# Dine Brands Global, Inc. (DIN) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Dine Brands Global, Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/49754/000004975423000004/din-20221231.htm Accession: 0000049754-23-000004 Filing date: 2023-03-01 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/DIN/ All MD&A years: /company/DIN/mda/ Previous year: /company/DIN/mda/fy2021/ (FY 2021) Next year: /company/DIN/mda/fy2023/ (FY 2023) 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 2022 as compared to 2021 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 2021 and fiscal 2020, 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, 2021, filed with the SEC on March 2, 2022, 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 and franchise the Applebee's Neighborhood Grill + Bar® (“Applebee's”) concept in the American full-service restaurant segment within the casual dining category of the restaurant industry and we own and franchise the International House of Pancakes® (“IHOP”) concept in the midscale full-service restaurant segment within the family dining category of the restaurant industry. In December 2022, we acquired the Fuzzy's Taco Shop® (“Fuzzy's”) concept in the Mexican limited-service restaurant segment within the fast-casual dining category of the restaurant industry and as such, Fuzzy's did not have a significant impact to the fiscal 2022 results of operations. 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 and Fuzzy's restaurants are located in 18 states. Internationally, IHOP restaurants are in two United States territories and nine countries, while Applebee's restaurants are in two United States territories and 11 countries. With over 3,500 franchised restaurants combined, we believe we are one of the largest full-service restaurant companies in the world. The June 2022 issue of Nation's Restaurant News reported that IHOP was the largest restaurant system in the midscale full-service restaurant segment and Applebee's was the second largest restaurant system in the American full-service restaurant segment, in terms of United States system-wide sales during 2021. 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 2022 fiscal year ended January 1, 2023. There were 52 calendar weeks in our 2021 fiscal year ended on January 2, 2022. There were 53 calendar weeks in our 2020 fiscal year ended January 3, 2021, and our fiscal 2020 fourth quarter contained 14 calendar weeks. Events Impacting Comparability of Financial Information Comparisons of financial results for the fiscal years ended December 31, 2022 and 2021 were impacted by the extent of restrictions in place on restaurant operations in 2021. 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 implementing restrictions that resulted in, to varying degrees, reduced operating hours, restaurant dine-in and/or indoor dining limitations, capacity limitations or other restrictions. The operating status of our restaurants was fluid during the year ended December 31, 2021 and subject to change. Restrictions on restaurant operations were relaxed, removed or increased in response to changes in the number of COVID-19 infections, the availability and acceptance of vaccines and an increase in vaccination rates within the respective governmental jurisdictions. Generally speaking, during the second quarter of 2021, many federal, state and local governments began to relax or remove the restrictive protocols noted above, while most international governments maintained the restrictions, the degree of which varied by country. 32 As of December 31, 2022 and 2021 almost all of our restaurants were operating without government-mandated restrictions, a significant improvement from December 31, 2021, at which time many international restaurants were operating with some restrictions. Government-mandated restrictions notwithstanding, some 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. As of December 31, 2022, approximately 545 IHOP restaurants operated 24 hours a day, seven days a week, with approximately 178 additional restaurants operating 24 hours a day for some portion of the week. In comparison, approximately 448 IHOP restaurants operated 24 hours a day, seven days a week, with 68 additional restaurants operating 24 hours a day for some portion of the week as of December 31, 2021. We have experienced a number of temporary and permanent closures of our restaurants during the COVID-19 pandemic. These closures occurred for a variety of reasons, and all closures were not necessarily related to the impact of the COVID-19 pandemic or related restrictions. We cannot predict the duration of the pandemic, recurrences of the virus (including the emergence of new variants of the virus), the availability and acceptance of vaccines and booster vaccines worldwide, whether any restrictions on in-restaurant dining may be re-imposed, and, in general, what the ultimate impact on consumer discretionary spending the COVID-19 pandemic might have on our operations and the restaurant industry as a whole. Executive Summary of 2022 Results Highlights •We reported net income of $81.1 million, or $4.96 per diluted share, in 2022 compared to $97.9 million, or $5.66 per diluted share, in 2021; •Applebee's reported system-wide sales grew 4.7% in 2022 driven by a 5.1% increase in domestic same-restaurant sales partially offset by an 1% decrease in domestic effective restaurants; •IHOP's reported system-wide sales grew 7.7% in 2022 driven by a 5.8% increase in domestic same-restaurant sales and an increase in franchise restaurants due to development; •We generated cash from operating activities of $89.3 million; •We returned over $151 million to our stockholders, comprised of $30.8 million in cash dividends and $120.5 million in the form of stock repurchases; and •We made voluntary repayments of long-term debt of $38.8 million purchased under par which resulted in a $1.4 million gain on debt extinguishment. Overview of 2022 Performance 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, 2022 were as follows: [[GREPCENT_TABLE]] [["","Applebee's","","IHOP"],["System-wide sales percentage increase","4.7","%","","7.7","%"],["Domestic system-wide same-restaurant sales percentage increase","5.1","%","","5.8","%"],["Net franchise restaurant development(1)","67","","","30"],["Net (decrease) increase in global effective restaurants(2)","(17)","","","26"]] [[/GREPCENT_TABLE]] _________________________________ (1)     Franchise and area license restaurant openings, net of closings, and includes the 69 former Applebee's company-operated restaurants refranchised in October 2022. (2)    Change in the weighted average number of franchise, area license and company-operated restaurants open during the year ended December 31, 2022, compared to the weighted average number of those open during the prior year referenced. 33 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. A summary of our financial summary for the years ended December 31, 2022 and 2021 is as follows: [[GREPCENT_TABLE]] [["Financial Summary","","","Variance 2022 vs 2021 Favorable (Unfavorable)"],["","2022","","","2021"],["","(In thousands, except per share amounts)"],["Income before income taxes","$","114,785","","","$","(7,138)","","","$","121,923"],["Income tax provision","(33,674)","","","(9,615)","","","(24,059)"],["Net income","$","81,111","","","$","(16,753)","","","$","97,864"],["Effective tax rate","29.3","%","","(9.6)","%","","19.7","%"],["Net income per diluted share","$","4.96","","","$","(0.70)","","","$","5.66"],["Weighted average diluted shares (in millions)","15.9","","","(1.0)","","","16.9"]] [[/GREPCENT_TABLE]] The primary reasons for the variances in income before income taxes are summarized as follows: [[GREPCENT_TABLE]] [["","2022 vs. 2021"],["","(In millions)"],["Increase (decrease) in gross profit:"],["Franchise operations","$","4.5"],["Company operations","(4.1)"],["Rental and Financing operations","1.8"],["Total gross profit increase","2.2"],["Decrease in closure and impairment charges","2.3"],["Increase in General & Administrative (\u201cG&A\u201d) expenses","(18.9)"],["Increase in (gain) loss on disposition of assets","4.6"],["All other","2.7"],["Decrease in income before income taxes","$","(7.1)"]] [[/GREPCENT_TABLE]] The decrease in income before income taxes in fiscal 2022 compared to fiscal 2021 was due to higher G&A expenses including acquisition costs, partially offset by the increase in gross profit. The increase in gross profit in fiscal 2022 compared to fiscal 2021 was primarily due to the increases in Applebee's and IHOP domestic same-restaurant sales and in the number of IHOP effective restaurants, partially offset by the decrease in company operations impacted by the sale of Applebee's company-owned restaurants in October 2022. Our 2022 effective tax rate of 29.3% applied to pretax book income was different than the statutory Federal income tax rate of 21% due to the state and local income taxes and the non-deductibility of executive compensation. The effective tax rate further increased due to the increase in the effective state tax rate applied to revaluing deferred tax balances. The increase in the effective state tax rate was due to the non-recurring refranchising of 69 Applebee’s company-operated restaurants in the fourth quarter of 2022 and various state legislative changes. See Note 16 - Income Taxes, of the Notes to the Consolidated Financial Statements included in this report, for reconciliations between our effective rates and the statutory Federal income tax rate. 34 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. [[GREPCENT_TABLE]] [["Applebee's"],["","Year Ended December 31,"],["Global Effective Restaurants:(a)","2022","","2021","","2020"],["Franchise","1,617","","","1,621","","","1,624"],["Company","56","","","69","","","68"],["Total","1,673","","","1,690","","","1,692"],["System-wide:(b)"],["Domestic sales percentage change(c)","4.7","%","","34.4","%","","(24.1)","%"],["Domestic same-restaurant sales percentage change(d)","5.1","%","","38.2","%","","(22.4)","%"],["Franchise:(b)"],["Domestic sales percentage change(c)(e)","5.3","%","","34.4","%","","(24.3)","%"],["Domestic same-restaurant sales percentage change(d)","5.1","%","","38.2","%","","(22.6)","%"],["Domestic average weekly unit sales (in thousands)","$","53.7","","","$","50.9","","","$","37.1"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["IHOP"],["Global Effective Restaurants:(a)"],["Franchise","1,597","","","1,571","","","1,532"],["Area license","156","","","156","","","155"],["Total","1,753","","","1,727","","","1,687"],["System-wide:(b)"],["Sales percentage change(c)","7.7","%","","38.5","%","","(34.9)","%"],["Domestic same-restaurant sales percentage change(d)","5.8","%","","40.2","%","","(32.8)","%"],["Franchise:(b)"],["Sales percentage change(c)","7.7","%","","38.1","%","","(35.0)","%"],["Domestic same-restaurant sales percentage change(d)","5.7","%","","39.7","%","","(32.8)","%"],["Average weekly unit sales (in thousands)","$","37.0","","","$","34.9","","","$","25.4"],["Area License:(b)"],["IHOP sales percentage change(c)","7.9","%","","42.4","%","","(34.2)","%"]] [[/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. 35 (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, 2022, 2021 and 2020 were as follows: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["Reported retail sales","2022","","2021","","2020"],["","(In millions)"],["Applebee's domestic franchise restaurant sales","$","4,235.3","","","$","4,021.7","","","$","2,993.0"],["Applebee's company-operated restaurants","126.7","","","146.0","","","108.0"],["IHOP franchise restaurant sales","3,070.0","","","2,850.3","","","2,063.6"],["IHOP area license restaurant sales","292.7","","","271.3","","","190.5"],["Total","$","7,724.7","","","$","7,289.3","","","$","5,355.1"]] [[/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 2022 was impacted by the refranchising of 69 company-operated restaurants in October 2022 now reported as franchised. Domestic Same-Restaurant Sales Trends Applebee’s system-wide domestic same-restaurant sales increased 1.7% for the three months ended December 31, 2022 and increased 5.1% for the year ended December 31, 2022 as compared to the same respective periods of 2021. The increase in both periods was due to an increase in average check. 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. Based on data from Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), Applebee's increase in same- restaurant sales during the three and twelve months ended December 31, 2022 underperformed the casual dining segment of the restaurant industry (excluding Applebee's) as compared to the same respective periods of 2021. The casual dining segment also experienced an increase in average customer check, partially offset by a decline in customer traffic. 36 [[GREPCENT_TABLE]] [["Applebee's Off-premise Sales Data","Three Months Ended December 31,","","Twelve Months Ended December 31,"],["","2022","","2021","","2020","","2022","","2021","","2020"],["Off-premise sales (in millions)(1)","$","250.7","","","$","280.5","","","$","314.2","","","$","1,088.7","","","$","1,241.0","","","$","1,037.2"],["% sales mix","23.8","%","","26.8","%","","36.8","%","","25.3","%","","30.1","%","","33.7","%"]] [[/GREPCENT_TABLE]] (1) Primarily to-go, delivery and catering sales. Applebee's off-premise sales dollars and percentage of sales mix for the three and twelve months ended December 31, 2022 decreased as compared with the same respective periods of 2021, due to guests returning to in-restaurant dining. While Applebee's off-premise sales for the three and twelve months ended December 31, 2022 declined as compared to the same respective periods of 2021, both off-premise sales dollars and percentage of sales mix have increased significantly compared to the pre-pandemic levels of 2019. IHOP’s domestic same-restaurant sales increased 2.0% for the three months ended December 31, 2022 and increased 5.8% for the year ended December 31, 2022, as compared to the same respective periods of 2021. Most of the improvement in both periods was due to an increase in average check. 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. Based on data from Black Box, IHOP's increase in same-restaurant sales for the three and twelve months ended December 31, 2022 underperformed the family dining segment of the restaurant industry (excluding IHOP) as compared with the same respective periods of 2021. According to Black Box, the family dining segment also experienced increases in same-restaurant sales resulting from an increase in average customer check, partially offset by a decline in customer traffic. [[GREPCENT_TABLE]] [["IHOP Off-premise Sales Data","Three Months Ended December 31,","","Twelve Months Ended December 31,"],["","2022","","2021","","2020","","2022","","2021","","2020"],["Off-premise sales (in millions)(1)","$","160.9","","","$","169.8","","","$","167.8","","","$","627.4","","","$","690.0","","","$","559.9"],["% sales mix","21.7","%","","23.3","%","","33.5","%","","22.0","%","","26.1","%","","31.0","%"]] [[/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, 2022 decreased as compared to the same respective periods of 2021, due to guests returning to in-restaurant dining. While IHOP's off-premise sales for the three and twelve months ended December 31, 2022 declined as compared to the same respective periods of 2021, both off-premise sales dollars and percentage of sales mix have increased significantly compared to the pre-pandemic levels of 2019. 37 Restaurant Development [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["Net Restaurant Development Activity"],["Restaurants opened","67","","","46","","","31"],["Restaurants closed","(39)","","","(96)","","","(178)"],["Net restaurant development (reduction)","28","","","(50)","","","(147)"]] [[/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 in fiscal 2021. 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, 2022 declined 0.1% from the number open at December 31, 2021. The total number of IHOP restaurants (domestic and international) open at December 31, 2022 increased 1.7% from the number open at December 31, 2021. Internationally, the number of restaurants of both brands increased 8.7% from the number open at December 31, 2021. The following tables present Applebee's and IHOP net restaurant development activity over the past three years: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["Applebee's Restaurant Development Activity"],["Summary - beginning of period:"],["Franchise","1,611","","","1,640","","","1,718"],["Company restaurants","69","","","69","","","69"],["Total Applebee's restaurants, beginning of period","1,680","","","1,709","","","1,787"],["Domestic","1,578","","","1,598","","","1,665"],["International","102","","","111","","","122"],["Franchise restaurants opened:"],["Domestic","4","","","5","","","1"],["International","12","","","1","","","3"],["Total franchise restaurants opened","16","","","6","","","4"],["Franchise restaurants closed:"],["Domestic","(13)","","","(25)","","","(68)"],["International","(5)","","","(10)","","","(14)"],["Total franchise restaurants closed","(18)","","","(35)","","","(82)"],["Net franchise restaurant reduction","(2)","","","(29)","","","(78)"],["Refranchised from Company restaurants","69","","","\u2014","","","\u2014"],["Net franchise restaurant additions/(reductions)","67","","","(29)","","","(78)"],["Summary - end of period:"],["Franchise","1,678","","","1,611","","","1,640"],["Company restaurants","\u2014","","","69","","","69"],["Total Applebee's restaurants, end of period","1,678","","","1,680","","","1,709"],["Domestic","1,569","","","1,578","","","1,598"],["International","109","","","102","","","111"],["% Decrease in total Applebee's restaurants from prior year","(0.1)","%","","(1.7)","%","","(4.4)","%"]] [[/GREPCENT_TABLE]] 38 [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["IHOP Restaurant Development Activity"],["Summary - beginning of period:"],["Franchise","1,595","","","1,611","","","1,669"],["Area license","156","","","158","","","162"],["Company","\u2014","","","3","","","\u2014"],["Total IHOP restaurants, beginning of period","1,751","","","1,772","","","1,831"],["Domestic","1,657","","","1,670","","","1,710"],["International","94","","","102","","","131"],["Franchise/area license restaurants opened:"],["Domestic franchise","34","","","35","","","16"],["Domestic area license","3","","","2","","","3"],["International franchise","14","","","3","","","8"],["Total franchise/area license restaurants opened","51","","","40","","","27"],["Franchise/area license restaurants closed:"],["Domestic franchise","(14)","","","(47)","","","(56)"],["Domestic area license","(3)","","","(3)","","","(3)"],["International franchise","(4)","","","(10)","","","(34)"],["International area license","\u2014","","","(1)","","","(3)"],["Total franchise/area license restaurants closed","(21)","","","(61)","","","(96)"],["Net franchise/area license restaurant development (reduction)","30","","","(21)","","","(69)"],["Refranchised from Company restaurants","\u2014","","","4","","","\u2014"],["Franchise restaurants reacquired by the Company","\u2014","","","(1)","","","(3)"],["Net franchise/area license restaurant additions (reductions)","30","","","(18)","","","(72)"],["Summary - end of period:"],["Franchise","1,625","","","1,595","","","1,611"],["Area license","156","","","156","","","158"],["Company","\u2014","","","\u2014","","","3"],["Total IHOP restaurants, end of period","1,781","","","1,751","","","1,772"],["Domestic","1,677","","","1,657","","","1,670"],["International","104","","","94","","","102"],["% Increase (decrease) in total IHOP restaurants from prior year","1.7","%","","(1.2)","%","","(3.7)","%"]] [[/GREPCENT_TABLE]] The restaurant counts and activity presented above do not include ghost kitchens (small kitchens with no store-front presence, used to fill off-premise orders). As of December 31, 2022, there was a total 64 ghost kitchens. The Applebee's franchise restaurant count of 1,642 restaurants originally reported at the end of the year ended December 31, 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. 39 Consolidated Results of Operations - Fiscal 2022, 2021 and 2020 The tables in the following section of this Form 10-K present information from our Consolidated Statements of Comprehensive Income (Loss) for our 2022, 2021 and 2020 fiscal years. The discussion of year-to-year comparisons between fiscal 2022 and fiscal 2021 can be found below. For a detailed discussion of year-to-year comparisons between fiscal 2021 and fiscal 2020 as well as between fiscal 2021 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, 2021, which is hereby incorporated by reference. Financial Review [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["Revenue","2022","","","2021","","","2020"],["","(In millions)"],["Franchise operations","$","662.4","","","$","30.5","","","$","631.9","","","$","162.4","","","$","469.5"],["Company restaurant operations","126.9","","","(19.1)","","","146.0","","","37.9","","","108.1"],["Rental operations","116.5","","","2.5","","","114.0","","","8.1","","","105.9"],["Financing operations","3.6","","","(0.7)","","","4.3","","","(1.5)","","","5.8"],["Total revenue","$","909.4","","","$","13.2","","","$","896.2","","","$","206.9","","","$","689.3"],["% Increase","","","1.5","%","","","","30.0","%"]] [[/GREPCENT_TABLE]] Our 2022 total revenue increased $13.2 million compared to 2021, primarily due to the increase in franchise operations revenue, offset by the decrease in company restaurant operations revenue. Franchise operations revenue primarily increased due to a 5.8% increase in IHOP domestic same-restaurant sales and a 5.1% increase in Applebee's domestic same-restaurant sales. Company restaurant operations revenue decreased primarily due to the sale of our 69 Applebee's company-operated restaurants to a franchisee in October 2022. [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["Gross Profit","2022","","","2021","","","2020"],["","(In millions)"],["Franchise operations","$","340.5","","","$","4.5","","","$","336.0","","","$","105.5","","","$","230.5"],["Company restaurant operations","5.1","","","(4.2)","","","9.3","","","12.8","","","(3.5)"],["Rental operations","28.5","","","2.4","","","26.1","","","9.7","","","16.4"],["Financing operations","3.2","","","(0.6)","","","3.8","","","(1.5)","","","5.3"],["Total gross profit","$","377.3","","","$","2.1","","","$","375.2","","","$","126.5","","","$","248.7"],["% Increase","","","0.6","%","","","","50.9","%"]] [[/GREPCENT_TABLE]] Our 2022 total gross profit grew by $2.1 million compared to 2021, primarily due to the revenue increases cited above, partially offset by a $5.2 million increase in bad debt expense. We recorded a bad debt expense of $0.3 million in 2022 compared to a bad debt recovery of $4.9 million in 2021. Company restaurant gross profit decreased primarily due to the sale of our Applebee's company-operated restaurants as noted above. Rental operations gross profit increased primarily due to a $2.6 million increase in rental income. 40 [[GREPCENT_TABLE]] [["Franchise Operations","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions, except number of restaurants)"],["Global Effective Franchise Restaurants:(1)"],["Applebee\u2019s","1,617","","(4)","","1,621","","(3)","","1,624"],["IHOP","1,753","","26","","1,727","","40","","1,687"],["Franchise Revenue:"],["Applebee's","$","173.2","","","$","5.6","","","$","167.6","","","$","42.8","","","$","124.8"],["IHOP","199.3","","","9.8","","","189.5","","","46.3","","","143.2"],["Advertising","289.3","","","14.5","","","274.8","","","73.3","","","201.5"],["Fuzzy's","0.6","","","0.6","","","\u2014","","","\u2014","","","\u2014"],["Total franchise revenue","662.4","","","30.5","","","631.9","","","162.4","","","469.5"],["Franchise Expenses:"],["Applebee\u2019s","4.3","","","(1.4)","","","2.9","","","4.1","","","7.0"],["IHOP","30.5","","","(9.8)","","","20.7","","","9.3","","","30.0"],["Advertising","287.1","","","(14.8)","","","272.3","","","(70.3)","","","202.0"],["Fuzzy's","0.0","","","0.0","","","\u2014","","","\u2014","","","\u2014"],["Total franchise expenses","321.9","","","(26.0)","","","295.9","","","(56.9)","","","239.0"],["Franchise Segment Profit:"],["Applebee\u2019s","168.9","","","4.2","","","164.7","","","46.9","","","117.8"],["IHOP","168.8","","","\u2014","","","168.8","","","55.6","","","113.2"],["Advertising","2.2","","","(0.3)","","","2.5","","","3.0","","","(0.5)"],["Fuzzy's","0.6","","","0.6","","","\u2014","","","\u2014","","","\u2014"],["Total franchise segment profit","$","340.5","","","$","4.5","","","$","336.0","","","$","105.5","","","$","230.5"],["Gross profit as % of total revenue","51.4","%","","","","53.2","%","","","","49.1","%"],["Gross profit as % of franchise fees(2)","90.7","%","","","","93.4","%","","","","86.2","%"]] [[/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 $30.5 million in 2022 compared to 2021, due to the following changes: •Applebee's franchise revenue increased $5.6 million, or 3.3%, compared to 2021 primarily due to higher royalty revenues resulting from a 5.1% increase in domestic franchise same-restaurant sales and the refranchising of the former company-operated restaurants. These favorable changes were partially offset by the decrease in the number of effective franchise restaurants and lower franchise fees. •IHOP franchise revenue increased $9.8 million, or 5.2%, compared to 2021, primarily due to higher royalty and pancake and waffle dry mix revenues resulting from a 5.8% increase in domestic franchise same-restaurant sales and a 1.5% increase in effective franchise restaurants. These favorable changes were partially offset by a $4.0 million decrease in domestic and international termination fees. •Advertising revenue increased $14.5 million, compared to 2021, as discussed by brand below. Our 2022 total franchise expenses increased $26.0 million compared to 2021, due to changes in the following components: •Applebee's franchise expenses increased $1.4 million, primarily due to a $1.3 million increase in bad debt expense. We had a bad debt expense of $0.4 million in 2022 as compared to a bad debt recovery of $0.9 million in 2021. •IHOP franchise expenses increased $9.8 million, primarily due to a $4.0 million increase in bad debt expense and an increase in purchases of pancake and waffle dry mix. IHOP had a bad debt recovery of $0.1 million in 2022 compared to a bad debt recovery of $4.1 million in 2021. •Advertising expenses increased $14.8 million, primarily due to a corresponding increase in advertising revenue. 41 Gross profit as a percentage of total revenue decreased in 2022 compared to 2021, primarily because of the $5.3 million increase in bad debt expense. Advertising revenue and expense by brand for fiscal 2022, 2021 and 2020 were as follows: [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["Advertising Revenues"],["Applebee's","$","177.4","","","$","7.8","","","$","169.6","","","$","44.8","","","$","124.8"],["IHOP","111.7","","","6.5","","","105.2","","","28.5","","","76.7"],["Fuzzy's","0.2","","","0.2","","","\u2014","","","\u2014","","","\u2014"],["Total advertising revenues","$","289.3","","","$","14.5","","","$","274.8","","","$","73.3","","","$","201.5"],["Advertising Expenses"],["Applebee\u2019s","$","174.6","","","$","(7.7)","","","$","166.9","","","$","(42.0)","","","$","124.9"],["IHOP","112.3","","","(6.9)","","","105.4","","","(28.3)","","","77.1"],["Fuzzy's","0.2","","","(0.2)","","","\u2014","","","\u2014","","","\u2014"],["Total advertising expenses","$","287.1","","","$","(14.8)","","","$","272.3","","","$","(70.3)","","","$","202.0"]] [[/GREPCENT_TABLE]] Applebee's advertising revenue for 2022 increased 4.6% compared to 2021, primarily due to the increase of 5.1% in domestic franchise same-restaurant sales, partially offset by a $1.1 million decrease to unfavorable collectability. The increase in Applebee's advertising expenses was less than the increase in advertising revenue primarily because of the recovery of an advertising fund deficit that had been recognized in prior years. IHOP's advertising revenue for 2022 increased by 6.2%, compared to 2021, primarily due to the increase of 5.8% in domestic franchise same-restaurant sales, partially offset by an increase in incentive credits that reduce advertising revenue. The increase in IHOP advertising expenses was greater than the increase in advertising revenue due to recognition of a deficit in the international advertising fund. It is our accounting policy to recognize any deficiency in advertising fee revenue compared to advertising expenditure, or recovery of a previously recognized deficiency in advertising fee revenue compared to advertising expenditures, in the fourth quarter of our fiscal year. [[GREPCENT_TABLE]] [["Rental Operations","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["Rental revenues","$","116.5","","","$","2.5","","","$","114.0","","","$","8.1","","","$","105.9"],["Rental expenses","88.0","","","(0.1)","","","87.9","","","1.6","","","89.5"],["Rental operations segment profit","$","28.5","","","$","2.4","","","$","26.1","","","$","9.7","","","$","16.4"],["Gross profit as % of revenue(1)","24.5","%","","","","22.9","%","","","","15.5","%"]] [[/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. Rental segment revenue for the year ended December 31, 2022 increased as compared to the same period of 2021, primarily due to a $2.2 million increase resulting from lease renewals and scheduled rent escalations and a $1.4 million increase in rental income based on a percentage of franchisees' retail sales, offset by a progressive decline of $1.0 million in interest income as real estate leases are repaid. Rental segment expenses for the year ended December 31, 2022 increased compared to the same period of 2021, primarily due to an $1.2 million increase resulting from lease renewals and scheduled rent escalations offset by a $0.6 million decrease in interest expense as finance lease obligations are repaid and a $0.4 million decrease in depreciation expense. 42 [[GREPCENT_TABLE]] [["Financing Operations","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["Financing revenues","$","3.6","","","$","(0.7)","","","$","4.3","","","$","(1.5)","","","$","5.8"],["Financing expenses","0.4","","","0.1","","","0.5","","","0.0","","","0.5"],["Financing operations segment profit","$","3.2","","","$","(0.6)","","","$","3.8","","","$","(1.5)","","","$","5.3"],["Gross profit as % of revenue(1)","88.4","%","","","","89.2","%","","","","90.9","%"]] [[/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 $0.7 million in 2022 compared to 2021. The change was primarily due to a $0.8 million decrease in IHOP interest income resulting from a decline in interest income from the financing of franchise fees and equipment leases as note balances were repaid offset by an increase in interest income on notes from franchisees. [[GREPCENT_TABLE]] [["Company Operations","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["Effective Company Restaurants:"],["Applebee\u2019s","56","","","(13)","","","69","","","1","","","68"],["Average weekly unit sales (in thousands)","$","43.6","","","$","3.0","","","$","40.6","","","$","10.9","","","$","29.7"],["","(In millions)"],["Applebee's company restaurant sales(1)","$","126.6","","","$","(19.4)","","","$","146.0","","","$","37.9","","","$","108.1"],["Applebee's company restaurant expenses(1)","121.5","","","14.3","","","135.8","","","(26.1)","","","109.7"],["IHOP restaurant expenses(2)","\u2014","","","0.9","","","0.9","","","1.0","","","1.9"],["Company restaurant segment profit (loss)","$","5.1","","","$","(4.2)","","","$","9.3","","","$","12.8","","","$","(3.5)"],["Gross profit (loss) as % of revenue(3)","4.0","%","","","","6.4","%","","","","(3.2)","%"]] [[/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. From time to time, we may reacquire restaurants from franchisees that we subsequently refranchise. These restaurants may or may not be operated by us on a temporary basis until refranchised. In October 2022, we sold 69 Applebee's restaurants in North Carolina and South Carolina to an Applebee's franchisee. The decrease in effective restaurants (a weighted average calculation) for 2022 reflects the period of time during fiscal 2022 when we no longer operated these Applebee's restaurants. Applebee's company restaurant sales for the year ended December 31, 2022 decreased 13% compared to the same period of 2021 primarily due to the sale of the 69 Applebee's company-operated restaurants in October 2022, offset by an increase in average check and an increase in traffic prior to the sale. Company segment restaurant expenses for the years ended December 31, 2021 and 2020 included $0.9 million and $1.9 million, respectively, of costs associated with certain IHOP restaurants incurred while the restaurants were being refranchised. None of the reacquired IHOP restaurants were operated during the years ended December 31, 2021 and 2020, and IHOP recorded no restaurant revenues in this period. We held no reacquired restaurants at or during the year ended December 31, 2022. 43 [[GREPCENT_TABLE]] [["General and Administrative Expenses","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["G&A expenses","$","190.7","","","$","(18.9)","","","$","171.8","","","$","(27.0)","","","$","144.8"]] [[/GREPCENT_TABLE]] G&A expenses for 2022 increased 11.0% compared to 2021, primarily due to increases in professional service fees including acquisition costs, occupancy costs, travel and conference expenses, and software maintenance costs, some of which are non-recurring expenditures, offset by lower personnel-related expenses. The decrease in personnel-related expenses primarily was due to lower costs of bonus and equity-based incentive compensation offset by increased costs of salaries and benefits. [[GREPCENT_TABLE]] [["Closure and Impairment Charges","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["Closure charges","$","1.7","","","$","2.0","","","$","3.7","","","$","(0.7)","","","$","3.0"],["Impairment of goodwill","\u2014","","","\u2014","","","\u2014","","","92.2","","","92.2"],["Impairment of tradename","\u2014","","","\u2014","","","\u2014","","","11.0","","","11.0"],["Long-lived asset impairment","1.4","","","0.3","","","1.7","","","20.6","","","22.3"],["Impairment of reacquired franchise rights","\u2014","","","\u2014","","","\u2014","","","3.3","","","3.3"],["Impairment of favorable leasehold intangible","\u2014","","","\u2014","","","\u2014","","","0.8","","","0.8"],["Total","$","3.1","","","$","2.3","","","$","5.4","","","$","127.2","","","$","132.6"]] [[/GREPCENT_TABLE]] Closure Charges The closure charges of $1.7 million for the year ended December 31, 2022 comprised of $1.3 million for revisions to existing closure reserves, including accretion for approximately 40 IHOP restaurants closed prior to 2022 and $0.4 million related to three IHOP restaurants closed in 2022. 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 for 28 IHOP restaurants closed prior to 2021. 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 $1.4 million for the year ended December 31, 2022 comprised of $1.1 million related to the 69 Applebee's company-owned restaurants in North Carolina and South Carolina that were sold in October 2022 and $0.3 million related to two IHOP franchisee-operated restaurants. The impairment recorded represented the difference between the carrying value and the estimated fair value. The long-lived asset impairment of $1.7 million for the year ended December 31, 2021 related to five IHOP franchisee-operated restaurants for which the carrying amount exceeded the undiscounted cash flows. [[GREPCENT_TABLE]] [["Other Income and Expense Items","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["Interest expense, net","$","60.7","","","$","2.6","","","$","63.3","","","$","3.6","","","$","66.9"],["Amortization of intangible assets","10.6","","","0.1","","","10.7","","","0.2","","","10.9"],["(Gain) loss on disposition of assets","(2.5)","","","4.5","","","2.0","","","0.1","","","2.1"],["Total","$","68.8","","","$","7.2","","","$","76.0","","","$","3.9","","","$","79.9"]] [[/GREPCENT_TABLE]] 44 Interest Expense, Net Interest expense, net, decreased $2.6 million in 2022 compared to 2021, primarily due to a $4.3 million increase in interest income offset by a $1.6 million increase in interest expense related to our revolving credit facility (the “Credit Facility”). See the “Liquidity and Capital Resources of the Company” section for additional discussion related to borrowings under our Credit Facility. Amortization of Intangible Assets Amortization of intangible assets primarily relates to franchising rights arising from the November 2007 acquisition of Applebee's and reacquired franchise rights arising from the December 2018 acquisition of 69 Applebee's restaurants from a former franchisee. The decrease in amortization expense in 2022 as compared to 2021 was insignificant. (Gain) Loss on Disposition of Assets The gain on disposition of assets for the year ended December 31, 2022 primarily related to the gain on sales of the land and buildings on which three IHOP restaurants were located, the 69 Applebee's company-operated restaurants and the termination of two IHOP restaurant leases. The loss on disposition of assets for the year ended 2021 primarily related to the disposition of capitalized software no longer in use. [[GREPCENT_TABLE]] [["Income Taxes","","","Variance 2022 vs 2021 Favorable (Unfavorable)","","","","Variance 2021 vs 2020 Favorable (Unfavorable)"],["","2022","","","2021","","","2020"],["","(In millions)"],["Income tax provision (benefit)","$","33.7","","","$","(9.6)","","","$","24.1","","","$","(28.7)","","","$","(4.6)"],["Effective tax rate","29.3","%","","(9.6)","%","","19.7","%","","(15.5)","%","","4.2","%"]] [[/GREPCENT_TABLE]] 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 2022 and 2021 and are addressed in the preceding sections of “Consolidated Results of Operations - Fiscal 2022, 2021 and 2020.” The fiscal year 2022 effective tax rate of 29.3% applied to pretax book income was different than the statutory Federal income tax rate of 21% due to the state and local income taxes and the non-deductibility of executive compensation. The effective tax rate further increased due to the increase in the effective state tax rate applied to revaluing deferred tax balances. The increase in the effective state tax rate was due to the non-recurring refranchising of 69 Applebee’s company-operated restaurants in the fourth quarter of 2022 and various state legislative changes. The fiscal year 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. 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. During fiscal 2022, we released a valuation allowance of $1.1 million related to state deferred tax assets based on positive evidence which suggests that deferred tax assets will be more likely than not to be realizable in the future. We also believe that the future realizability of benefits arising from foreign tax credit carryforwards and certain state net operating loss carryforwards does not meet the more-likely-than-not threshold. In recognition of this risk, there is a valuation allowance of $3.5 million as of December 31, 2022. 45 Liquidity and Capital Resources of the Company Our total cash balances, net of revolving credit facility borrowings, at December 31, 2022, 2021 and 2020 were as follows: [[GREPCENT_TABLE]] [["","","December 31, 2022","","December 31, 2021","","December 31, 2020"],["","","(In millions)"],["Cash and cash equivalents","","$","269.7","","","$","361.4","","","$","383.4"],["Restricted cash, current","","38.9","","","47.5","","","39.9"],["Restricted cash, non-current","","16.4","","","16.4","","","32.8"],["Total cash, restricted cash and cash equivalents","","325.0","","","425.3","","","456.1"],["Less: Revolving credit facility borrowing","","(100.0)","","","\u2014","","","(220.0)"],["Total cash, restricted cash and cash equivalents, net","","$","225.0","","","$","425.3","","","$","236.1"]] [[/GREPCENT_TABLE]] At December 31, 2022, we had contractual obligations to repay debt, make payments under operating leases, finance leases and financing obligations, and to purchase certain goods and services. Material cash requirements to satisfy these obligations were as follows: [[GREPCENT_TABLE]] [["Obligation","","Due in Fiscal 2023","","Due Thereafter","","Total","","Reference(1)"],["","","(in millions)"],["Long-term debt (principal)","","$","100.0","","","$","1,247.0","","","$","1,347.0","","","Note 8 - Long-term Debt"],["Long-term debt (interest)","","64.1","","","83.8","","","147.9","","","Note 8 - Long-term Debt"],["Operating leases","","63.7","","","340.6","","","404.3","","","Note 10 - Leases"],["Finance leases","","8.8","","","39.1","","","47.9","","","Note 10 - Leases"],["Financing obligations","","4.0","","","41.1","","","45.1","","","Note 9 - Financing Obligations"],["Purchase commitments","","95.2","","","0.4","","","95.6","","","Note 11 - Commitments and Contingencies"],["Total","","$","335.8","","","$","1,752.0","","","$","2,087.8"]] [[/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 the 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. Long-Term Debt Key provisions of our long-term debt potentially impacting liquidity are summarized below. See Note 8 - Long-term Debt, of the Notes to the Consolidated Financial Statements, for additional detail on long-term debt, including the balances outstanding at December 31, 2022 and 2021. 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”). In August 2022, Applebee's Funding LLC and IHOP Funding LLC (the “Co-Issuers”) entered into the Credit Facility that allows for drawings up to $325 million of variable funding notes on a revolving basis and the issuance of letters of credit. 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. The renewal date of the Credit Facility is June 2027, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions. 46 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. On February 16, 2023, our Company's Board of Directors authorized a debt repurchase program of up to $100 million. As of December 31, 2022, our leverage ratio was 4.4x. Therefore, quarterly principal payments are not required. 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, 2022, the make-whole premium associated with voluntary prepayment of the Class A-2-I Notes was zero and will remain as such. As of December 31, 2022, the make-whole premium associated with voluntary prepayment of the Class A-2-II Notes was approximately $0.5 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 certain rapid amortization events 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, 2022, 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 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. 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, 2022 was approximately 4.1x. Credit Facility In August 2022, the Co-Issuers entered into the Credit Facility that allows for drawings up to $325 million of variable funding notes on a revolving basis and the issuance of letters of credit. The applicable interest rate under the Credit Facility depends on the type of borrowing by the Co-Issuers. The applicable interest rate for advances is generally calculated at a per annum rate equal to the commercial paper funding rate or one-, two-, three- or six-month Secured Overnight Financing Rate (“SOFR”), in either case, plus 2.50%. The applicable interest rate for swingline advances and unreimbursed draws on outstanding letters of credit is a per annum base rate equal to the sum of (a) the greatest of (i) the prime rate in effect from time to time; (ii) the federal funds rate in effect from time to time plus 0.50%; and (iii) SOFR for a one-month tenor in effect at such time plus 0.50% plus (b) 2.00%. In August 2022, the Company borrowed $100 million against the Credit Facility, all of which was outstanding at December 31, 2022. The amount of $3.4 million was pledged against the Credit Facility for outstanding letters of credit, leaving $221.6 million of the Credit Facility available for borrowing at December 31, 2022. It is anticipated that any principal and interest on the Credit Facility outstanding will be repaid in full on or prior to the quarterly payment date in June 2027, subject to two additional one-year extensions at the option of the Company upon the satisfaction of certain conditions. The letters of credit are used primarily to satisfy insurance-related collateral requirements. The weighted average interest rate on Credit Facility borrowings for the period outstanding during the year ended December 31, 2022 was 3.64%. 47 [[GREPCENT_TABLE]] [["Cash Flows","","","Variance 2022 vs 2021 Favorable (Unfavorable)"],["","2022","","","2021"],["","(In millions)"],["Net cash provided by operating activities","$","89.3","","","$","(106.5)","","","$","195.8"],["Net cash (used in) provided by investing activities","(80.9)","","","(84.8)","","","3.9"],["Net cash used in financing activities","(108.8)","","","121.6","","","(230.4)"],["Net decrease in cash, cash equivalents and restricted cash","$","(100.4)","","","$","(69.7)","","","$","(30.7)"]] [[/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 decreased $106.5 million in 2022 compared to 2021. The components of those changes are as follows: [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)"],["","2022","","","2021"],["","(In millions)"],["Net income","$","81.1","","","$","(16.8)","","","$","97.9"],["Non-cash reconciling items","46.8","","","(4.6)","","","51.4"],["Changes in working capital","(38.6)","","","(85.1)","","","46.5"],["Cash provided by operating activities","$","89.3","","","$","(106.5)","","","$","195.8"]] [[/GREPCENT_TABLE]] The change in net income was primarily due to higher G&A expenses, as 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 gain/loss on extinguishment of debt) decreased $4.6 million from fiscal 2021. Net changes in working capital used cash of $38.6 million during fiscal 2022 compared to providing cash of $46.5 million during fiscal 2021. This unfavorable change of $85.1 million between years primarily resulted from a decrease in accrued employee incentive compensation and the timing of payments of advertising and marketing accruals as well as a decrease in income taxes paid. Investing Activities Investing activities used net cash of $80.9 million for the year ended December 31, 2022, as compared to providing net cash of $3.9 million in 2021. The components of those changes are as follows: [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)"],["","2022","","","2021"],["","(In millions)"],["Principal receipts from notes, equipment contracts and other long-term receivables","$","17.1","","","$","(3.1)","","","$","20.2"],["Additions to property and equipment","(35.3)","","","(18.5)","","","(16.8)"],["Acquisition of business","(78.3)","","","(78.3)","","","\u2014"],["Additions to long-term receivables","(1.1)","","","(1.1)","","","\u2014"],["Proceeds from sale of assets","17.0","","","17.0","","","\u2014"],["Other","(0.3)","","","(0.8)","","","0.5"],["Cash (used in) provided by investing activities","$","(80.9)","","","$","(84.8)","","","$","3.9"]] [[/GREPCENT_TABLE]] The Company acquired Fuzzy's for $80 million in December 2022 (See Note 19 - Business Acquisition of the Notes to the Consolidated Financial Statements) but had no acquisitions in 2021. Additions to property and equipment increased in 2022 as compared to 2021 due to increased capital spending such as investments in consumer-facing technology. Proceeds from the sales of assets in 2022 related to the sales of the land and buildings on which three IHOP restaurants were located and the 69 Applebee's company-operated restaurants. There were no such sales of assets in 2021. 48 The following table represents the timing of principal receipts from the Company's long-term receivables for equipment, real estate leases receivable, and other notes receivable from franchisees as of December 31, 2022: [[GREPCENT_TABLE]] [["","Principal Receipts Due By Period"],["","2023","","2024","","2025","","2026","","2027","","Thereafter","","Total"],["","(In millions)"],["Equipment leases(1)","$","6.9","","","$","6.4","","","$","5.3","","","$","3.9","","","$","2.4","","","$","1.7","","","$","26.6"],["Real estate leases receivable(2)","3.6","","","1.8","","","1.1","","","1.1","","","1.2","","","9.7","","","18.5"],["Other notes(3)","6.6","","","2.9","","","2.5","","","2.1","","","0.1","","","3.0","","","17.2"],["Total","$","17.1","","","$","11.1","","","$","8.9","","","$","7.1","","","$","3.7","","","$","14.4","","","$","62.3"]] [[/GREPCENT_TABLE]] __________________________________________ (1)Equipment leases receivable extend through the year 2029. (2)Real estate leases receivable extend through the year 2042. (3)Other notes receivable extend through the year 2028. Financing Activities Financing activities used cash of $108.9 million during the year ended December 31, 2022, as compared to using cash of $230.5 million in 2021. The components of the changes are as follows: [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)"],["","2022","","","2021"],["","(In millions)"],["Repurchase of common stock","$","(120.5)","","","$","(116.3)","","","$","(4.2)"],["Dividends paid","(30.8)","","","(30.8)","","","\u2014"],["Net repayment of long-term debt, including issuance costs","(45.1)","","","(35.3)","","","(9.8)"],["Net borrowing (repayment of) from Credit Facility","100.0","","","320.0","","","(220.0)"],["All other","(12.5)","","","(16.0)","","","3.5"],["Cash used in financing activities","$","(108.9)","","","$","121.6","","","$","(230.5)"]] [[/GREPCENT_TABLE]] Financing activities used net cash of $108.9 million during 2022. The primary uses of cash in financing activities consisted of repurchases of our common stock totaling $120.5 million, voluntary repayments of long-term debt of $38.8 million purchased under par which resulted in a $1.4 million gain on debt extinguishment, dividends paid of $30.8 million and debt issuance costs of $6.3 million. These outflows were partially offset by net borrowings under our Credit Facility of $100.0 million. In March 2021, we repaid $220 million that was drawn on our Credit Facility in March 2020. Adjusted Free Cash Flow We define “adjusted free cash flow” for a given period as cash provided by operating activities, plus receipts from notes and equipment contract receivables, less additions to property and equipment. Management uses this liquidity measure in its periodic assessments of, among other things, the amount of cash dividends per share of common stock and repurchases of common stock and we believe it is important for investors to have the same measure used by management for that purpose. Adjusted free cash flow does not represent residual cash flow available for discretionary purposes. Adjusted free cash flow is a non-U.S. GAAP measure. This non-U.S. GAAP measure is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute for, the U.S. GAAP information contained within our financial statements. Reconciliation of the cash provided by operating activities to adjusted free cash flow is as follows: [[GREPCENT_TABLE]] [["","","","Variance 2022 vs 2021 Favorable (Unfavorable)"],["","2022","","","2021"],["","(In millions)"],["Cash flows provided by operating activities","$","89.3","","","$","(106.5)","","","$","195.8"],["Net receipts from notes and equipment receivables","10.6","","","(1.4)","","","12.0"],["Additions to property and equipment","(35.3)","","","(18.5)","","","(16.8)"],["Adjusted free cash flow","$","64.6","","","$","(126.4)","","","$","191.0"]] [[/GREPCENT_TABLE]] 49 The decrease in adjusted free cash flow in 2022 compared to 2021 was primarily due to the decrease in cash provided by operating activities and an increase in capital expenditures, each of which was discussed in preceding sections of this MD&A. 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. Dividends During the year ended December 31, 2022, our Board of Directors declared a fourth quarter 2022 cash dividend of $0.51 per share, paid in January 2023. 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 2022, 2021 and 2020. Share Repurchases On February 17, 2022, our Board of Directors authorized a new share repurchase program, effective April 1, 2022, of up to $250 million. In connection with the approval of the 2022 Repurchase Program, effective April 1, 2022, the 2019 share repurchase program ended. A summary of shares repurchased under the 2022 Repurchase Program, during the year ended December 31, 2022 and cumulatively, is as follows: [[GREPCENT_TABLE]] [["","Shares","","Cost of shares"],["","","","(In millions)"],["2022 Repurchase Program"],["Repurchased during the year ended December 31, 2022","1,149,589","","","$","78.7"],["Cumulative (life-of-program) repurchases","1,149,589","","","$","78.7"],["Remaining dollar value of shares that may be repurchased","n/a","","$","171.3"]] [[/GREPCENT_TABLE]] See Note 12 - Stockholders' Deficit, of the Notes to the Consolidated Financial Statements included in this report for shares repurchased in fiscal 2022, 2021 and 2020. 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 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for detail on all share repurchase activity during the fourth quarter of 2022. 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- 50 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 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, 2022, 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 2022 compared to the year ended December 31, 2021, as discussed above under “Consolidated Results of Operations - Fiscal 2022, 2021 and 2020,” and the impact that had on future system-wide sales forecasts relative to the sales forecasts that had been used in performing the 2021 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, 2022. 51 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 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. 52 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. Business Acquisitions We allocate the purchase price of acquired companies to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill. The allocation of the purchase price requires us to make significant estimates and assumptions to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date. Examples of assets we have acquired or may acquire in the future that required the use of critical estimates in valuations include, but are not limited to, tradenames and franchising rights. We engage third-party valuation specialists to assist in determining the fair value associated with our business combinations and related identifiable intangible assets. These estimates are inherently uncertain and unpredictable due to the sensitivity of the assumptions used, which may include, among others, the future expected cash flows and discount rates. Changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. 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 2022. 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.