million decrease in interest expense as finance lease obligations are repaid, a $2.3 million decrease in depreciation expense, a $1.9 million decrease in base rent, primarily due to restaurant closures, lease buy-outs and expirations and a $0.7 million increase in rent paid based on a percentage of franchisees' retail sales. These favorable items were partially offset by a $4.8 million increase in expense offsetting the revenue increase noted above from the gross presentation of certain elements of variable subleases.

[[GREPCENT_TABLE]]
[["Financing Operations","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Financing revenues","","$","4.3","","","$","5.8","","","$","(1.5)","","","$","7.1","","","$","(2.8)"],["Financing expenses","","0.5","","","0.5","","","0.0","","","0.6","","","0.1"],["Financing operations segment profit","","$","3.8","","","$","5.3","","","$","(1.5)","","","$","6.5","","","$","(2.7)"],["Gross profit as % of revenue (1)","","89.2","%","","90.9","%","","","","91.9","%"]]
[[/GREPCENT_TABLE]]

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

Financing operations relate primarily to IHOP franchise restaurants that were developed under the Previous IHOP Business Model described under Item 1. - Business. Financing operations revenue primarily consists of interest income from the financing of IHOP equipment leases and franchise fees, as well as from notes receivable from Applebee's and IHOP franchisees. Financing expenses are the cost of taxes related to IHOP equipment leases.

Financing revenues decreased $1.5 million in 2021 compared to 2020. The change was due to a $1.3 million decrease in IHOP interest income due to the decline in interest income from the financing of franchise fees and equipment leases as note balances were repaid as well as a decrease in interest income on notes from franchisees.

Financing revenues decreased $2.7 million in 2021 compared to 2019. The change was due to a $2.5 million decrease in IHOP interest income due to the decline in interest income from the financing of franchise fees and equipment leases as note balances were repaid as well as a decrease in interest income on notes from franchisees.

47

[[GREPCENT_TABLE]]
[["Company Operations","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["Effective Company Restaurants:"],["Applebee\u2019s","","69","","","68","","","1","","","69","","","\u2014"],["Average weekly unit sales (in thousands)","","$","40.6","","","$","29.7","","","$","10.9","","","$","36.6","","","$","4.0"],["","","(In millions)"],["Applebee's company restaurant sales(1)","","$","146.0","","","$","108.1","","","$","37.9","","","$","131.2","","","$","14.8"],["Applebee's company restaurant expenses(1)","","135.8","","","109.7","","","(26.1)","","","123.2","","","(12.6)"],["IHOP restaurant expenses(2)","","0.9","","","1.9","","","1.0","","","\u2014","","","(0.9)"],["Company restaurant segment profit (loss)","","$","9.3","","","$","(3.5)","","","$","12.8","","","$","8.0","","","$","1.3"],["Gross profit (loss) as % of revenue(3)","","6.9","%","","(1.5)","%","","","","6.1","%"]]
[[/GREPCENT_TABLE]]

___________________________________________________________________________________________________

(1) Related to 69 Applebee's company-operated restaurants. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, beverage, labor, benefits, utilities, rent, depreciation and other operating costs.

(2) Costs associated with IHOP restaurants in the process of being refranchised.

(3) Calculated for Applebee's company-operated restaurants only. Percentages calculated on actual amounts, not rounded amounts shown above.

In December 2018, we acquired 69 Applebee's restaurants in North Carolina and South Carolina from a former Applebee's franchisee. The slight decrease in effective restaurants (a weighted average calculation) for 2020 reflects the temporary closure of seven restaurants for a short period of time during 2020 in compliance with state and local COVID-19-related mitigation measures.

Applebee's company same-restaurant sales for the year ended December 31, 2021 increased 38.0% compared to the same period of 2020, primarily due to a significant increase in customer traffic as well as an increase in average check. The increase in customer traffic primarily was due to the favorable change in operating capacity of the restaurants. Since the second week of January 2021, the 27 restaurants in South Carolina operated without capacity limitations, while the 42 restaurants in North Carolina operated at 50% capacity until June 1, 2021, from which point those 42 restaurants also were able to operate without capacity limitations. In comparison, all 69 restaurants operated without restriction for the first 10 weeks of 2020 but essentially were limited only to off-premise sales from the middle of March until the middle of May 2020, at which time all 69 restaurants were allowed to operate at 50% capacity. The increase in average check was due to favorable product mix and daypart shifts related to a reduction in core menu items, successful promotional food and beverage offerings and a larger number of items purchased with off-premise orders, as well as menu price increases. These favorable impacts were partially offset by additional revenue and gross profit from the 53rd week in 2020 of approximately $2.6 million and $0.2 million, respectively, that did not recur in 2021.

Applebee's company same-restaurant sales for the year ended December 31, 2021 increased 11.0% compared to the same period of 2019 primarily due to an increase in average check, partially offset by a decrease in traffic. The increase in average check was due to favorable product mix and daypart shifts related to a reduction in core menu items, successful promotional food and beverage offerings and a larger number of items purchased with off-premise orders, as well as menu price increases.

From time to time, we may reacquire IHOP restaurants from franchisees that we subsequently refranchise. These restaurants may or may not be operated by us on a temporary basis until refranchised. Company segment restaurant expenses for the years ended December 31, 2021 and 2020 include $0.9 million and $1.9 million, respectively, of costs associated with certain IHOP restaurants incurred while the restaurants were being refranchised. None of the reacquired IHOP restaurants were operated during the years ended December 31, 2021 or 2020, and IHOP recorded no restaurant revenues in either of those periods. We held no reacquired restaurants at December 31, 2021. We may reacquire both IHOP and Applebee's restaurants on a temporary basis in the future.

[[GREPCENT_TABLE]]
[["General and Administrative Expenses","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["G&A expenses","","$","171.8","","","$","144.8","","","$","(27.0)","","","$","162.8","","","$","(9.0)"]]
[[/GREPCENT_TABLE]]

48

G&A expenses for 2021 increased 18.7% compared to 2020, primarily due an increase in personnel-related expenses. That increase primarily was due to higher costs of bonus and equity-based incentive compensation and higher costs of salaries and benefits. The Company had furloughed approximately one-third of team members across various functional groups for approximately six months during 2020. G&A expenses for 2020 included approximately $1.2 million of costs due to the 53rd week that did not recur in 2021. Included in total G&A expenses for 2021 were $5.8 million of expenses related to company-operated restaurants, as compared to $4.3 million in 2020. The increase in G&A expenses related to company-operated restaurants primarily was due to higher personnel-related costs as well as increased recruitment costs.

G&A expenses for 2021 increased 5.5% compared to 2019, primarily due to higher costs of bonus and equity-based incentive compensation, partially offset by a decrease in costs for travel and conferences as well as lower consumer research expenses. Included in total G&A expenses for 2019 were $5.3 million of expenses related to company-operated restaurants. The increase from 2019 to 2021 related to company-operated restaurants primarily was due to higher personnel-related costs as well as increased recruitment costs.

[[GREPCENT_TABLE]]
[["Closure and Impairment Charges","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Closure charges","","$","3.7","","","$","3.0","","","$","(0.7)","","","$","1.5","","","$","(2.2)"],["Impairment of goodwill","","\u2014","","","92.2","","","92.2","","","\u2014","","","\u2014"],["Impairment of tradename","","\u2014","","","11.0","","","11.0","","","\u2014","","","\u2014"],["Long-lived asset impairment","","1.7","","","22.3","","","20.6","","","\u2014","","","(1.7)"],["Impairment of reacquired franchise rights","","\u2014","","","3.3","","","3.3","","","\u2014","","","\u2014"],["Impairment of favorable leasehold intangible","","\u2014","","","0.8","","","0.8","","","\u2014","","","\u2014"],["Total","","$","5.4","","","$","132.6","","","$","127.2","","","$","1.5","","","$","(3.9)"]]
[[/GREPCENT_TABLE]]

Closure Charges

The closure charges of $3.7 million for the year ended December 31, 2021 comprised $2.1 million related to 20 IHOP restaurants closed in 2021 and $1.6 million for revisions to existing closure reserves, including accretion, primarily for 28 IHOP restaurants closed prior to December 31, 2020. Approximately $1.6 million of the $3.0 million of closure charges for the year ended December 31, 2020 related to seven IHOP restaurants closed during 2020, with the remainder primarily related to adjustments to reserves, including accretion, for IHOP and Applebee's restaurants closed prior to 2020. Approximately $0.5 million of the $1.5 million of closure charges for the year ended December 31, 2019 related to two IHOP and one Applebee's restaurant closed during 2019, with the remainder primarily related to adjustments to reserves, including accretion, for IHOP and Applebee's restaurants closed prior to 2019.

Impairment Charges

The Company evaluates its goodwill and the indefinite-lived Applebee's tradename for impairment annually in the fourth quarter of each year or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. Definite-lived intangible assets and long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows.

The long-lived asset impairment of $1.7 million for the year ended December 31, 2021 related to five IHOP

franchisee-operated restaurants for which the carrying amount exceeded the undiscounted cash flows. The impairment recorded represented the difference between the carrying value and the estimated fair value. The impairments primarily related to operating lease right-of-use assets that had been recorded in 2019 upon adoption of new lease accounting guidance codified in Accounting Standards Codification Topic 842 (“ASC 842”).

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly spreading

outbreak of COVID-19. The impacts of the pandemic on our operations were considered indicators of impairment and quantitative tests for impairment were performed. As a result of performing the quantitative tests for impairment, we recognized an impairment of Applebee's goodwill of $92.2 million and an impairment of Applebee's tradename of $11.0 million during the year ended December 31, 2020.

A long-lived asset impairment of $22.3 million was recognized during the year ended December 31, 2020 related to 29 Applebee's company-operated restaurants and 41 IHOP franchisee-operated restaurants for which the carrying amount exceeded

49

the undiscounted cash flows. The impairment recorded represented the difference between the carrying value and the estimated fair value. Approximately $15.1 million of the total impairment related to operating lease right-of-use assets that had been recorded in 2019 upon adoption of ASC 842, while $7.2 million related to impairments of land, building, leasehold improvements and finance leases. The impairments by individual property varied in amount, ranging from the largest single-property impairment of $1.3 million to less than $5,000. We also recognized an impairment of $3.3 million related to the reacquired franchise rights intangible asset recorded in the purchase price allocation of the December 2018 acquisition of 69 Applebee's restaurants from a former franchisee.

[[GREPCENT_TABLE]]
[["Other Income and Expense Items","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Interest expense, net","","$","63.3","","","$","66.9","","","$","3.6","","","$","60.4","","","$","(2.9)"],["Amortization of intangible assets","","10.7","","","10.9","","","0.2","","","11.7","","","1.0"],["Loss (gain) on disposition of assets","","2.0","","","2.1","","","0.1","","","(0.3)","","","(2.3)"],["Loss on extinguishment of debt","","\u2014","","","\u2014","","","\u2014","","","8.3","","","8.3"],["Total","","$","76.0","","","$","79.9","","","$","3.9","","3900000","$","80.1","","","$","4.1"]]
[[/GREPCENT_TABLE]]

Interest Expense, Net

Interest expense, net, decreased $3.6 million in 2021 compared to 2020, primarily due to a $3.3 million decrease in interest expense related to our revolving credit facility (the “Credit Facility”) and additional interest of approximately $1.2 million on our Class A-2 Notes due to the 53rd week in 2020 that did not recur in 2021, partially offset by lower interest income of $0.6 million. Interest income was $0.4 million in 2021 compared to $1.0 million in 2020. See “Liquidity and Capital Resources” for additional discussion related to borrowings under our Credit Facility.

Interest expense, net, increased $2.9 million in 2021 compared to 2019, primarily due to an increase of $1.2 million on our Class A-2 Notes that were refinanced in 2019, a $1.2 million decrease in interest income and a $0.5 million increase in interest expense related to our Credit Facility. Interest income was $0.4 million in 2021 compared to $1.6 million in 2019.

Amortization of Intangible Assets

Amortization of intangible assets primarily relates to franchising rights arising from the November 2007 acquisition of Applebee's and reacquired franchise rights arising from the December 2018 acquisition of 69 Applebee's restaurants from a former franchisee. The decrease in amortization expense in 2021 as compared to both 2020 and 2019 was due to the impairment of reacquired franchise rights discussed under Impairment Charges above. See Note 7 - Other Intangible Assets, of the Notes to the Consolidated Financial Statements for additional information.

Loss (Gain) on Disposition of Assets

The loss on disposition of assets for the year ended December 31, 2021 primarily related to disposition of capitalized software no longer in use. The loss on disposition of assets for the year ended 2020 primarily related to termination of 12 IHOP restaurant leases and the disposition of capitalized software no longer in use. There were no individually significant gains or losses on disposition of assets during the year ended 2019.

Loss on Extinguishment of Debt

In connection with the refinancing of its long-term debt, the Company recognized a loss on extinguishment of debt of $8.3 million during the year ended December 31, 2019, representing the remaining unamortized costs related to the refinanced indebtedness.

[[GREPCENT_TABLE]]
[["Income Taxes","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Income tax provision (benefit)","","$","24.1","","","$","(4.6)","","","$","(28.7)","","","$","34.1","","","$","10.0"],["Effective tax rate","","19.7","%","","4.2","%","","(15.5)","%","","24.6","%","","4.9","%"]]
[[/GREPCENT_TABLE]]

50

The income tax provision will vary from period to period for two primary reasons: a change in pretax book income and a change in the effective tax rate. Changes in our pretax book income between 2021 and 2020 and 2021 and 2019 are addressed in the preceding sections of “Consolidated Results of Operations - Fiscal 2021, 2020 and 2019.”

The 2021 effective tax rate of 19.7% applied to pretax book income was different than the statutory Federal income tax rate of 21% primarily due to the recognition of excess tax benefits on stock-based compensation, offset by non-deductibility of executive compensation and state and local income taxes. The 2020 effective tax rate of 4.2% applied to pretax book loss was significantly different than the statutory Federal income tax rate of 21% primarily because of the $92.2 million impairment of goodwill incurred, which was not deductible for income tax purposes and therefore had no associated tax benefit. The 2019 effective tax rate of 24.6% applied to pretax book income was higher than the statutory Federal tax rate of 21% primarily due to tax expense associated with unrecognized tax benefits and state and local income taxes, offset by the recognized benefit from general business credits. See Note 16 - Income Taxes, of the Notes to the Consolidated Financial Statements for a reconciliation between our effective rates and the statutory Federal income tax rate for the years ended December 31, 2021, 2020 and 2019.

As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regards to future realization of deferred tax assets. As of December 31, 2021, management determined that it is more likely than not that the benefits from foreign tax credit carryforward and certain state deferred tax assets, including net operating loss carryforwards, from the Applebee’s company-operated restaurants will not be realized. In recognition of this risk, management recorded a valuation allowance of $4.2 million.

Liquidity and Capital Resources of the Company

Our total cash balances, net of revolving credit facility borrowings, at December 31, 2021, 2020 and 2019 were as follows:

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","December 31, 2020","","December 31, 2019"],["","","(In millions)"],["Cash and cash equivalents","","$","361.4","","","$","383.4","","","$","116.1"],["Restricted cash, current","","47.5","","","39.9","","","40.7"],["Restricted cash, non-current","","16.4","","","32.8","","","15.7"],["Total cash, restricted cash and cash equivalents","","425.3","","","456.1","","","172.5"],["Less: Revolving credit facility borrowing","","\u2014","","","(220.0)","","","\u2014"],["Total cash, restricted cash and cash equivalents, net of revolving credit facility borrowing","","$","425.3","","","$","236.1","","","$","172.5"]]
[[/GREPCENT_TABLE]]

At December 31, 2021 we had contractual obligations to repay debt, make payments under operating leases, finance leases and financing obligations, and to purchase certain goods and services. Material cash requirements to satisfy these obligations were as follows:

[[GREPCENT_TABLE]]
[["Obligation","","Due in Fiscal 2022","","Due Thereafter","","Total","","Reference (1)"],["","","(in millions)"],["Long-term debt (principal)","","$","\u2014","","","$","1,287.0","","","$","1,287.0","","","Note 8 - Long-term Debt"],["Long-term debt (interest)","","$","57.1","","","$","141.8","","","$","198.9","","","Note 8 - Long-term Debt"],["Operating leases","","91.8","","","384.8","","","476.6","","","Note 10 - Leases"],["Finance leases","","14.3","","","81.5","","","95.8","","","Note 10 - Leases"],["Financing obligations","","4.5","","","49.2","","","53.7","","","Note 9 - Financing Obligations"],["Purchase commitments","","74.9","","","3.2","","","78.1","","","Note 11 - Commitments and Contingencies"],["Total","","$","242.6","","","$","1,947.5","","","$","2,190.1"]]
[[/GREPCENT_TABLE]]

(1) See referenced note of Notes to the Consolidated Financial Statements for additional information about the obligation.

See Note 11 - Commitments and Contingencies, of Notes to the Consolidated Financial Statements, for a description of the Company's lease guarantees.

We believe that our unrestricted cash and cash equivalents on hand, cash flow from operations and the borrowing capacity available under our Credit Facility will provide us with adequate liquidity for at least the next twelve months.

51

COVID-19 Pandemic Actions - Impacts on Liquidity

The measures put in place by various governmental entities to help contain the spread of the COVID-19 virus had a significant adverse impact on our restaurant and rental operations over the last ten months of 2020 and a continuing, although less significant, impact in 2021. In response to the uncertainties related to the pandemic, we took several actions that impacted our liquidity in both 2021 and 2020, as discussed below:

Capital Allocation Changes

We temporarily suspended repurchasing our common stock and the declaration of dividends on our common stock after the first quarter of 2020. After evaluating repurchases of common stock and dividend payments on common stock within the context of our overall capital allocation strategy, giving consideration to our current and forecast earnings, financial condition, cash requirements and other factors, we resumed repurchasing our common stock in November 2021 under our existing $200 million stock repurchase program approved by the Board of Directors in 2019 (the “2019 Repurchase Program”). Additionally, in October 2021, our Board of Directors declared a fourth quarter 2021 cash dividend of $0.40 per common share, payable in January 2022.

We repurchased $4.5 million of common stock during the year ended December 31, 2021, leaving $65.7 million available for future repurchases under the 2019 Repurchase program as of December 31, 2021. The fourth quarter 2021 dividend of $6.9 million was paid January 7, 2022. 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. There can be no assurance that we will continue to pay dividends or the amount of such dividends.

Use of Revolving Credit Facility

We drew down a total of $220 million from our Credit Facility in March 2020. We had no immediate need for additional liquidity, but drew on the Credit Facility to maximize our financial flexibility. We repaid the $220 million drawn on the Credit Facility in the month of March 2021. We incurred additional interest expense on the borrowings while outstanding, partially offset by interest income as the majority of the amount drawn was invested in money market funds.

Franchisee Deferrals

In 2020, we offered Applebee's franchisees the opportunity to defer payment of their royalty, advertising and other fees, primarily amounts due for the months of March and April 2020. A total of 30 franchisees representing 94% of Applebee’s restaurants deferred payments totaling $33.4 million. Repayment of deferred amounts, began in the third quarter of 2020, with $19.7 million collected in fiscal 2020. Approximately $13.7 million was collected during the year ended December 31, 2021, which had a favorable impact on cash provided by operating activities in 2021. As of December 31, 2021, there were no deferred amounts outstanding.

In 2020 we offered IHOP franchisees the opportunity to defer their royalty, advertising, equipment rent and sublease rent payments, primarily for the months of March and April 2020. Initially, 193 franchisees representing 58% of IHOP restaurants deferred payments totaling $24.1 million. Including subsequent deferrals made on a case-by case basis, the deferral program totaled $28.6 million. Repayment began in the third quarter of 2020, with $12.0 million collected in fiscal 2020. In certain instances, repayments were temporarily paused for up to 60 days. As of December 31, 2021, the outstanding balance was less than $0.1 million. Approximately $16.5 million was collected during the year ended December 31, 2021, which had a favorable impact on cash provided by operating activities in 2021.

Rent Deferrals

In 2020, we received rent deferrals and abatements on properties we lease of approximately $11 million, primarily related to rent deferrals for properties on which IHOP restaurants are located, of which approximately $6 million was paid in 2020. Approximately $4.8 million was paid during the year ended December 31, 2021, which had an unfavorable impact on cash provided by operating activities in 2021. As of December 31, 2021, the deferred balance was approximately $0.1 million.

52

Payroll Tax Deferrals

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. Among the various provisions in the CARES Act, the Company utilized the payroll tax deferrals in 2020, where 50% of the payroll taxes deferred in 2020 are to be paid back by December 31, 2021 with the remaining 50% paid back by December 31, 2022. The Company deferred $3.1 million of payroll taxes in 2020 and paid its first required installment of 50% of the deferral in December 2021.

Long-Term Debt

Key provisions of our long-term debt potentially impacting liquidity are summarized below. See Note 8 - Long-term Debt, of Notes to the Consolidated Financial Statements, for additional detail on long-term debt, including the balances outstanding at December 31, 2021 and 2020.

Instruments

Our long-term debt consists of two tranches of fixed rate senior secured notes, the Series 2019-1 4.194% Fixed Rate Senior Secured Notes, Class A-2-I (“Class A-2-I Notes”) in an initial aggregate principal amount of $700 million and the Series 2019-1 4.723% Fixed Rate Senior Secured Notes in an initial aggregate principal amount of $600 million (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “2019 Class A-2 Notes”). We also have our Credit Facility, the 2019-1 Variable Funding Senior Notes, Class A-1 (the “2019 Class A-1 Notes”).

Maturity

The legal final maturity of the 2019 Class A-2 Notes is in June 2049, but it is anticipated that, unless repaid earlier, the Class A-2-I Notes will be repaid in June 2024 and the Class A-2-II Notes will be repaid in June 2026.

It is anticipated that any outstanding principal and interest on the 2019 Class A-1 Notes will be repaid in full on or prior to June 2024, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions.

Payment of Principal and Interest

While the 2019 Class A-2 Notes are outstanding, payment of principal and interest is required to be made on the Class A-2 Notes on a quarterly basis. The payment of principal on the 2019 Class A-2 Notes may be suspended when the leverage ratio for the Company and its subsidiaries is less than or equal to 5.25x. Exceeding the leverage ratio of 5.25x does not violate any covenant related to the Class A-2 Notes.

As of December 31, 2021 our leverage ratio was 3.86x. Therefore, quarterly principal payments are not required. During 2021, our leverage ratio exceeded 5.25x until the quarterly payment period ended September 30, 2021. Accordingly, we made three principal payments totaling $9.75 million in 2021.

We made four quarterly interest payments on the Class A-2 Notes totaling $57.3 million during the year ended December 31, 2021.

Make-whole Premiums

We may voluntarily repay the Class A-2 Notes at any time; however, if repaid prior to certain dates we would be required to pay make-whole premiums. As of December 31, 2021, the make-whole premium associated with voluntary prepayment of the Class A-2-I Notes was approximately $10 million; this amount declines each quarter to zero in June 2022. As of December 31, 2021, the make-whole premium associated with voluntary prepayment of the Class A-2-II Notes was approximately $39 million; this amount declines each quarter to zero in June 2024. We would also be subject to a make-whole premium in the event of a mandatory prepayment required following a Rapid Amortization Event or certain asset dispositions. The mandatory make-whole premium requirements are considered embedded derivatives that must be bifurcated for separate valuation. We estimated the fair value of these derivatives to be immaterial as of December 31, 2021, based on the probability-weighted discounted cash flows associated with either event.

Covenants and Restrictions

Our long-term debt is subject to a series of covenants and restrictions customary for transactions of this type, including maintenance of a debt service coverage ratio (“DSCR”). In general, the DSCR ratio is Net Cash Flow for the four quarters preceding the calculation date divided by the total debt service payments of the preceding four quarters. The complete definitions of the DSCR and all calculation elements are contained in the indenture, and subsequent amendments thereto, under which the Class A-2 Notes were issued.

53

Failure to maintain a prescribed DSCR can trigger the following events:

•DSCR less than 1.75x - Cash Flow Sweeping Event

•DSCR less than 1.20x - Rapid Amortization Event

•Interest-only DSCR less than 1.20x - Manager Termination Event

•Interest-only DSCR less than 1.10x - Default Event

Our DSCR for the reporting period ended December 31, 2021 was approximately 4.7x.

Credit Facility

The variable interest rate for borrowings under the Credit Facility is the three-month LIBOR rate plus 2.15% for 60% of the advances and the commercial paper funding rate of our conduit investor plus 2.15% for 40% of the advances. There is a commitment fee of 50 basis points on any unused portion of the Credit Facility and undrawn face amounts of outstanding letters of credit that are not cash collateralized accrue a fee of 2.15% per annum.

In March 2021, we repaid $220.0 million of amounts outstanding under the Credit Facility and have not utilized the Credit Facility subsequent to that repayment. As such, there were no borrowings outstanding under the Credit Facility at December 31, 2021. At December 31, 2021, $3.3 million was pledged against the Credit Facility for outstanding letters of credit, leaving $221.7 million of the Credit Facility available for borrowing. The letters of credit are used primarily to satisfy insurance-related collateral requirements.

The weighted average interest rate on Credit Facility borrowings for the period outstanding during the year ended December 31, 2021 was 2.42%. We made four quarterly payments, comprised of interest and fees, totaling $2.3 million related to the Credit Facility during the year ended December 31, 2021.

The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR, initially by the end of 2021. On November 30, 2020, the Federal Reserve announced that LIBOR will be phased out and eventually replaced by June 2023. In the same announcement, U.S. banks were instructed to stop writing contracts using LIBOR by the end of 2021 and all contracts using LIBOR should be amended or terminated by June 30, 2023. We do not believe that the discontinuation of LIBOR as a reference rate for our 2019 Class A-1 Notes will have a material adverse effect on our financial position or materially affect our interest expense; however, it is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates.

[[GREPCENT_TABLE]]
[["Cash Flows","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Net cash provided by operating activities","","$","195.8","","","$","96.5","","","$","99.3","","","$","155.2","","","$","40.6"],["Net cash provided by (used in) investing activities","","3.9","","","18.7","","","(14.8)","","","(0.2)","","","4.1"],["Net cash(used in) provided by financing activities","","(230.4)","","","168.4","","","(398.8)","","","(182.9)","","","(47.5)"],["Net (decrease) increase in cash, cash equivalents and restricted cash","","$","(30.7)","","","$","283.6","","","$","(314.3)","","","$","(27.9)","","","$","(2.8)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Cash provided by operating activities is primarily driven by revenues earned and collected from our franchisees, and profit from our company-owned restaurants, rental operations and financing operations.

Cash provided by operating activities increased $99.3 million in 2021 compared to 2020 and $40.6 million compared to 2019. The components of those changes are as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Net income (loss)","","$","97.9","","","$","(104.0)","","","$","201.9","","","$","104.3","","","$","(6.4)"],["Non-cash reconciling items","","51.4","","","164.2","","","(112.8)","","","47.6","","","3.8"],["Changes in working capital","","46.5","","","36.3","","","10.2","","","3.3","","","43.2"],["Cash provided by operating activities","","$","195.8","","","$","96.5","","","$","99.3","","","$","155.2","","","$","40.6"]]
[[/GREPCENT_TABLE]]

54

The significant increase in net income in 2021 compared to 2020 was due to an increase in gross profit and the absence of impairment charges taken in 2020 that did not recur in 2021, partially offset by higher G&A expenses, each of which was discussed in preceding sections of this MD&A. Non-cash reconciling items (primarily closure and impairment charges, depreciation and amortization, deferred income taxes, stock-based compensation and loss on extinguishment of debt) decreased $112.8 million from 2020. The decrease primarily was due to impairments of goodwill, intangible assets and long-lived tangible assets totaling $129.6 million taken in 2020 that did not recur in 2021 as discussed in preceding sections of this MD&A. Net changes in working capital provided cash of $46.5 million during 2021 compared to providing cash of $36.3 million during 2020. This favorable change of $10.2 million between years primarily resulted from collection in 2021 of the franchisee deferrals discussed above and an increase in accrued employee incentive compensation, partially offset by an increase in income taxes paid.

The decrease in in net income in 2021 compared to 2019 primarily was due to decrease in gross profit and higher G&A expenses, each of which was discussed in preceding sections of this MD&A. Non-cash reconciling items (primarily closure and impairment charges, depreciation and amortization, deferred income taxes, stock-based compensation and loss on extinguishment of debt) decreased $3.8 million from 2020. The decrease primarily was due to a loss on extinguishment of debt in 2019 that did not recur in 2021. Net changes in working capital provided cash of $46.5 million during 2021 compared to providing cash of $3.3 million during 2019. This favorable change of $43.2 million between years primarily due to an increase in accrued employee incentive compensation, the timing of payments of marketing accruals and a decrease in income taxes paid.

Investing Activities

Investing activities provided net cash of $3.9 million for the year ended December 31, 2021, as compared to providing net cash of $18.7 million in 2020 and using net cash of $0.1 million in 2019. The components of those changes are as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Principal receipts from notes, equipment contracts and other long-term receivables","","$","20.2","","","$","31.2","","","$","(11.0)","","","$","24.1","","","$","(3.9)"],["Additions to property and equipment","","(16.8)","","","(10.9)","","","(5.9)","","","(19.4)","","","2.6"],["Additions to long-term receivables","","\u2014","","","(1.5)","","","1.5","","","(7.0)","","","7.0"],["Other","","0.5","","","\u2014","","","0.5","","","2.2","","","(1.7)"],["Cash provided by (used in) investing activities","","$","3.9","","","$","18.7","","","$","(14.9)","","","$","(0.1)","","","$","4.0"]]
[[/GREPCENT_TABLE]]

Principal receipts from notes, equipment contracts and other long-term receivables in 2021 decreased compared to 2020 due to the early payoff of several notes in 2020 that did not recur in 2021 and a progressive decline in annual collections as balances are repaid. Principal receipts from notes, equipment contracts and other long-term receivables in 2021 decreased compared to 2019 due a progressive decline in annual collections as balances are repaid.

Additions to property and equipment increased in 2021 as compared to 2020 due to increased capital spending at company restaurants as well as spending reductions in 2020 because of the pandemic. Additions to long-term receivables for loans to franchisees we made in 2019 did not recur in 2021.

The following table represents the timing of principal receipts from the Company's long-term receivables for equipment, direct financing receivables and other notes receivable from franchisees as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Principal Receipts Due By Period"],["","2022","","2023","","2024","","2025","","2026","","Thereafter","","Total"],["","(In millions)"],["Equipment leases(1)","$","7.3","","","$","7.0","","","$","6.4","","","$","5.3","","","$","3.9","","","$","3.5","","","$","33.4"],["Direct financing leases(2)","6.6","","","3.3","","","1.4","","","0.7","","","0.7","","","4.0","","","16.7"],["Other notes(3)","5.5","","","3.6","","","2.6","","","1.5","","","1.8","","","0.0","","","15.0"],["Total","$","19.4","","","$","13.9","","","$","10.4","","","$","7.5","","","$","6.4","","","$","7.5","","","$","65.1"]]
[[/GREPCENT_TABLE]]
______________________________________________

(1)Equipment lease receivables extend through the year 2029.

(2)Direct financing lease receivables extend through the year 2041.

(3)Other notes receivable extend through the year 2026.

55

Financing Activities

Financing activities used cash of $230.5 million during the year ended December 31, 2021, as compared to providing cash of $168.4 million in 2020 and using cash of $182.9 million in 2019 . The components of the changes are as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","","2021","","2020","","","2019"],["","","(In millions)"],["Repurchase of common stock","","$","(4.2)","","","$","(29.9)","","","$","25.7","","","$","(109.7)","","","$","105.5"],["Dividends paid","","\u2014","","","(23.9)","","","23.9","","","(46.9)","","","46.9"],["Net (repayment) issuance of long-term debt, including issuance costs","","(9.8)","","","(3.3)","","","(6.5)","","","3.1","","","(12.9)"],["Net (repayment of) borrowing from Credit Facility","","(220.0)","","","220.0","","","(440.0)","","","(25.0)","","","(195.0)"],["All other","","3.5","","","5.4","","","(1.9)","","","(4.4)","","","7.9"],["Cash (used in) provided by financing activities","","$","(230.5)","","","$","168.3","","","$","(398.8)","","","$","(182.9)","","","$","(47.6)"]]
[[/GREPCENT_TABLE]]

Several actions we took in 2020 noted above in response to the COVID-19 pandemic were the primary factors underlying the significant changes shown above. In March 2021, we repaid $220 million that was drawn on our Credit Facility in March 2020. In March 2020, we temporarily suspended repurchasing our common stock and paying dividends on common stock after the onset of the pandemic. Prior to the suspension, we used cash totaling $53.8 million for dividends and stock repurchases in 2020. We resumed repurchasing common stock in November 2021.

Adjusted Free Cash Flow

We define “adjusted free cash flow” for a given period as cash provided by operating activities, plus receipts from notes and equipment contract receivables, less additions to property and equipment. Management uses this liquidity measure in its periodic assessments of, among other things, the amount of cash dividends per share of common stock and repurchases of common stock and we believe it is important for investors to have the same measure used by management for that purpose. Adjusted free cash flow does not represent residual cash flow available for discretionary purposes.

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

[[GREPCENT_TABLE]]
[["","","","","","Variance 2021 vs 2020 Favorable (Unfavorable)","","","","Variance 2021 vs 2019 Favorable (Unfavorable)"],["","2021","","2020","","","2019"],["","(In millions)"],["Cash flows provided by operating activities","$","195.8","","","$","96.5","","","$","99.3","","","$","155.2","","","$","40.6"],["Net receipts from notes and equipment receivables","12.0","","","21.0","","","(9.0)","","","13.0","","","(1.0)"],["Additions to property and equipment","(16.8)","","","(10.9)","","","(5.9)","","","(19.4)","","","2.6"],["Adjusted free cash flow","$","191.0","","","$","106.6","","","$","84.4","","","$","148.8","","","$","42.2"]]
[[/GREPCENT_TABLE]]

The increase in adjusted free cash flow in 2021 compared to 2020 primarily was due to the increase in cash provided by operating activities, partially offset by a decrease in receipts from notes and equipment receivables and an increase in capital expenditures, each of which was discussed in preceding sections of this MD&A. The increase in adjusted free cash flow in 2021 compared to 2019 primarily was due to the increase in cash provided by operating activities.

Capital Allocation

We suspended our repurchasing of common stock and the declaration of dividends on our common stock after the first quarter of 2020 due to COVID-19 pandemic. After evaluating repurchases of common stock and dividend payments on common stock within the context of our overall capital allocation strategy, giving consideration to our current and forecast earnings, financial condition, cash requirements and other factors, we resumed repurchasing our common stock and the declaration of dividends in the fourth quarter of 2021.

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Dividends

During the year ended December 31, 2021, our Board of Directors declared a fourth quarter 2021 cash dividend of $0.40 per share, paid in January 2022. See Note 12 - Stockholders' Deficit, of the Notes to the Consolidated Financial Statements included in this report for all dividends paid and declared in fiscal 2021, 2020 and 2019.

On February 17, 2022, our Board of Directors declared a first quarter 2022 cash dividend of $0.46 per share of common stock, payable on April 1, 2022 to the stockholders of record as of the close of business on March 21, 2022.

Share Repurchases

A summary of shares repurchased under the 2019 Repurchase Program, during the year ended December 31, 2021 and cumulatively, is as follows:

[[GREPCENT_TABLE]]
[["","Shares","","Cost of shares"],["","","","(In millions)"],["2019 Repurchase Program:"],["Repurchased during the year ended December 31, 2021","59,099","","","$","4.5"],["Cumulative (life-of-program) repurchases","1,756,696","","","$","134.3"],["Remaining dollar value of shares that may be repurchased","n/a","","$","65.7"]]
[[/GREPCENT_TABLE]]

See Note 12 - Stockholders' Deficit, of the Notes to the Consolidated Financial Statements included in this report for shares repurchased in fiscal 2021, 2020 and 2019.

On February 17, 2022, the Company's Board of Directors authorized a new share repurchase program, effective April 1, 2022, of up to $250 million (the “2022 Repurchase Program”). Approximately $66 million remained available for repurchases under the existing 2019 Share Repurchase Program as of December 31, 2021. In connection with the approval of the 2022 Repurchase Program, effective April 1, 2022, the 2019 Share Repurchase Program will terminate.

From time to time, we also repurchase shares owned and tendered by employees to satisfy tax withholding obligations on the vesting of restricted stock awards. Shares are deemed purchased at the closing price of our common stock on the vesting date. See Part II, Item 5 for detail on all share repurchase activity during the fourth quarter of 2021.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Our significant accounting policies are comprehensively described in Note 2 - Basis of Presentation and Significant Accounting Policies, of the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this 10-K. We believe the accounting policies discussed below are particularly important to the understanding of our consolidated financial statements and require higher degree of judgment and/or complexity in the preparation of those consolidated financial statements. In exercising those judgments, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates based on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates. Changes in estimates and judgments could significantly affect our results of operations, financial condition and cash flow in the future.

Goodwill and Intangible Assets

Goodwill and intangible assets considered to have an indefinite life are evaluated throughout the year to determine if indicators of impairment exist. Such indicators include, but are not limited to, events or circumstances such as a significant adverse change in our business, in the business overall climate, unanticipated competition, a loss of key personnel, adverse legal or regulatory developments or a significant decline in the market price of our common stock.

If no indicators of impairment have been noted during these preliminary assessments, we perform an assessment of goodwill and intangible assets annually in the fourth fiscal quarter. We first assess qualitatively whether it is more-likely-than-not that an impairment does not exist. Significant factors considered in this assessment include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, share price

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fluctuations, overall financial performance and results of past impairment tests. If we do not qualitatively determine that it is more-likely-than-not that an impairment does not exist, we perform a quantitative impairment test.

In performing a quantitative test for impairment of goodwill, we primarily use the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of goodwill and intangible assets. Significant assumptions made by management in estimating fair value under the discounted cash flow model include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures, changes in working capital and an estimated income tax rate, along with an appropriate discount rate based on our estimated cost of equity capital and after-tax cost of debt. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.

In the process of a quantitative test, if necessary, of the Applebee's tradename intangible asset, we primarily use the relief of royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate, an estimated income tax rate and a discount rate to be applied to the forecast revenue stream.

There is an inherent degree of uncertainty in preparing any forecast of future results. Future trends in system-wide sales are dependent to a significant extent on national, regional and local economic conditions, and, to a lesser extent, on global economic conditions, particularly those conditions affecting the demographics of the guests that frequently patronize our restaurants. There are numerous potential events that could reasonably be expected to negatively affect the forecast of system-wide sales, including a decrease in customers' disposable income available for discretionary spending or a decrease in the perceived wealth of customers, as well as unexpected events such as a global pandemic. As a result, our restaurants could experience a decline in sales and/or customer traffic as potential customers choose lower-cost alternatives (such as quick-service restaurants) or other alternatives to dining out. Any decreases in customer traffic or average customer check due to these or other reasons could reduce gross sales at franchise restaurants, resulting in lower royalty and other payments from franchisees. This could reduce the profitability of franchise restaurants, potentially impacting the ability of franchisees to make royalty payments owed to us when due, which could adversely impact our current cash flow from franchise operations, and negatively impacting franchisees’ ability to develop new restaurants, which could adversely impact our future cash flows from franchise operations. Any decreases in customer traffic or average customer check also could reduce the profitability of our company-operated restaurants. Significant increases in either the estimated income tax rate or the discount rate also could adversely impact estimated fair values used in quantitative tests for impairment.

As discussed above under “Events Impacting Comparability of Financial Information - COVID 19 Pandemic,” government-mandated restrictions had a significant adverse impact on industry-wide restaurant operations in 2020. As a result, we performed quantitative impairment tests of our goodwill and intangible that reflected, among other things, a reduction in future system-wide sales and resulted in impairment of the goodwill of the Applebee's franchise unit, Applebee's tradename and other intangible assets during the year ended December 31, 2020. See Note 6 - Goodwill and Note 7 - Intangible Assets, of the Notes to the Consolidated Financial Statements for a detail description of these impairments.

During the year ended December 31, 2021, we qualitatively assessed our goodwill and intangible assets for impairment. One of the primary considerations underlying those assessments was the improvement in our system-wide sales in 2021 compared to the year ended December 31, 2020, as discussed above under “Consolidated Results of Operations - Fiscal 2021, 2020 and 2019,” and the impact that had on future system-wide sales forecasts relative to the sales forecasts that had been used in performing the 2020 quantitative tests for impairment. We concluded it was more likely than not that the fair values of goodwill and intangible assets exceeded their respective carrying amounts and quantitative tests of impairment were not necessary during the year ended December 31, 2021.

Long-Lived Assets

On a regular basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived tangible assets (primarily assets related to properties and equipment leased or subleased to franchisees, including operating lease right-of-use assets recorded upon adoption of ASC 842) may not be recoverable. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. Significant factors considered include, but are not limited to, current and forecast sales, current and forecast cash flows, the number of years the franchisee's restaurant has been in operation, its remaining lease life, and other factors which apply on a case-by-case basis. The analysis is performed at the individual restaurant level for indicators of permanent impairment. Recoverability of the Company's assets is measured by comparing the assets' carrying value to the undiscounted cash flows expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. This assessment requires the use of estimates and assumptions as to future cash flows of individual restaurants and properties, which are subject to a high degree of judgment and are unique to each property. If assumptions as to future cash flows decrease in the future, we may be required to record impairment charges for these assets. See Note 13 - Closure and Long-lived Tangible Asset

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Impairment Charges, of the Notes to the Consolidated Financial Statements for additional information on impairments of long-lived tangible assets.

On a regular basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of intangible assets with finite lives, primarily assets related to Applebee's franchise rights. Recoverability of the asset is measured by comparing the assets' carrying value to the discounted future cash flows expected to be generated over the asset's remaining useful life. Significant factors considered include, but are not limited to, current and forecast sales, current and forecast cash flows and a discount rate to be applied to the forecast revenue stream.

Current Expected Credit Losses (“CECL”)

The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself.

We estimate credit loss reserves in the following manner. We record specific reserves against account balances of franchisees deemed “at-risk” when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed “at-risk,” an allowance is recorded based on expected loss rates that consider four components - historical losses, current conditions, reasonable and supportable forecasts and a reversion to history, if applicable.

The majority of our allowance for credit losses is comprised of specific reserves related to individual franchisees. These reserves are subject to a high degree of judgment and are unique to each franchisee. Changes in circumstances relating to each franchisee may result in increases or decreases to the allowance for credit losses in the future. Since adoption of the CECL methodology, the portion of the allowance based on expected loss rates has not been a material component of the total allowance for credit losses.

Income Taxes

We provide for income taxes based on our estimate of federal and state income tax liabilities. We make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. Tax laws are complex and subject to different interpretations by the taxpayers and respective governmental authorities. We review our tax positions quarterly and adjust the balances as new information becomes available.

We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between the financial reporting basis and the tax basis of recorded assets and liabilities. Deferred tax accounting requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portions or all the net deferred tax assets will not be realized. This test requires projection of our taxable income into future years to determine if there will be taxable income sufficient to realize the tax assets. The preparation of the projections requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense will increase or decrease, respectively, in the period such determination is made.

FASB ASC Topic 740-10 requires that a position taken or expected to be taken in a tax return be recognized in the financial statement when it is more likely than not (i.e. a likelihood of more than 50 percent) that the position would be sustained upon examination by taxing authorities including all appeals or litigation processes, based on its technical merits. A recognized tax position is then measured on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. For each reporting period, management applies a consistent methodology to measure and adjust all uncertain tax positions based on the available information.

Accounting Standards Adopted in the Current Fiscal Year

See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in this report for a description of accounting standards we adopted in fiscal 2021.

Newly Issued Accounting Standards Not Yet Adopted

See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in this report, for a description of newly issued accounting standards that may impact us in the future.

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