IHOP 2012 Annual Report Download - page 72

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Debt Covenants
Pursuant to the Credit Agreement, we are required to comply with a maximum consolidated leverage ratio and a minimum
consolidated cash interest coverage ratio. The Company's current required maximum consolidated leverage ratio of total debt (net
of unrestricted cash not to exceed $75 million) to adjusted EBITDA is 7.25:1. Our current required minimum ratio of adjusted
EBITDA to consolidated cash interest is 1.5:1. Compliance with each of these ratios is required quarterly, on a trailing four-quarter
basis. These ratio thresholds become more rigorous over time. The maximum consolidated leverage ratio, originally 7.5:1, will
decline, in annual 25-basis-point decrements beginning with the first quarter of 2012, to 6.5:1 by the first quarter of 2015, then to
6.0:1 for the first quarter of 2016 until the Credit Agreement expires in October 2017. The minimum consolidated cash interest
coverage ratio will increase to 1.75:1 commencing in the first quarter of 2013 and to 2.0:1 commencing in the first quarter of 2016
and remain at that level until the Credit agreement expires in October 2017.
For the trailing twelve months ended December 31, 2012, our consolidated leverage ratio was 4.6:1 and our consolidated cash
interest coverage ratio was 2.5:1.
There are no financial maintenance covenants associated with the Senior Notes.
The Senior Notes, the Term Facility and the Revolving Facility are also subject to affirmative and negative covenants considered
customary for similar types of facilities, including, but not limited to, covenants with respect to incremental indebtedness, liens,
investments, affiliate transactions, and capital expenditures. These covenants are subject to a number of important limitations,
qualifications and exceptions. Certain of these covenants will not be applicable to the Senior Notes during any time that the Senior
Notes maintain investment grade ratings.
The EBITDA used in calculating these ratios is considered to be a non-U.S. GAAP measure. The reconciliation between our
income before income taxes, as determined in accordance with U.S. GAAP, and EBITDA used for covenant compliance purposes
is as follows:
Trailing Twelve Months Ended December 31, 2012
(in thousands)
U.S. GAAP income before income taxes............................................................................................................... $ 194,923
Interest charges....................................................................................................................................................... 131,869
Loss on extinguishment of debt ............................................................................................................................. 5,554
Depreciation and amortization ............................................................................................................................... 39,538
Non-cash stock-based compensation ..................................................................................................................... 11,442
Impairment and closure charges............................................................................................................................. 4,218
Other....................................................................................................................................................................... 15,304
Gain on disposition of assets.................................................................................................................................. (102,597)
EBITDA................................................................................................................................................................. $ 300,251
We believe this non-U.S. GAAP measure is useful in evaluating our results of operations in reference to compliance with the
debt covenants discussed above. 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.
Franchising of Applebee's Company-Operated Restaurants
In October 2012, we achieved our stated goal of transitioning Applebee's to a 99% franchised system, similar to IHOP's 99%
franchised system. We believe a highly franchised business model requires less capital investment and general and administrative
overhead, generates higher gross and operating profit margins (as a percentage of revenue) and reduces the volatility of free cash
flow performance, as compared to a model based on operating a significant number of company restaurants.
During 2012, we completed the refranchising and sale of related restaurant assets of 154 Applebee's company-operated
restaurants. Proceeds from asset dispositions, including the 154 restaurants, totaled $168.9 million for the year ended December 31,
2012, the majority of which was used to retire debt, after payment of income taxes related to the transactions. With the completion
of our strategy to refranchise and sell the related restaurant assets of Applebee's company-operated restaurants, we do not anticipate
significant proceeds from asset dispositions in the foreseeable future.