Dine Brands Global, Inc.: Form 10-Q for the period ended Sep 30, 2025

You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this report and the MD&A contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the section of this report under the heading “Cautionary Statement Regarding Forward-Looking Statements” for more information. Except where the context indicates otherwise, the words “we,” “us,” “our,” “Dine Brands Global” and the “Company” refer to Dine Brands Global, Inc., together with its subsidiaries that are consolidated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

Overview

Through various subsidiaries, we own and franchise the Applebee's Neighborhood Grill & Bar® (“Applebee's”) concept in the American full-service segment within the casual dining category of the restaurant industry, the International House of Pancakes® (“IHOP”) concept in the mid-scale full-service restaurant segment within the family dining category of the restaurant industry, and 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. References herein to Applebee's®, IHOP® and Fuzzy's Taco Shop® restaurants are to these three restaurant concepts, whether operated by franchisees, area licensees and their sub-licensees (collectively, “area licensees”) or by us. With close to 3,500 restaurants, we are one of the largest full-service restaurant companies in the world.

We identify our business segments based on the organizational units used by management to monitor performance and make operating decisions. We currently have six operating segments: Applebee's franchise operations, IHOP franchise operations, Fuzzy's franchise operations, rental operations, financing operations, and company-owned restaurant operations. We have four reportable segments: franchise operations (an aggregation of each restaurant concept's franchise operations), rental operations, financing operations, and company-owned restaurant operations.

Key Financial Results

The financial tables appearing in this MD&A present amounts in millions of dollars that are rounded from our condensed consolidated financial statements presented in thousands of dollars. As a result, the tables may not foot or crossfoot due to rounding.

(In millions, except per share data)

The effective tax rate for the three months ended September 30, 2025 was comparable to the prior year period. The effective tax rate for the nine months ended September 30, 2025 was higher than the rate of the prior comparable period primarily due to a lower tax deduction related to stock-based compensation, resulting from the changes in our share price.

The following table highlights the primary components of the decrease in our income before income taxes for the three and nine months ended September 30, 2025, compared to our income before income taxes for the comparable prior year periods (in millions):

Total gross profit for the three months ended September 30, 2025 decreased compared with the same period of the prior year due to company restaurant and franchise operations. The company restaurant operations gross profit decreased primarily due to the operation of the 59 Applebee's restaurants and ten IHOP restaurants acquired over the last 11 months. The franchise operations gross profit decreased primarily due to a lower number of effective franchise restaurants and decreases in IHOP and Fuzzy’s domestic franchise same-restaurant sales as well as a decrease in IHOP’s proprietary product gross profit, offset by a 3.1% increase in Applebee’s domestic franchise same-restaurant sales (see Franchise Operations section below for further details).

In addition, income before income taxes for the three months ended September 30, 2025 decreased compared with the prior year period primarily due to a decrease in gross profit, an increase in G&A expenses and an increase in interest expense in the current period. The increase in G&A expenses is primarily attributable to an increase in compensation-related expenses (predominantly incentive compensation) and an increase in travel and conference expenses. The increase in interest expense is primarily due to a refinancing transaction completed in June 2025.

Total gross profit for the nine months ended September 30, 2025 decreased compared with the same period of the prior year due to franchise, company restaurant and rental operations. The franchise operations gross profit decreased primarily due to a lower number of effective franchise restaurants and decreases in IHOP and Fuzzy’s domestic franchise same-restaurant sales as well as increases in bad debt expense and refranchising costs and a decrease in IHOP’s proprietary product gross profit, offset by a 1.9% increase in Applebee’s domestic franchise same-restaurant sales, an increase in termination fees and a decrease in franchisor advertising contribution (see Franchise Operations section below for further details). The company restaurant operations gross profit decreased primarily due to the operation of the 59 Applebee's restaurants and ten IHOP restaurants acquired over the last 11 months as mentioned above (see Franchise Operations section below for further details). Rental operations gross profit decreased primarily due to lease terminations and a decrease in percentage rent due to lower system sales.

In addition, income before income taxes for the nine months ended September 30, 2025 decreased compared with the prior year period due to a decrease in gross profit, an increase in G&A expenses, an increase in closure and impairment charges and an increase in interest expense. The increase in G&A expenses is primarily due to an increase in professional service and legal fees, an increase in travel and conference expenses and an increase in compensation-related expenses (predominantly incentive compensation offset by a decrease in severance expense) as well as costs related to company restaurant operations and our dual brand initiative, partially offset by a decrease in software maintenance costs. The increase in closure and impairment charges was primarily attributable to the strategic realignment of the IHOP Cincinnati market resulting in the acquisition and closure of certain IHOP restaurants in March 2025 and revisions to existing closure reserves. The increase in interest expense is primarily due to a refinancing transaction completed in June 2025.

Increases in commodity, labor and other restaurant operating costs experienced at restaurants owned and operated by our franchisees could impact us to the extent our franchisees are adversely impacted by a sustained decline in their operating margins. At company-owned restaurants, when applicable, increases in commodity, labor and other restaurant operating costs impact us directly.

See “Consolidated Results of Operations - Comparison of the Three and Nine Months Ended September 30, 2025 and 2024” for additional discussion of the changes shown above.

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 and the change in effective restaurants. Changes in both domestic same-restaurant sales and in the number of Applebee's, IHOP and Fuzzy's restaurants will impact our system-wide retail sales that drive franchise royalty revenues. Restaurant development also impacts franchise revenues in the form of initial franchise fees and, in the case of IHOP and Fuzzy's restaurants, sales of proprietary products.

Our key performance indicators for the three and nine months ended September 30, 2025 were as follows:

(1) Franchise and area license restaurant closings, net of openings, during the three and nine months ended September 30, 2025.

(2) Change in the weighted average number of franchise, area license and company-owned restaurants open during the three and nine months ended September 30, 2025, compared to the weighted average number of those open during the same periods of 2024.

The change in total effective restaurants for each brand reflects both permanent closures, net of openings, over the past 12 months as well as the weighted effect of restaurants temporarily closed during each period.

Applebee’s system-wide domestic same-restaurant sales increased 3.1% for the three months ended September 30, 2025 and 1.9% for the nine months ended September 30, 2025 as compared to the same periods of 2024. The increase in same-restaurant sales was due to an increase in traffic and average check.

Based on data from Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), Applebee's increase in same-restaurant sales for the three and nine months ended September 30, 2025 underperformed the casual dining category of the restaurant industry (excluding Applebee's) as compared with the same respective periods of 2024.

(1) Primarily to-go, delivery and catering sales for comparable 2025 and 2024 restaurants.

IHOP's system-wide domestic same-restaurant sales decreased 1.5% for the three months ended September 30, 2025 as compared to the same period of 2024, primarily due to a decrease in average check. IHOP's system-wide domestic same-restaurant sales decreased 2.2% for the nine months ended September 30, 2025 as compared to the same period of 2024, primarily due to a decrease in average check, partially offset by an increase in traffic.

Based on data from Black Box, IHOP's same-restaurant sales for the three and nine months ended September 30, 2025 underperformed the family dining category of the restaurant industry (excluding IHOP) as compared with the same respective periods of 2024.

(1) Primarily to-go, delivery and catering sales for comparable 2025 and 2024 restaurants.

Quarterly Domestic Same-Restaurant Sales - Fuzzy's

Fuzzy's system-wide domestic same-restaurant sales decreased 1.5% for the three months ended September 30, 2025 and 8.7% for the nine months ended September 30, 2025 as compared to the same respective periods of 2024. The decrease in same-restaurant sales was primarily due to a decrease in traffic, partially offset by an increase in average check.

Restaurant Data

The following table sets forth the number of “Effective Restaurants” in the Applebee’s, IHOP and Fuzzy's systems and information regarding the percentage change in sales at those restaurants compared to the same period of the prior year. Sales at restaurants that are owned by franchisees and area licensees are not revenues of the Company. However, franchisees and area licensees pay us royalties and advertising fees that are based on a percentage of their sales, and, where applicable, rental payments under leases that are based on a percentage of their sales. Management also uses this information to make decisions about plans for future development of additional restaurants as well as evaluation of current operations.

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(a) “Effective Restaurants” are the weighted average number of restaurants open in each 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, IHOP and Fuzzy's systems, which consist of 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 and Fuzzy's restaurants operated by franchisees and IHOP restaurants operated by franchisees and area licensees, as reported to the Company, in addition to retail sales at company-owned Applebee's, IHOP and Fuzzy's restaurants. Sales at restaurants that are owned by franchisees and area licensees are not attributable to the Company. An increase in franchisees' reported sales will result in a corresponding increase in our royalty revenue, while a decrease in franchisees' reported sales will result in a corresponding decrease in our royalty revenue. Unaudited reported sales for Applebee's, IHOP and Fuzzy's franchise restaurants, IHOP area license restaurants, and Applebee's, IHOP and Fuzzy's company-owned restaurants were as follows:

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

(d) “Domestic same-restaurant sales percentage change” reflects the percentage change in sales in any given fiscal period, compared to the same weeks in the prior year period, for domestic restaurants that have been operated during both periods 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 both fiscal periods being compared may be different from period to period.

(e) The franchise sales percentage change for 2025 was impacted by the acquisition of 47 Applebee's restaurants in November 2024, 10 IHOP restaurants in March 2025, and 12 Applebee's restaurants in May 2025 now reported as company-owned.

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The restaurant counts and activity presented above include 23 dual branded international and six dual branded domestic Applebee's and IHOP restaurants at September 30, 2025, and 13 dual branded international and no dual branded domestic Applebee's and IHOP restaurants at September 30, 2024, which are separately counted in each of our brands' restaurant counts and activity. Dual branded restaurants are defined as restaurants that reside in one location and operate two of our restaurant concepts under two separate franchise agreements.

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 this table and are included in the summary counts at the beginning and end of each period shown. Temporary closures are reflected in the weighted calculation of Effective Restaurants presented in the preceding Restaurant Data table.

Closures of restaurants adversely impact our system-wide retail sales that drive our franchise royalty revenues as well as, in the case of IHOP and Fuzzy's restaurants, sales of proprietary products. 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 the loss of such income, as well as our obligation to make rental or other payments for such properties.

CONSOLIDATED RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 2025 and 2024

Events Impacting Comparability of Financial Information

Acquisition of Franchise Restaurants

During the three and nine months ended September 30, 2025, we owned 47 Applebee's restaurants across Georgia, Texas, Arkansas, Illinois, Kentucky, Tennessee, Mississippi and Missouri acquired in November 2024, 10 IHOP restaurants in Ohio and Kentucky in March 2025, and 12 Applebee's restaurants across Kentucky, Indiana, Arkansas and Oklahoma acquired in May 2025. Including our one Fuzzy's company-owned restaurant, our total number of company-owned restaurants represents 2% of total system restaurant count as of September 30, 2025. During the three and nine months ended September 30, 2024, we did not own any Applebee's or IHOP restaurants.

While we currently intend to own and operate these restaurants for the near term, we will assess and monitor opportunities to refranchise these restaurants under favorable circumstances. From time to time, we may acquire restaurants from franchisees for a variety of reasons which is consistent with, and should not be considered a change in, our business strategy to operate largely as a franchisor.

Financial Results

(In millions)

Total revenue for the three and nine months ended September 30, 2025 increased compared with the same periods of the prior year, primarily due to the operation of 47 Applebee's restaurants acquired in November 2024 and ten IHOP restaurants acquired in March 2025 (and to a lesser extent for the nine-month period, 12 Applebee's restaurants acquired in May 2025), partially offset by the decreases in franchise and rental operations revenue. The decrease in franchise operations revenue was primarily attributable to the decreases in IHOP and Fuzzy's domestic same-restaurant sales, the decrease in the number of effective franchise restaurants and the decrease in proprietary product sales, partially offset by an increase in Applebee's domestic same-restaurant sales. Rental operations revenue for the three and nine months ended September 30, 2025 decreased compared with the same periods of the prior year, primarily due to operating lease terminations.

(In millions)

Total gross profit for the three months ended September 30, 2025 decreased compared with the same period of the prior year, primarily due to company restaurant and franchise operations. The company restaurant operations gross profit decreased primarily due to the operation of the 59 Applebee's restaurants and ten IHOP restaurants acquired over the last 11 months as mentioned above which the Company is investing. The franchise operations gross profit decreased primarily due to a lower number of effective franchise restaurants and decreases in IHOP and Fuzzy’s domestic franchise same-restaurant sales as well as a decrease in IHOP’s proprietary product gross profit, offset by a 3.1% increase in Applebee’s domestic franchise same-restaurant sales (see Franchise Operations section below for further details).

Total gross profit for the nine months ended September 30, 2025 decreased compared with the same period of the prior year, primarily due to franchise operations, company restaurant and rental operations. The franchise operations gross profit decreased primarily due to a lower number of effective franchise restaurants and decreases in IHOP and Fuzzy’s domestic franchise same-restaurant sales as well as increases in bad debt expense and refranchising costs and a decrease in IHOP’s proprietary product gross profit, offset by a 1.9% increase in Applebee’s domestic franchise same-restaurant sales, an increase in termination fees and a decrease in franchisor advertising contribution (see Franchise Operations section below for further details). The company restaurant operations gross profit decreased primarily due to the operation of the 59 Applebee's restaurants and ten IHOP restaurants acquired over the last 11 months as mentioned above. The decrease in rental operations gross profit for the nine months ended September 30, 2025 was primarily due to decreased rental revenue as described above.

(In millions, except number of restaurants)

(1) Effective Franchise Restaurants are the weighted average number of franchise and area license restaurants open in each fiscal period, adjusted to account for restaurants open for only a portion of the period.

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

(3) From time to time, advertising fee revenue may be different from advertising expenses in a given accounting period. Over the long term, advertising activity should not generate gross profit or loss.

Applebee's franchise fees revenue for the three months ended September 30, 2025 decreased 2.9% as compared with the same period of the prior year, primarily attributable to the unfavorable impact on royalties by a decrease in the number of effective franchise restaurants due in part to the acquisition of our Applebee's company restaurants, offset by a 3.1% increase in domestic franchise same-restaurant sales.

Applebee's franchise fees revenue for the nine months ended September 30, 2025 decreased 0.7% as compared with the same period of the prior year, primarily attributable to the unfavorable impact on royalties of a decrease in the number of effective franchise restaurants due in part to the acquisition of our Applebee's company restaurants and decreased collections from international franchisees, offset by a 2.0% increase in domestic franchise same-restaurant sales and an increase in termination fees.

Applebee's franchise expenses for the three and nine months ended September 30, 2025 increased $1.0 million and $7.0 million, respectively, compared with the same periods of the prior year primarily due to an increase in bad debt expense mainly resulting from a recovery of bad debt expense in the same periods of the prior year as well as an increase in refranchising costs.

IHOP franchise fees revenue for the three months ended September 30, 2025 decreased 3.0% as compared with the same period of the prior year, primarily due to a decrease in proprietary product sales, the unfavorable impact on royalties of a 1.4% decrease in domestic franchise same-restaurant sales and a decrease in the number of effective franchise restaurants, partially offset by improved collections from international franchisees.

IHOP franchise fees revenue for the nine months ended September 30, 2025 decreased 3.8%, as compared with the same period of the prior year, primarily due to a decrease in the number of effective franchise restaurants, a 2.1% decrease in domestic franchise same-restaurant sales and a decrease in proprietary product sales, partially offset by an increase in termination fees.

IHOP franchise expense for the three months ended September 30, 2025 decreased $0.8 million as compared with the same period of the prior year, primarily due to a decrease in the cost of proprietary product sales and a decrease in bad debt expense.

IHOP franchise expenses for the nine months ended September 30, 2025 decreased $2.4 million as compared with the same period of the prior year, primarily due to a decrease in the cost of proprietary product sales and a decrease in franchisor advertising contribution.

Fuzzy's franchise fees revenue for the three months ended September 30, 2025 decreased $0.8 million as compared with the same period of the prior year, primarily due to the unfavorable impact on royalties of a 1.5% decrease in franchise same-restaurant sales, the decrease in the number of effective franchise restaurants and a decrease in termination fees.

Fuzzy's franchise fees revenue for the nine months ended September 30, 2025 decreased $2.1 million as compared with the same period of the prior year, primarily due to the unfavorable impact on royalties of an 8.7% decrease in franchise same-restaurant sales, a decrease in the number of effective franchise restaurants and a decrease in termination and franchisee IT support fees.

Fuzzy's franchise expenses for the three months ended September 30, 2025 increased $0.1 million as compared with the same period of the prior year primarily due to an increase in franchisee IT support costs.

Fuzzy's franchise expenses for the nine months ended September 30, 2025 decreased $2.3 million as compared with the same period of the prior year primarily due to a decrease in franchisor advertising contribution and a decrease in bad debt expense.

(In millions)

Advertising revenues and expenses for the three and nine months ended September 30, 2025 decreased compared to the same periods of the prior year primarily due to fewer effective franchise restaurants due in part to our acquisition of company restaurants (whose contributions to the respective brand's national advertising fund are reflected as company restaurant expenses instead of advertising revenue) and the decreases in IHOP and Fuzzy's domestic franchise same-restaurant sales, partially offset by the increase in Applebee's domestic franchise same-restaurant sales.

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

(In millions)

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

Rental operations relate primarily to IHOP franchise restaurants. Rental income includes sublease revenue from operating leases and interest income from real estate leases. Rental expenses are costs of prime operating leases and interest expense on prime finance leases.

Rental operations gross profit for the three months ended September 30, 2025 decreased as compared to the same period of the prior year, primarily due to operating lease terminations.

Rental operations gross profit for the nine months ended September 30, 2025 decreased as compared to the same period of the prior year, primarily due to lease terminations and a decrease in percentage rent due to lower system sales.

(in millions)

As discussed under "Events Impacting Comparability of Financial Information," company restaurant operations for the nine months ended September 30, 2025 included 47 Applebee's restaurants acquired in November 2024, 10 IHOP restaurants acquired in March 2025, 12 Applebee's restaurants acquired in May 2025, and one Fuzzy's restaurant. Company restaurant operations for the nine months ended September 30, 2024 included one Fuzzy's restaurant. There were no acquired restaurant expenses during the nine months ended September 30, 2024.

Financing revenues primarily consist of interest income from the financing of IHOP equipment leases and franchise fees as well as interest income on notes receivable due from franchisees. Financing expenses are sales and use taxes related to IHOP equipment leases. Financing revenue and gross profit for the three and nine months ended September 30, 2025 declined compared to the same period of the prior year, primarily due to progressive decline in interest income as note balances are repaid.

(In millions)

G&A expenses for the three months ended September 30, 2025 increased 10.6% compared to the same period of the prior year, primarily due to an increase in compensation-related expenses (predominantly incentive compensation), an increase in travel and conference expenses and an increase in professional service and legal fees. Included in G&A expenses are costs related to company restaurant operations as well as dual brand and remodel initiatives.

G&A expenses, including costs related to company restaurant operations, for the nine months ended September 30, 2025 increased 5.4% compared to the same period of the prior year, primarily due to an increase in professional service and legal fees, an increase in travel and conference expenses and an increase in compensation-related expenses (predominantly incentive compensation offset by a decrease in severance expense) as well as costs related to company restaurant operations and our dual brand initiatives, partially offset by a decrease in software maintenance costs.

(In millions)

Interest expense, net

Interest expense, net for the three and nine months ended September 30, 2025 increased compared to the same periods of the prior year, primarily due to the refinancing transaction of the Series 2025-1 Fixed Rate Senior Secured Notes, partially offset by a decrease in interest rates on our Credit Facility.

The Company repaid the entire outstanding balance of approximately $594.0 million of its 2019 Class A-2-II Notes during the nine months ended September 30, 2025 and recognized a $0.9 million loss on extinguishment of debt from the write-off of the related remaining issuance costs.

Closure and impairment charges

Closure and impairment charges for the three months ended September 30, 2025 increased $0.2 million compared to the same period of the prior year primarily attributable to revisions to existing closure reserves for IHOP restaurants closed prior to 2025.

Closure and impairment charges for the nine months ended September 30, 2025 increased $6.2 million compared to the same period of the prior year primarily attributable to the strategic realignment of the IHOP Cincinnati market resulting in the acquisition and closure of certain IHOP restaurants in March 2025 and revisions to existing closure reserves including accretion.

(In millions)

Our income tax provision or benefit will vary from period to period in our normal course of business for two reasons: a change in income before income taxes and a change in the effective tax rate. Changes in our income before income taxes were addressed in the preceding sections of “Consolidated Results of Operations - Comparison of the Three and Nine Months Ended September 30, 2025 and 2024."

Our effective tax rate for the three months ended September 30, 2025 was comparable to the prior year period. Our effective tax rate for the nine months ended September 30, 2025 was higher than the rate of the prior comparable period primarily due to a lower tax deduction related to stock-based compensation, resulting from the changes in our share price.

The One Big Beautiful Bill Act ("OBBBA") was enacted on July 4, 2025. The OBBBA amends U.S. tax law, including provisions related to bonus depreciation, research and development expensing, and interest expense deduction, among other provisions. The Company has incorporated the effects of the enacted provisions into its financial statements for the third quarter of 2025. These provisions are expected to reduce cash taxes for 2025, with no material impact on the effective tax rate.

Liquidity and Capital Resources

Key provisions of our long-term debt potentially impacting liquidity are summarized below. See Note 7 — Long-Term Debt, of the Notes to Condensed Consolidated Financial Statements, for additional detail on long-term debt, including the balances outstanding at September 30, 2025 and 2024. 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.

Instruments

Our long-term debt includes two series of fixed rate senior secured notes, the Series 2023-1 7.824% Fixed Rate Senior Secured Notes, Class A-2 in an initial aggregate principal amount of $500 million (the “2023 Class A-2 Notes”) and the Series 2025-1 6.720% Fixed Rate Senior Secured Notes, Class A-2 in an initial aggregate principal amount of $600 million (the "2025 Class A-2 Notes" and, together with the 2023 Class A-2 Notes, the "Class A-2 Notes").

Our long-term debt also includes a revolving financing facility, the 2025-1 Variable Funding Senior Notes, Class A-1 (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 final maturity of the 2023 Class A-2 Notes is in March 2053, but it is anticipated that, unless repaid earlier, to the extent permitted under the Indenture, the 2023 Class A-2 Notes will be repaid in June 2029.

The final maturity of the 2025 Class A-2 Notes is in June 2055, but it is anticipated that, unless repaid earlier, the 2025 Class A-2 Notes will be repaid in June 2030.

The renewal date of the Credit Facility is June 2030, 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 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 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. As of September 30, 2025, our leverage ratio was approximately 4.58x. Therefore, quarterly principal payments are not required.

Exceeding the leverage ratio of 5.25x does not violate any covenant related to the Class A-2 Notes.

On February 16, 2023, the Company's Board of Directors authorized a debt repurchase program of up to $100 million. Repurchases of the Company’s debt, if any, are expected to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption. Under the authorization, the Company may make repurchases of the Company's debt from time to time in the open market or in privately negotiated transactions upon such terms and at such prices as management may determine.

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 September 30, 2025, the make-whole premium associated with voluntary prepayment of the 2023 Class A-2 Notes was approximately $20.9 million. As of September 30, 2025, the make-whole premium associated with the voluntary prepayment of the 2025 Class A-2 Notes was approximately $40.6 million. We also would 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 derivatives embedded that must be bifurcated for separate valuation. We estimated the fair value of these derivatives to be immaterial as of September 30, 2025, 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.

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

• DSCR less than 1.75x - Cash Trapping 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 September 30, 2025 was approximately 3.1x.

Credit Facility

In June 2025, 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%.

As of September 30, 2025, the outstanding balance of the Credit Facility was $100 million. The amount of $0.6 million was pledged against the Credit Facility for outstanding letters of credit, leaving $224.4 million of the Credit Facility available for borrowing at September 30, 2025. 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 2030, 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 nine months ended September 30, 2025 was 6.85%.

Capital Allocation

Dividends

Dividends declared and paid per share for the three and nine months ended September 30, 2025 and 2024 were as follows:

During the nine months ended September 30, 2025 and 2024, the Company paid dividends of $23.6 million and $23.5 million, respectively.

On September 4, 2025, the Board of Directors declared a third quarter 2025 cash dividend of $0.51 per share of common stock, paid on October 8, 2025 to the stockholders of record as of the close of business on September 19, 2025.

On May 14, 2025, the Board of Directors declared a second quarter 2025 cash dividend of $0.51 per share of common stock, paid on July 9, 2025 to the stockholders of record as of the close of business on June 20, 2025.

On February 21, 2025, the Board of Directors declared a first quarter 2025 cash dividend of $0.51 per share of common stock, paid on April 4, 2025 to the stockholders of record as of the close of business on March 17, 2025.

On November 22, 2024, the Board of Directors declared a fourth quarter 2024 cash dividend of $0.51 per share of common stock, paid on January 7, 2025 to the stockholders of record as of the close of business on December 20, 2024.

Stock Repurchases

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”).

During the nine months ended September 30, 2025, the Company repurchased 1,299,440 shares of common stock at a cost of $30.1 million. Cumulatively, the Company has repurchased 3,164,839 shares at a cost of $146.9 million under the 2022 Repurchase Program.

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 2 for detail on this stock repurchase activity during the nine months ended September 30, 2025.

Cash Flows

In summary, our cash flows for the nine months ended September 30, 2025 and 2024 were as follows:

(In millions)

Operating Activities

Cash provided by operating activities is primarily driven by revenues earned and collected from our franchisees, and profit from our rental operations, financing operations and our company-owned restaurants. Cash provided by operating activities increased $5.6 million during the nine months ended September 30, 2025 compared to the same period of the prior year. This increase was primarily attributable to a favorable increase in working capital mainly resulting from a shift in timing of income tax payments postponed due to wildfire relief and of interest payments postponed in connection with the June 2025 debt refinancing, partially offset by a decrease in gross segment profit and higher G&A expenses as discussed in the preceding sections of this MD&A.

Investing Activities

Investing activities used net cash of $15.8 million for the nine months ended September 30, 2025 compared to $0.7 million for the nine months ended September 30, 2024. The increase in net cash used was primarily attributable to an increase in additions to property and equipment, including capital investments in company-owned restaurants and a decrease in principal receipts from notes and equipment contracts receivables compared to the same period of the prior year.

Financing Activities

Financing activities used net cash of $65.0 million for the nine months ended September 30, 2025 compared to $42.5 million for the nine months ended September 30, 2024. The change in cash used by financing activities was primarily due to the repayment of long-term debt, an increase in common stock repurchases compared to the same period of the prior year and the payment of debt issuance costs offset by the proceeds from issuance of long-term debt during the nine months ended September 30, 2025.

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 assessment of, among other things, payment of cash dividends on 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:

(In millions)

Adjusted free cash flow for the nine months ended September 30, 2025 decreased $9.6 million compared to the same period of the prior year primarily due to an increase in additions to property and equipment as the Company invests in its company-owned restaurants and a decrease in principal receipts from notes and equipment contracts, partially offset by higher cash flows from operating activities as discussed in the preceding section of this MD&A.

Contractual Obligations and Commitments

There were no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. We continually review the estimates and underlying assumptions to ensure they are appropriate for the circumstances. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates.

A summary of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2024. During the nine months ended September 30, 2025, there were no significant changes in our critical accounting policies or in our critical accounting estimates.

There were no material changes from the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There are no material changes from the risk factors set forth under Item 1A of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024.