Impairment and Closure Charges

9 Months Ended

Sep. 30, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Most of the Company's goodwill and intangible assets arose from the November 29, 2007 acquisition of Applebee's. 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.

Because of the risks and uncertainties associated with the COVID-19 pandemic, during the three months ended March 31, 2020, the Company performed assessments to determine whether the impacts of COVID-19 indicated a potential impairment to our goodwill and intangible assets, as well as our tangible assets. In the second quarter of 2020, the Company noted that its common stock had recovered less of its early March 2020 (pre-pandemic) market value than the overall U.S. stock market had recovered. The Company also was able to assess several additional months of data as to the impact of the COVID-19 pandemic on its operations and, in turn, assess the impact that might have on the risk premium incorporated into its discount rate. Based on these developments, the Company determined that an interim quantitative test of goodwill and indefinite-lived intangible assets for impairment should be performed as of May 24, 2020. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The fair value technique used in this instance is classified as Level 3, where unobservable inputs are used when little or no market data is available.

During the three months ended September 30, 2020, the Company assessed its goodwill, intangible assets and tangible assets for impairment, considering, among other things, the market value of the Company's stock, absolute and relative to peers, and the Company's operating performance during the three months ended September 30, 2020 compared to forecast results that had been used in performing the impairment analyses during the second quarter of 2020 discussed above. The Company concluded the were no indicators of additional impairment during the three months ended September 30, 2020.

In performing the quantitative test for impairment of goodwill in the second quarter of 2020, the Company used 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 and changes in working capital, along with an appropriate discount rate based on the Company's 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 performing the impairment review of the tradename in the second quarter of 2020, the Company used 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 and a discount rate to be applied to forecasted revenue.

As a result of performing the quantitative test of impairment, the Company recognized an impairment of $92.2 million to the goodwill of the Applebee's franchise unit and an impairment of $11.0 million to Applebee's tradename during the three months ended June 30, 2020. The majority of the impairment was due to an increase in the assessed risk premium incorporated into the discount rate assumption.

In addition, the Company reviewed its reacquired franchising rights and determined that the carrying amount exceeded the estimated fair value by $3.3 million and has recorded an impairment to that intangible asset.

Changes in the carrying amount of goodwill for the nine months ended September 30, 2020 are as follows:


	Applebee's Franchise Unit		Applebee's Company Unit		IHOP Franchise Unit		Total
	(In millions)
Balance at December 31, 2019:	$	328.4	$	4.6	$	10.8	$	343.9
Impairment loss	(92.2)		—		—		(92.2)
Balance at September 30, 2020:	$	236.2	$	4.6	$	10.8	$	251.6

Changes in the carrying amount of intangible assets for the nine months ended September 30, 2020 are as follows:


	Not Subject to Amortization						Subject to Amortization
	Tradename		Other		Franchising Rights		Reacquired Franchising Rights		Leaseholds		Total
	(In millions)
Balance at December 31, 2019:	$	479.0	$	3.2	$	79.0	$	9.8	$	4.1	$	575.1
Impairment loss	(11.0)		—		—		(3.3)		—		(14.3)
Amortization expense	—		—		(7.5)		(0.7)		(0.1)		(8.3)
Additions	—		0.4		—		—		—		0.4
Balance at September 30, 2020:	$	468.0	$	3.6	$	71.5	$	5.8	$	4.0	$	552.9

The Company's goodwill and intangible assets are at risk of additional impairment in the future in the event of sustained downward movement in the Company's stock price, downward revisions of long-term performance assumptions or increases in the assumed long-term discount rate.

Long-lived Assets Impairment and Closure Charges

Long-lived tangible asset impairment and closure charges for the three and nine months ended September 30, 2020 were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020		2019		2020		2019
	(In millions)
Long-lived tangible asset impairment	$	—	$	—	$	17.1	$	—
Closure charges	0.2		0.3		0.9		0.5
Total long-lived asset impairment and closure charges	$	0.2	$	0.3	$	18.0	$	0.5

The long-lived asset impairment for the nine months ended September 30, 2020 related to 45 Applebee's company-operated restaurants and 29 IHOP franchisee-operated restaurants for which the carrying amount exceeded the undiscounted cash flows The impairment recorded represented the difference between the carrying value and the estimated fair value. Approximately $11.2 million of the total impairment related to operating lease right-of-use assets that had been recorded in 2019 upon adoption of new lease accounting guidance codified in Accounting Standards Topic 842, while $5.9 million related to impairments of land, building, leasehold improvements and finance leases. The impairments by individual property varied in amount, ranging from the largest single-property impairment of $1.3 million to less than $5,000.