IHOP 2009 Annual Report Download - page 139

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DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. Impairments and Closure Charges (Continued)
The Company recognized closure charges of $1.2 million in 2009 related to two IHOP franchise
restaurants.
During 2008 the Company recognized impairment and closure charges totaling $240.6 million. In
June 2008, the Company entered into a sale-leaseback transaction relating to 181 parcels of real estate
comprising land, buildings and improvements. The net book value of the real estate exceeded the
proceeds received by $40.6 million. All of the parcels involved in the transactions had been acquired in
the November 29, 2007 acquisition of Applebee’s and their estimated fair value was assigned as part of
the purchase price allocation as of that date. The Company evaluated events subsequent to
November 29, 2007 and noted a deterioration in both the domestic real estate and credit markets
between the date of the purchase price allocation and the June 2008 closing date of the sale-leaseback
transactions. In the absence of objective evidence to the contrary, the Company concluded that the
estimated fair value of the real estate determined in the purchase price allocation had been reasonable
and the decline in value related primarily to market events subsequent to the acquisition date
necessitating a fixed asset impairment charge as opposed to an adjustment to the allocated purchase
price.
The Company evaluated whether, as of June 30, 2008, this charge, in addition to other
macroeconomic data and the decline in the market price of the Company’s common stock, were
indicators of potential impairment of its goodwill, intangible assets and long-lived assets. The Company
concluded that they were not indicators because (i) the impairment charge was related to a specific
transaction that resulted in the disposal of the majority of the Company’s real estate; (ii) Applebee’s
June 30, 2008 year-to-date same-store sales for company-operated stores had increased slightly
compared with the same period of the prior year; (iii) while directionally the U.S. economy was slowing
down, there was considerable uncertainty as to the depth and duration of the slowdown, such that the
Company believed its internal forecasts of same-store sales growth were achievable; and (iv) the
Company’s net book value was in excess of its market capitalization throughout the period up to and
including the date of filing its Form 10-Q for the Quarterly Period ended June 30, 2008.
As part of the ongoing assessment of the recoverability of its long-lived assets, the Company
recorded fixed asset impairment charges of $28.3 million for the three-month period ended
September 30, 2008. Of that amount, $26.8 million related to Applebee’s properties and primarily
resulted from a continuing deterioration in credit markets in general and a decline in operating results
of Applebee’s company-operated restaurants expected to be franchised in particular geographic areas.
The remainder of the impairment related to an individual underperforming IHOP property whose
estimates of future cash flows indicated the carrying value would not be recovered.
The Company again evaluated whether the impairment charges taken in the third quarter of 2008,
in addition to other macroeconomic data and the decline in the market price of the Company’s
common stock, were an indicator of potential impairment of its goodwill, intangible assets and
long-lived assets. The Company concluded that they were not an indicator, because (i) the impairments
were related to specific transactions in three geographic markets characterized as having a larger
proportion of underperforming restaurants than the other geographic markets in which the remaining
company-operated restaurants are located; (ii) while Applebee’s year-to-date September 30, 2008
same-store sales for company-operated stores had decreased slightly compared with the same period of
the prior year, the Company was in the process of implementing several initiatives designed to improve
the same-store sales and did not believe there had been enough time to adequately assess the
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