Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2018

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________

dennyslogo2017a03.jpg

Commission File Number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-3487402
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization
 
Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-0001
(Address of principal executive offices)
(Zip Code)

(864) 597-8000
(Registrant’s telephone number, including area code)
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes  þ  No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨  No  þ

 As of May 1, 2018, 63,576,618 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.




TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 

2



PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
March 28, 2018
 
December 27, 2017
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,919

 
$
4,983

Receivables, net
19,512

 
21,384

Inventories
3,101

 
3,134

Prepaid and other current assets
9,048

 
11,788

Total current assets
35,580

 
41,289

Property, net of accumulated depreciation of $245,365 and $243,325, respectively
141,357

 
139,856

Goodwill
39,843

 
38,269

Intangible assets, net
61,628

 
57,109

Deferred financing costs, net
2,790

 
2,942

Deferred income taxes
22,294

 
16,945

Other noncurrent assets
30,097

 
27,372

Total assets
$
333,589

 
$
323,782

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of capital lease obligations
$
3,126

 
$
3,168

Accounts payable
25,411

 
32,487

Other current liabilities
51,707

 
59,246

Total current liabilities
80,244

 
94,901

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
282,000

 
259,000

Capital lease obligations, less current maturities
28,734

 
27,054

Liability for insurance claims, less current portion
12,465

 
12,236

Other noncurrent liabilities
51,561

 
27,951

Total long-term liabilities
374,760

 
326,241

Total liabilities
455,004

 
421,142

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity (deficit)
 

 
 

Common stock $0.01 par value; shares authorized - 135,000; March 28, 2018:108,259 shares issued and 64,037 shares outstanding; December 27, 2017: 107,740 shares issued and 64,589 shares outstanding
$
1,083

 
$
1,077

Paid-in capital
595,069

 
594,166

Deficit
(340,348
)
 
(334,661
)
Accumulated other comprehensive loss, net of tax
(5,407
)
 
(2,316
)
Shareholders’ equity before treasury stock
250,397

 
258,266

Treasury stock, at cost, 44,222 and 43,151 shares, respectively
(371,812
)
 
(355,626
)
Total shareholders' deficit
(121,415
)
 
(97,360
)
Total liabilities and shareholders' deficit
$
333,589

 
$
323,782


See accompanying notes

3



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands, except per share amounts)
Revenue:
 
 
 
Company restaurant sales
$
101,193

 
$
93,779

Franchise and license revenue
54,080

 
34,131

Total operating revenue
155,273

 
127,910

Costs of company restaurant sales:
 
 
 
Product costs
24,935

 
23,133

Payroll and benefits
41,226

 
37,397

Occupancy
5,647

 
4,734

Other operating expenses
15,050

 
12,571

Total costs of company restaurant sales
86,858

 
77,835

Costs of franchise and license revenue
28,556

 
9,746

General and administrative expenses
16,560

 
17,509

Depreciation and amortization
6,514

 
5,736

Operating (gains), losses and other charges, net
360

 
783

Total operating costs and expenses, net
138,848

 
111,609

Operating income
16,425

 
16,301

Interest expense, net
4,625

 
3,541

Other nonoperating expense (income), net
212

 
(357
)
Net income before income taxes
11,588

 
13,117

Provision for income taxes
1,829

 
4,744

Net income
$
9,759

 
$
8,373

 
 
 
 
Basic net income per share
$
0.15

 
$
0.12

Diluted net income per share
$
0.15

 
$
0.11

 
 
 
 
Basic weighted average shares outstanding
64,432

 
71,004

Diluted weighted average shares outstanding
66,946

 
73,241

 
See accompanying notes

4


Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Net income
$
9,759

 
$
8,373

Other comprehensive income, net of tax:
 
 
 
Minimum pension liability adjustment, net of tax of $6 and $9, respectively
22

 
14

Recognition of unrealized loss on hedge transactions, net of tax of $(1,085) and $(397), respectively
(3,113
)
 
(623
)
Other comprehensive loss
(3,091
)
 
(609
)
Total comprehensive income
$
6,668

 
$
7,764


See accompanying notes

5



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Deficit
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Deficit
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, December 27, 2017
107,740

 
$
1,077

 
(43,151
)
 
$
(355,626
)
 
$
594,166

 
$
(334,661
)
 
$
(2,316
)
 
$
(97,360
)
Cumulative effect adjustment

 

 

 

 

 
(15,446
)
 

 
(15,446
)
Net income

 

 

 

 

 
9,759

 

 
9,759

Other comprehensive loss

 

 

 

 

 

 
(3,091
)
 
(3,091
)
Share-based compensation on equity classified awards

 

 

 

 
(104
)
 

 

 
(104
)
Purchase of treasury stock

 

 
(1,071
)
 
(16,186
)
 

 

 

 
(16,186
)
Issuance of common stock for share-based compensation
233

 
3

 

 

 
(3
)
 

 

 

Exercise of common stock options
286

 
3

 

 

 
1,010

 

 

 
1,013

Balance, March 28, 2018
108,259

 
$
1,083

 
(44,222
)
 
$
(371,812
)
 
$
595,069

 
$
(340,348
)
 
$
(5,407
)
 
$
(121,415
)
 
See accompanying notes

6



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
9,759

 
$
8,373

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
6,514

 
5,736

Operating (gains), losses and other charges, net
360

 
783

Amortization of deferred financing costs
152

 
148

Loss on early extinguishments of debt and leases

 
73

Deferred income tax expense
1,118

 
3,225

Share-based compensation
1,350

 
1,973

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
1,821

 
3,345

Inventories
33

 
(41
)
Other current assets
2,739

 
3,131

Other assets
(160
)
 
(2,312
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(9,865
)
 
(2,277
)
Accrued salaries and vacations
(4,048
)
 
(11,584
)
Accrued taxes
38

 
(215
)
Other accrued liabilities
(5,948
)
 
(1,204
)
Other noncurrent liabilities
(413
)
 
(1,133
)
Net cash flows provided by operating activities
3,450

 
8,021

Cash flows from investing activities:
 
 
 
Capital expenditures
(4,148
)
 
(3,017
)
Acquisition of restaurants and real estate
(8,418
)
 
(3,800
)
Proceeds from disposition of property
4

 
252

Collections on notes receivable
859

 
612

Issuance of notes receivable
(1,934
)
 
(1,010
)
Net cash flows used in investing activities
(13,637
)
 
(6,963
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
39,500

 
31,000

Revolver payments
(16,500
)
 
(19,500
)
Long-term debt payments
(823
)
 
(826
)
Proceeds from exercise of stock options
1,013

 
130

Tax withholding on share-based payments
(1,696
)
 

Purchase of treasury stock
(15,691
)
 
(11,742
)
Net bank overdrafts
3,320

 
(972
)
Net cash flows provided by (used in) financing activities
9,123

 
(1,910
)
Decrease in cash and cash equivalents
(1,064
)
 
(852
)
Cash and cash equivalents at beginning of period
4,983

 
2,592

Cash and cash equivalents at end of period
$
3,919

 
$
1,740

 
See accompanying notes

7



Denny’s Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At March 28, 2018, the Denny's brand consisted of 1,724 restaurants, 1,542 of which were franchised/licensed restaurants and 182 of which were company operated.

Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 27, 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 27, 2017. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 26, 2018.

Note 2.     Summary of Significant Accounting Policies
 
Newly Adopted Accounting Standards

Effective December 28, 2017, the first day of fiscal 2018, we adopted Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. The new guidance clarifies the principles used to recognize revenue for all entities and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. We elected to apply the modified retrospective method of adoption to those contracts which were not completed as of December 28, 2017. In doing so, we applied the practical expedient to aggregate all contract modifications that occurred before December 28, 2017 in determining the satisfied and unsatisfied performance obligations, the transaction price and the allocation of the transaction price to the satisfied and unsatisfied performance obligations. Results for reporting periods beginning after December 28, 2017 are presented under Topic 606. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605 “Revenue Recognition.” Our transition to Topic 606 represents a change in accounting principle. See Note 3 for further information about our transition to Topic 606 and the newly required disclosures.

Effective December 28, 2017, we adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Effective December 28, 2017, we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”. The new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Effective December 28, 2017, we adopted ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The new guidance clarifies the definition of a business. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

8




Effective December 28, 2017, we adopted ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The new guidance requires an entity to report the service cost component in the same line on the income statement as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Effective December 28, 2017, we adopted ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”. The new update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Effective December 28, 2017, we early adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and requires certain disclosures about stranded tax effects. Due to the immateriality of the stranded tax effects resulting from the implementation Tax Act, we have elected not to reclassify these amounts from accumulated other comprehensive income to retained earnings. Therefore the adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Effective December 28, 2017, we early adopted ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The new update clarifies certain aspects of the guidance issued in ASU 2016-01. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Effective December 28, 2017, we early adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The new update better aligns an entity’s risk management activities and financial reporting for hedging relationships, simplifies the hedge accounting requirements, and improves the disclosures of hedging arrangements. The amended presentation and disclosure guidance has been applied on a prospective basis. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.

Accounting Standards to be Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842)”, which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (our fiscal 2019) with early adoption permitted. The guidance will be adopted using a modified retrospective approach. Based on a preliminary assessment, we expect the adoption will result in a significant increase in the assets and liabilities on our Consolidated Balance Sheets, as most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets. We are continuing our evaluation, which may identify additional impacts this standard will have on our Consolidated Financial Statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform financial statement users of credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 (our fiscal 2020) with early adoption permitted for annual and interim periods beginning after December 15, 2018 (our fiscal 2019). We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements as a result of future adoption.


9



Note 3.     Revenues

Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and franchised and licensed restaurants. The following table disaggregates our revenue by sales channels and types of goods or services.

 
Quarter Ended
 
March 28, 2018
March 29, 2017 (1)
 
(Dollars in thousands)
Company restaurant sales
$
101,193

 
$
93,779

Franchise and license revenue:
 
 
 
Royalties
25,165

 
24,544

Advertising revenue
19,310

 

Initial and other fees
1,417

 
484

Occupancy revenue 
8,188

 
9,103

Franchise and license revenue 
54,080

 
34,131

Total operating revenue
$
155,273

 
$
127,910


(1)
As disclosed in Note 2, prior period amounts have not been adjusted under the modified retrospective method of adoption of Topic 606.

Company Restaurant Revenue

Company restaurant revenue is recognized at the point in time when food and beverage products are sold at company restaurants. We present company restaurant sales net of sales-related taxes collected from customers and remitted to governmental taxing authorities. The adoption of Topic 606 did not impact the recognition of company restaurant sales.

Franchise Revenue

Franchise and license revenues consist primarily of royalties, advertising revenue, initial and other fees and occupancy revenue.
Our performance obligations under franchise agreements consist of a license of our brand’s symbolic intellectual property, administration of advertising programs (including local co-operatives), and other ongoing support services. These performance obligations are highly interrelated so we do not consider them to be individually distinct, and therefore account for them under Topic 606 as a single performance obligation. Revenue from franchise agreements is recognized evenly over the term of the agreement with the exception of sales-based royalties and revenue allocated to goods and services distinct from the franchise right.

Royalty and advertising revenues represent sales-based royalties that are recognized in the period in which the sales occur. Sales-based royalties are variable consideration related to our performance obligations to our franchisees to maintain the intellectual property being licensed. Under our franchise agreements, franchisee advertising contributions must be spent on marketing and related activities. The adoption of Topic 606 did not impact the recognition of royalties. Upon adoption of Topic 606, advertising revenues and expenditures are recorded on a gross basis within the Consolidated Statements of Income. Under the previous guidance of Topic 605, we recorded franchise advertising expense net of contributions from franchisees to our advertising programs, including local co-operatives. While this change materially impacts the gross amount of reported franchise and license revenue and costs of franchise and license revenue, the impact is generally an offsetting increase to both revenue and expense with little, if any, impact on operating income and net income.
Initial and other fees consist of initial, successor and assignment franchise fees (“initial franchise fees”), training fees and other franchise services fees. Initial franchise fees are billed and received upon the signing of the franchise agreement. Under Topic 606, recognition of these fees is deferred until the commencement date of the agreement and occurs over time based on the term of the underlying franchise agreement. In the event a franchise agreement is terminated, any remaining deferred fees are recognized in the period of termination. Under the previous guidance, initial franchise fees were recognized upon the opening of a franchise restaurant. Training and other franchise services fees are billed and recognized at a point in time as services are rendered. Similar to advertising revenue, upon adoption of Topic 606, other franchise services fees are recorded on a gross basis within the Consolidated Statements of Income, whereas, under previous guidance, they were netted against the related expenses.

10



Occupancy revenue results from leasing or subleasing restaurants to franchisees and is recognized over the term of the lease agreement.
With the exception of initial and other franchise fees, revenues are typically billed and collected on a weekly basis.
Gift Card Breakage
Under previous guidance, we recorded gift card breakage when the likelihood of redemption was remote. Breakage was recorded as a benefit to our advertising fund or reduction to other operating expenses, depending on where the gift cards were sold. Upon adoption of Topic 606, gift card breakage is recognized proportionally as redemptions occur. Our gift card breakage primarily relates to cards sold by third parties. Breakage revenue related to third party sales is recorded as advertising revenue (included as a component of franchise and license revenue) with an offsetting amount recorded as advertising expense (included as a component of costs of franchise and license revenue).
Financial Statement Impact of Adoption
The following tables summarize the impact of adopting Topic 606 on our financial statement line items as of March 28, 2018 and for the quarter ended March 28, 2018.

 
March 28, 2018
Consolidated Balance Sheet
As Reported
 
Adjustments
 
Balances without adoption of Topic 606
 
(In thousands)
Prepaid and other current assets
$
9,048

 
$
509

 
$
9,557

Deferred income taxes
22,294

 
(5,282
)
 
17,012

Other current liabilities
51,707

 
(1,158
)
 
50,549

Other noncurrent liabilities
51,561

 
(18,624
)
 
32,937

Deficit
(340,348
)
 
15,009

 
(325,339
)

 
Quarter ended March 28, 2018
Consolidated Statement of Income
As Reported
 
Adjustments
 
Balances without adoption of Topic 606
 
(In thousands, except per share amounts)
Franchise and license revenue
$
54,080

 
$
(20,307
)
 
$
33,773

Costs of franchise and license revenue
28,556

 
(19,764
)
 
8,792

Provision for income taxes
1,829

 
(140
)
 
1,689

Net income
9,759

 
(403
)
 
9,356

Basic net income per share
$
0.15

 
$
(0.01
)
 
$
0.14

Diluted net income per share
$
0.15

 
$
(0.01
)
 
$
0.14


 
Quarter ended March 28, 2018
Consolidated Statement of Comprehensive Income
As Reported
 
Adjustments
 
Balances without adoption of Topic 606
 
(In thousands)
Net income
$
9,759

 
$
(403
)
 
$
9,356

Total comprehensive income
6,668

 
(403
)
 
6,265



11



 
Quarter ended March 28, 2018
Consolidated Statement of Cash Flow
As Reported
 
Adjustments
 
Balances without adoption of Topic 606
 
(In thousands)
Net income
$
9,759

 
$
(403
)
 
$
9,356

Deferred income tax expense
1,118

 
(140
)
 
978

Changes in assets and liabilities:
 
 
 
 
 
Other current assets
2,739

 
(509
)
 
2,230

Other accrued liabilities
(5,948
)
 
923

 
(5,025
)
Other noncurrent liabilities
(413
)
 
129

 
(284
)
Net cash flows provided by operating activities
3,450

 

 
3,450


The following significant changes impacted our financial statement line items as of March 28, 2018 and for the quarter ended March 28, 2018:
Upon adoption of Topic 606, we recorded a cumulative effect adjustment related to previously recognized initial franchise fees resulting in a $21.0 million increase to deferred franchise revenue, a $15.6 million increase to opening deficit and a $5.4 million increase to deferred tax assets. The deferred franchise revenue resulting from the cumulative effect adjustment will be amortized over the remaining lives of the individual franchise agreements. Also upon adoption, we recorded a cumulative effect adjustment to recognize breakage in proportion to redemptions that occurred prior to December 28, 2017 resulting in a decrease of $0.6 million to gift card liability (a component of other current liabilities), a $0.5 million increase to accrued advertising (a component of other current liabilities) and a $0.1 million decrease to opening deficit.
We recognized $19.2 million of franchise and license revenue and $19.2 million of costs of franchise and license revenue resulting from the recording of advertising revenues and expenditures on a gross basis under Topic 606 versus recording these amounts on a net basis under Topic 605.

We recognized an additional $0.5 million of franchise and license revenue under Topic 606 than we would have recognized under Topic 605, resulting from the timing of recognition of initial franchise fees.

We recognized $0.5 million of franchise and license revenue and $0.5 million of costs of franchise and license revenue resulting from the recording of other franchise services fees on a gross basis under Topic 606 versus recording these amount on a net basis under Topic 605.

Contract Balances
Contract balances related to contracts with customers consists of receivables, deferred franchise revenue and deferred gift card revenue. See note 4 for details on our receivables.
Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being amortized into revenue and amounts related to development agreements and unopened restaurants that will begin amortizing into revenue when the related restaurants are opened. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sale-based royalties and advertising. The components of the change in deferred franchise revenue are as follows:


12



 
(In thousands)
Balance, December 27, 2017
$
1,643

Cumulative effect adjustment recognized upon adoption of Topic 606
20,976

Fees received from franchisees
239

Revenue recognized (1)
(930
)
Balance, March 28, 2018
21,928

Less current portion included in other current liabilities
3,303

Deferred franchise revenue included in other noncurrent liabilities
$
18,625


(1) Of this amount $0.9 million was included in either the deferred franchise revenue balance as of December 27, 2017 or the cumulative effect adjustment.

As of March 28, 2018, the deferred franchise revenue expected to be recognized for each of the next five years and in the aggregate is as follows:

 
(In thousands)
Remainder of 2018
$
1,646

2019
2,105

2020
1,981

2021
1,769

2022
1,661

Thereafter
11,270

Development agreements and unopened restaurants
1,496

Deferred franchise revenue
$
21,928


Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. We recognize gift card revenue when a gift card is redeemed in one of our company restaurants. Gift card breakage is recognized proportionally as redemptions occur. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The balance of deferred gift card liabilities as of March 28, 2018 and December 27, 2017 was $4.4 million and $6.5 million, respectively. During the quarter ended March 28, 2018, we recognized revenue of $0.7 million from gift card redemptions.

Note 4.     Receivables
 
Receivables were comprised of the following:
 
 
March 28, 2018
 
December 27, 2017
 
(In thousands)
Receivables, net:
 
 
 
Trade accounts receivable from franchisees
$
10,379

 
$
10,688

Financing receivables from franchisees
4,675

 
5,084

Vendor receivables
1,791

 
3,256

Credit card receivables
1,549

 
1,870

Other
1,545

 
762

Allowance for doubtful accounts
(427
)
 
(276
)
Total receivables, net
$
19,512

 
$
21,384

 
 
 
 
Other noncurrent assets:
 
 
 
Financing receivables from franchisees
$
1,573

 
$
427


During the quarter ended March 28, 2018, we recorded an allowance for doubtful accounts of $0.2 million of financing receivables from a franchisee.

13



Note 5.    Goodwill and Other Intangible Assets

The following table reflects the changes in carrying amounts of goodwill.

 
(In thousands)
Balance, December 27, 2017
$
38,269

Additions related to acquisition
1,574

Balance, March 28, 2018
$
39,843


Other intangible assets were comprised of the following:
 
 
March 28, 2018
 
December 27, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,081

 
$

 
$
44,080

 
$

Liquor licenses
166

 

 
166

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Reacquired franchise rights
20,553

 
3,172

 
15,252

 
2,389

Intangible assets
$
64,800

 
$
3,172

 
$
59,498

 
$
2,389

 
During the quarter ended March 28, 2018, we acquired five franchised restaurants for $7.9 million, of which $5.3 million was allocated to reacquired franchise rights, $1.0 million to property and $1.6 million to goodwill. In addition, we recorded $2.4 million of capital leases in connection with the acquired franchised restaurants. We account for the acquisition of franchised restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on Level 3 fair value estimates.

Note 6.     Other Current Liabilities
 
Other current liabilities consisted of the following:

 
March 28, 2018
 
December 27, 2017
 
(In thousands)
Accrued payroll
$
16,989

 
$
20,998

Accrued insurance, primarily current portion of liability for insurance claims
6,863

 
6,922

Accrued taxes
7,422

 
7,384

Accrued advertising
5,499

 
8,417

Gift cards
4,419

 
6,480

Other
10,515

 
9,045

Other current liabilities
$
51,707

 
$
59,246



14



Note 7.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Software implementation costs
$

 
$
2,124

Gains on sales of assets and other, net
(37
)
 
(1,440
)
Restructuring charges and exit costs
360

 
99

Impairment charges
37

 

Operating (gains), losses and other charges, net
$
360

 
$
783

 
Software implementation costs of $2.1 million for the quarter ended March 29, 2017 were the result of our investment in a new cloud-based Enterprise Resource Planning system. Gains on sales of assets and other, net of $1.4 million for the quarter ended March 29, 2017 primarily related to real estate sold to a franchisee.

Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Exit costs
$
24

 
$
31

Severance and other restructuring charges
336

 
68

Total restructuring charges and exit costs
$
360

 
$
99


The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance, December 27, 2017
$
1,180

Exit costs (1)
24

Payments, net of sublease receipts
(128
)
Interest accretion
21

Balance, March 28, 2018
1,097

Less current portion included in other current liabilities
333

Long-term portion included in other noncurrent liabilities
$
764


(1)
Included as a component of operating (gains), losses and other charges, net.

As of March 28, 2018 and December 27, 2017, we had accrued severance and other restructuring charges of $0.3 million and less than $0.1 million, respectively. The balance as of March 28, 2018 is expected to be paid during the next 12 months.


15



Note 8.     Fair Value of Financial Instruments

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

 
 
Total
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Valuation Technique
 
(In thousands)
 
 
Fair value measurements as of March 28, 2018:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
12,424

 
$
12,424

 
$

 
$

 
market approach
Interest rate swaps, net (2)
(6,385
)
 

 
(6,385
)
 

 
income approach
Total
$
6,039

 
$
12,424

 
$
(6,385
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements as of December 27, 2017:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
12,663

 
$
12,663

 
$

 
$

 
market approach
Interest rate swaps, net (2)
(2,187
)
 

 
(2,187
)
 

 
income approach
Total
$
10,476

 
$
12,663

 
$
(2,187
)
 
$

 
 

(1)
The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments.
(2)
The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. See Note 9 for details on the interest rate swaps.

Note 9.     Long-Term Debt

Denny's Corporation and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $30 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million. As of March 28, 2018, we had outstanding revolver loans of $282.0 million and outstanding letters of credit under the senior secured revolver of $21.2 million. These balances resulted in availability of $96.8 million under the credit facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 3.76% and 3.42% as of March 28, 2018 and December 27, 2017, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 3.53% and 3.32% as of March 28, 2018 and December 27, 2017, respectively.

A commitment fee is paid on the unused portion of the credit facility and was 0.30% as of March 28, 2018. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was set at LIBOR plus 200 basis points as of March 28, 2018. The maturity date for the credit facility is October 26, 2022.

The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by the Company and its material subsidiaries and is secured by assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We were in compliance with all financial covenants as of March 28, 2018.

Interest Rate Hedges
We have interest rate swaps to hedge a portion of the forecasted cash flows of our floating rate debt. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on specific notional amounts.

Under the interest rate swaps, we pay a fixed rate on the notional amount in addition to the current interest rate as determined by our consolidated leverage ratio in effect at the time. A summary of our interest rate swaps as of March 28, 2018 is as follows:


16



Trade Date
 
Effective Date
 
Maturity Date
 
Notional Amount
 
Fixed Rate
 
 
 
 
 
 
(In thousands)
 
 
April 30, 2013
 
March 31, 2015
 
March 29, 2018
 
$
120,000

 
1.13
%
March 20, 2015
 
March 29, 2018
 
March 31, 2025
 
120,000

 
2.44
%
October 1, 2015
 
March 29, 2018
 
March 31, 2026
 
50,000

 
2.46
%
February 15, 2018
 
March 31, 2020
 
December 31, 2033
 
80,000

(1) 
3.19
%

(1)
The notional amount of the swaps entered into on February 15, 2018 increases annually beginning September 30, 2020 until they reach the maximum notional amount of $425.0 million on September 28, 2029.

As of March 28, 2018, the fair value of the interest rate swaps was a net liability of $6.4 million, which is comprised of assets of $1.7 million recorded as a component of other noncurrent assets and liabilities of $8.1 million recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets. See Note 15 for the amounts recorded in accumulated other comprehensive loss related to the interest rate swaps.

Note 10.     Defined Benefit Plans

The components of net periodic benefit cost for our defined benefit plans, included as a component of general and administrative costs, were as follows:

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Interest cost
$
19

 
$
21

Amortization of net loss
28

 
23

Net periodic benefit cost
$
47

 
$
44


We made contributions of less than $0.1 million to our defined benefit plans during both the quarter ended March 28, 2018 and the quarter ended March 29, 2017. We expect to contribute $0.1 million to our defined benefit plans over the remainder of fiscal 2018.

Additional minimum pension liability, net of tax, of $1.0 million related to our defined benefit plans is reported as a component of accumulated other comprehensive loss in our Condensed Consolidated Statement of Shareholders’ Equity as of both March 28, 2018 and December 27, 2017, respectively.

Note 11.     Share-Based Compensation

Total share-based compensation cost included as a component of net income was as follows:

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Performance share awards
$
1,078

 
$
1,940

Restricted stock units for board members
272

 
33

Total share-based compensation
$
1,350

 
$
1,973

 

17



Performance Share Units
 
During the quarter ended March 28, 2018, we granted certain employees approximately 0.2 million performance share units that vest based on the total shareholder return (“TSR”) of our common stock compared to the TSRs of a group of peer companies and 0.3 million performance share units that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based performance share units contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value of $18.17 per share. The performance share units based on the Adjusted EPS growth rate have a grant date fair value of $15.93 per share, the market value of our common stock on the date of grant. The awards granted to our named executive officers also contain a performance condition based on the attainment of an operating measure for the fiscal year ended December 26, 2018. The performance period for these performance share units is the three year fiscal period beginning December 28, 2017 and ending December 30, 2020. They will vest and be earned (from 0% to 150% of the target award for each such increment) at the end of the performance period.

During the quarter ended March 28, 2018, we issued 0.2 million shares of common stock related to vested performance share units. In addition 0.3 million shares of common stock were deferred and 0.1 million shares of common stock were withheld in lieu of taxes related to vested performance share units.
 
As of March 28, 2018, we had approximately $13.3 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which is expected to be recognized over a weighted average of 2.2 years.
 
Restricted Stock Units for Board Members

As of March 28, 2018, we had approximately $0.2 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 0.8 years.
 
Note 12.     Income Taxes

The effective income tax rate was 15.8% for the quarter ended March 28, 2018 compared to 36.2% for the prior year period. The 2018 period was impacted by the Tax Act. In addition, the 2018 period benefited from a 4.7% discrete item relating to share-based compensation. The Tax Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. We revalued our deferred taxes during fiscal 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are realized. The implementation of the Tax Act resulted in certain stranded tax effects in accumulated other comprehensive income. Due to the immateriality of the stranded tax effects, we have elected not to reclassify these amounts from accumulated other comprehensive income to retained earnings.
 
Note 13.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands, except for per share amounts)
Net income
$
9,759

 
$
8,373

 
 
 
 
Weighted average shares outstanding - basic
64,432

 
71,004

Effect of dilutive share-based compensation awards
2,514

 
2,237

Weighted average shares outstanding - diluted
66,946

 
73,241

 
 
 
 
Basic net income per share
$
0.15

 
$
0.12

Diluted net income per share
$
0.15

 
$
0.11

 
 
 
 
Anti-dilutive share-based compensation awards
471

 
580

    

18



Note 14.     Supplemental Cash Flow Information

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Income taxes paid, net
$
423

 
$
395

Interest paid
$
4,272

 
$
3,261

 
 
 
 
Noncash investing and financing activities:
 
 
 
Issuance of common stock, pursuant to share-based compensation plans
$
3,513

 
$
4,946

Execution of capital leases
$
2,478

 
$
1,523

Treasury stock payable
$
615

 
$
862

Notes received in connection with disposition of property
$

 
$
1,750

 
Note 15.     Shareholders' Equity

Share Repurchase
 
Our credit facility permits the purchase of Denny’s stock and the payment of cash dividends subject to certain limitations. In October 2017, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $200 million of our common stock (in addition to prior authorizations). Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended) or in privately negotiated transactions, subject to market and business conditions.

During the quarter ended March 28, 2018, we repurchased 1.1 million shares of our common stock for approximately $16.2 million. This brings the total amount repurchased under the current repurchase program to 1.3 million shares of our common stock for approximately $19.9 million, leaving approximately $180.1 million that can be used to repurchase our common stock under this program as of March 28, 2018. Repurchased shares are included as treasury stock in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statement of Shareholders' Equity.

Accumulated Other Comprehensive Loss

The components of the change in accumulated other comprehensive loss were as follows:

 
Pensions
 
Derivatives
 
Accumulated Other Comprehensive Loss
 
(In thousands)
Balance as of December 27, 2017
$
(982
)
 
$
(1,334
)
 
$
(2,316
)
Amortization of net loss (1)
28

 

 
28

Net change in fair value of derivatives

 
(4,058
)
 
(4,058
)
Reclassification of derivatives to interest expense, net (2)

 
(140
)
 
(140
)
Income tax (expense) benefit related to items of other comprehensive loss
(6
)
 
1,085

 
1,079

Balance as of March 28, 2018
$
(960
)
 
$
(4,447
)
 
$
(5,407
)

(1)
Before-tax amount related to our Other Defined Benefit Plans that was reclassified from accumulated other comprehensive loss and included as a component of pension expense within general and administrative expenses in our Condensed Consolidated Statements of Income during the quarter ended March 28, 2018. See Note 10 for additional details.
(2)
Amounts reclassified from accumulated other comprehensive loss into income represent payments either received from or made to the counterparty for the effective portions of the interest rate swaps. These amounts are included as a component of interest expense, net in our Condensed Consolidated Statements of Income. We expect to make payments to the counterparty and reclassify approximately $1.0 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. See Note 9 for additional details.


19



Note 16.     Commitments and Contingencies

We have guarantees related to certain franchisee loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through March 28, 2018, no events had occurred that caused us to make payments under these guarantees. There were $4.7 million and $5.1 million of loans outstanding under these programs as of March 28, 2018 and December 27, 2017, respectively. As of March 28, 2018, the maximum amount payable under the loan guarantees was $1.1 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both March 28, 2018 and December 27, 2017, which are included as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets and other nonoperating expense in our Condensed Consolidated Statements of Income.

There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company's consolidated results of operations or financial position. 

Note 17.     Subsequent Events

We performed an evaluation of subsequent events and determined that no events required disclosure.


20



Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements reflect our best judgment based on factors currently known and are intended to speak only as of the date such statements are made. Forward-looking statements involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. You should consider our forward-looking statements in light of the risks discussed under Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Factors Impacting Comparability

Impact of New Revenue Recognition Standard

Effective December 28, 2017, the first day of fiscal 2018, the Company adopted Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606 on a modified retrospective basis. Results for reporting periods beginning after December 28, 2017 are presented under Topic 606. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605 “Revenue Recognition.”

The most significant effects of the new guidance on the comparability of our results of operations between 2018 and 2017 include the following:

Under Topic 606, advertising revenues and expenditures are recorded on a gross basis within the Consolidated Statements of Income. Under the previous guidance of Topic 605, we recorded franchise advertising expense net of contributions from franchisees to our advertising programs, including local co-operatives. While this change materially impacts the gross amount of reported franchise and license revenue and costs of franchise and license revenue, the impact is generally an offsetting increase to both revenue and expense with little, if any, impact on operating income and net income. Similarly, upon adoption, other franchise services fees are recorded on a gross basis within the Consolidated Statements of Income, whereas, under previous guidance, they were netted against the related expenses.

Under Topic 606, recognition of initial franchise fees is deferred until the commencement date of the agreement and occurs over time based on the term of the underlying franchise agreement. In the event a franchise agreement is terminated, any remaining deferred fees are recognized in the period of termination. Under the previous guidance, initial franchise fees were recognized upon the opening of a franchise restaurant. The effect of the required deferral of initial franchise fees received in a given year is mitigated by the recognition of revenue from fees received in prior periods.

Under previous guidance, we recorded gift card breakage when the likelihood of redemption was remote. Breakage was recorded as a benefit to our advertising fund or reduction to other operating expenses, depending on where the gift cards were sold. Under Topic 606, gift card breakage is recognized proportionally as redemptions occur. Our gift card breakage primarily relates to cards sold by third parties. Breakage revenue related to third party sales is recorded as advertising revenue (included as a component of franchise and license revenue) with an offsetting amount recorded as advertising expense (included as a component of costs of franchise and license revenue).

See Note 2 and Note 3 for information on the implementation of Topic 606 and its impact on our Consolidated Financial Statements.


21



Statements of Income
 
The following table contains information derived from our Condensed Consolidated Statements of Income expressed as a percentage of total operating revenues, except as noted below. Percentages may not add due to rounding.
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
101,193

 
65.2
%
 
$
93,779

 
73.3
 %
Franchise and license revenue
54,080

 
34.8
%
 
34,131

 
26.7
 %
Total operating revenue
155,273

 
100.0
%
 
127,910

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
Product costs
24,935

 
24.6
%
 
23,133

 
24.7
 %
Payroll and benefits
41,226

 
40.7
%
 
37,397

 
39.9
 %
Occupancy
5,647

 
5.6
%
 
4,734

 
5.0
 %
Other operating expenses
15,050

 
14.9
%
 
12,571

 
13.4
 %
Total costs of company restaurant sales
86,858

 
85.8
%
 
77,835

 
83.0
 %
Costs of franchise and license revenue (a)
28,556

 
52.8
%
 
9,746

 
28.6
 %
General and administrative expenses
16,560

 
10.7
%
 
17,509

 
13.7
 %
Depreciation and amortization
6,514

 
4.2
%
 
5,736

 
4.5
 %
Operating (gains), losses and other charges, net
360

 
0.2
%
 
783

 
0.6
 %
Total operating costs and expenses, net
138,848

 
89.4
%
 
111,609

 
87.3
 %
Operating income
16,425

 
10.6
%
 
16,301

 
12.7
 %
Interest expense, net
4,625

 
3.0
%
 
3,541

 
2.8
 %
Other nonoperating expense (income), net
212

 
0.1
%
 
(357
)
 
(0.3
)%
Net income before income taxes
11,588

 
7.5
%
 
13,117

 
10.3
 %
Provision for income taxes
1,829

 
1.2
%
 
4,744

 
3.7
 %
Net income
$
9,759

 
6.3
%
 
$
8,373

 
6.5
 %
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

Company average unit sales
$
565

 
 

 
$
553

 
 

Franchise average unit sales
$
396

 
 

 
$
385

 
 

Company equivalent units (b)
179

 
 

 
170

 
 

Franchise equivalent units (b)
1,543

 
 

 
1,561

 
 

Company same-store sales increase (decrease) (c)(d)
3.2
%
 
 

 
(1.6
)%
 
 

Domestic franchise same-store sales increase (decrease) (c)(d)
1.2
%
 
 

 
(1.1
)%
 
 

            
(a)
Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.
(b)
Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.
(c)
Same-store sales include sales from company restaurants or non-consolidated franchised and licensed restaurants that were open the same period in the prior year.
(d)
Prior year amounts have not been restated for 2018 comparable units.


22



Unit Activity
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
Company restaurants, beginning of period
178

 
169

Units opened

 

Units acquired from franchisees
5

 
3

Units closed
(1
)
 

End of period
182

 
172

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,557

 
1,564

Units opened 
10

 
8

Units acquired by Company
(5
)
 
(3
)
Units closed
(20
)
 
(10
)
End of period
1,542

 
1,559

Total restaurants, end of period
1,724

 
1,731


Company Restaurant Operations
 
During the quarter ended March 28, 2018, company restaurant sales increased $7.4 million, or 7.9%, primarily resulting from a nine equivalent unit increase in company restaurants as compared to the prior year period and a 3.2% increase in company same-store sales.
 
Total costs of company restaurant sales as a percentage of company restaurant sales increased to 85.8% for the quarter from 83.0% in the prior year period.

Product costs decreased to 24.6% from 24.7%. Payroll and benefits increased to 40.7% from 39.9% primarily due to a 0.6 percentage point increase in labor costs. The increase in labor costs primarily resulted from minimum wage increases. Occupancy costs increased to 5.6% from 5.0% primarily due to increases in general liability insurance costs, as the prior year included $0.4 million in favorable claims development.

Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(Dollars in thousands)
Utilities
$
3,405

 
3.4
%
 
$
3,053

 
3.3
%
Repairs and maintenance
1,890

 
1.9
%
 
1,663

 
1.8
%
Marketing
3,765

 
3.7
%
 
3,621

 
3.9
%
Other direct costs
5,990

 
5.9
%
 
4,234

 
4.5
%
Other operating expenses
$
15,050

 
14.9
%
 
$
12,571

 
13.4
%

The increase in other direct costs was primarily related to a $0.7 million increase in third party delivery fees related to Denny's On Demand.


23



Franchise Operations
 
Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(Dollars in thousands)
Royalties
$
25,165

 
46.5
%
 
$
24,544

 
71.9
%
Advertising revenue
19,310

 
35.7
%
 

 
%
Initial and other fees
1,417

 
2.6
%
 
484

 
1.4
%
Occupancy revenue 
8,188

 
15.1
%
 
9,103

 
26.7
%
Franchise and license revenue 
$
54,080

 
100.0
%
 
$
34,131

 
100.0
%
 
 
 
 
 
 
 
 
Advertising costs
$
19,310

 
35.7
%
 
$
525

 
1.5
%
Occupancy costs 
$
5,829

 
10.8
%
 
$
6,506

 
19.1
%
Other direct costs 
3,417

 
6.3
%
 
2,715

 
8.0
%
Costs of franchise and license revenue 
$
28,556

 
52.8
%
 
$
9,746

 
28.6
%

During the quarter ended March 28, 2018, royalties increased $0.6 million, or 2.5%, primarily resulting from a 1.2% increase in domestic same-store sales and a higher average royalty rate as compared to the prior year period, partially offset by an 18 equivalent unit decrease in franchised and licensed restaurants. The increases in initial and other fees and advertising revenue primarily resulted from the implementation of Topic 606 related to revenue recognition. The adoption of this guidance resulted in the recognition of approximately $0.5 million of initial fees that would not have been recognized under the previous guidance and $0.4 million of other franchise fees that are now required to be presented on a gross basis, instead of a net basis as previously presented. Advertising revenue and costs are also now required to be presented on a gross basis, instead of a net basis as previously presented. The decrease in occupancy revenue of $0.9 million, or 10.1%, was primarily the result of lease expirations.

Costs of franchise and license revenue increased $18.8 million, or 193.0%. The increase in advertising costs related to the implementation of Topic 606, as advertising revenue is no longer netted with advertising expense. Occupancy costs decreased $0.7 million, or 10.4%, primarily resulting from lease expirations. The increase in other direct costs primarily related to the implementation of Topic 606, as certain other franchise expenses are no longer netted with the related fees received from franchisees. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue increased to 52.8% from 28.6%.

Other Operating Costs and Expenses

Other operating costs and expenses such as general and administrative expenses and depreciation and amortization expense relate to both company and franchise operations.

General and administrative expenses were comprised of the following:

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Share-based compensation
$
1,350

 
$
1,973

Other general and administrative expenses
15,210

 
15,536

Total general and administrative expenses
$
16,560

 
$
17,509


Other general and administrative expenses decreased by $0.3 million primarily resulting from a $0.7 million decrease related to market valuation changes in our non-qualified deferred compensation plan liabilities in the current year period and a $0.6 million decrease in professional fees. Offsetting losses on the underlying plan investments are included as a component of other

24



non-operating income, net. These decreases were partially offset by a $1.0 million increase related to investments in personnel and increased incentive compensation.
 
Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Depreciation of property and equipment
$
4,480

 
$
4,217

Amortization of capital lease assets
1,071

 
994

Amortization of intangible and other assets
963

 
525

Total depreciation and amortization expense
$
6,514

 
$
5,736


The increase in amortization of intangible and other assets was primarily due to the increase in reacquired franchise rights related to acquisitions of franchised restaurants during the current and prior year.
 
Operating (gains), losses and other charges, net were comprised of the following:

 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Software implementation costs

 
2,124

Gains on sales of assets and other, net
(37
)
 
(1,440
)
Restructuring charges and exit costs
360

 
99

Impairment charges
37

 

Operating (gains), losses and other charges, net
$
360

 
$
783


Software implementation costs of $2.1 million for the quarter ended March 29, 2017 were the result of our investment in a new cloud-based Enterprise Resource Planning system. Gains on sales of assets and other, net of $1.4 million for the quarter ended March 29, 2017 primarily related to real estate sold to a franchisee.

Restructuring charges and exit costs were comprised of the following:
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Exit costs
$
24

 
$
31

Severance and other restructuring charges
336

 
68

Total restructuring and exit costs
$
360

 
$
99


Operating income was $16.4 million for the quarter ended March 28, 2018 compared to $16.3 million for the quarter ended March 29, 2017.


25



Interest expense, net was comprised of the following:
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Interest on credit facilities
$
2,590

 
$
1,498

Interest on interest rate swaps
(140
)
 
108

Interest on capital lease liabilities
1,604

 
1,393

Letters of credit and other fees
320

 
280

Interest income
(29
)
 
(15
)
Total cash interest
4,345

 
3,264

Amortization of deferred financing costs
152

 
148

Interest accretion on other liabilities
128

 
129

Total interest expense, net
$
4,625

 
$
3,541


Interest expense, net increased by $1.1 million primarily due to increases in the balance of our credit facility and related interest rates.

Other nonoperating (income) expense, net was expense of $0.2 million for the quarter ended March 28, 2018, resulting primarily from losses on deferred compensation plan investments, compared to income of $0.4 million for the prior year period, resulting primarily from gains on deferred compensation plan investments.

Provision for income taxes was $1.8 million for the quarter ended March 28, 2018 compared to $4.7 million for the quarter ended March 29, 2017. The effective tax rate was 15.8% compared to 36.2%. The 2018 period was impacted by the Tax Act. In addition, the 2018 period benefited from a 4.7% discrete item relating to share-based compensation. The Tax Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. We revalued our deferred taxes during fiscal 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are realized. The implementation of the Tax Act resulted in certain stranded tax effects in accumulated other comprehensive income. Due to the immateriality of the stranded tax effects, we have elected not to reclassify these amounts from accumulated other comprehensive income to retained earnings. We expect the 2018 fiscal year effective tax rate to be between 16% and 19%. The annual effective tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.

Net income was $9.8 million for the quarter ended March 28, 2018 compared with $8.4 million for the quarter ended March 29, 2017.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility (as described below). Principal uses of cash are operating expenses, capital expenditures and the repurchase of shares of our common stock.
 
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:
 
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Net cash provided by operating activities
$
3,450

 
$
8,021

Net cash used in investing activities
(13,637
)
 
(6,963
)
Net provided by cash (used in) financing activities
9,123

 
(1,910
)
Decrease in cash and cash equivalents
$
(1,064
)
 
$
(852
)
  

26



Net cash flows provided by operating activities were $3.5 million for the quarter ended March 28, 2018 compared to $8.0 million for the quarter ended March 29, 2017. The decrease in cash flows provided by operating activities was primarily due to the reduction in payables during the quarter ended March 28, 2018. We believe that our estimated cash flows from operations for 2018, combined with our capacity for additional borrowings under our credit facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next 12 months.
 
Net cash flows used in investing activities were $13.6 million for the quarter ended March 28, 2018. These cash flows were primarily comprised of capital expenditures of $4.1 million, acquisitions of restaurants of $8.4 million and note receivable issuances of $1.9 million. Cash flows for acquisitions included $7.9 million for the acquisition of five franchised restaurants and $0.5 million related to a prior year acquisition. Net cash flows used in investing activities were $7.0 million for the quarter ended March 29, 2017. These cash flows were primarily comprised of capital expenditures of $3.0 million, acquisitions of restaurants and real estate of $3.8 million and note receivable issuances of $1.0 million. Cash flows for acquisitions included $2.4 million of real estate associated with relocating a high-performing company restaurant due to the impending loss of property control and $1.4 million for the reacquisition of three franchised restaurants.

Our principal capital requirements have been largely associated with the following:
  
 
Quarter Ended
 
March 28, 2018
 
March 29, 2017
 
(In thousands)
Facilities
$
2,208

 
$
1,767

New construction 
205

 
109

Remodeling
126

 
230

Information technology
215

 
86

Other
1,394

 
825

Capital expenditures (excluding acquisitions)
$
4,148

 
$
3,017

 
Capital expenditures and acquisitions for fiscal 2018 are expected to be approximately $33 to $35 million, including the above mentioned acquisition of franchised restaurants, a planned company restaurant opening later in the year, remodels from recent franchise acquisitions, restaurant offsets and on-going maintenance capital.
 
Cash flows provided by financing activities were $9.1 million for the quarter ended March 28, 2018, which included net long-term debt borrowings of $22.2 million, partially offset by cash payments for stock repurchases of $15.7 million. Cash flows used in financing activities were $1.9 million for the quarter ended March 29, 2017, which included cash payments for stock repurchases of $11.7 million, partially offset by net long-term debt borrowings of $10.7 million.

Our working capital deficit was $44.7 million at March 28, 2018 compared to $53.6 million at December 27, 2017. The decrease in working capital deficit was primarily related to the payout of accrued incentive compensation and accrued advertising during the quarter ended March 28, 2018. We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually become due after the receipt of cash from the related sales.

Credit Facility

As of March 28, 2018, we had outstanding revolver loans of $282.0 million and outstanding letters of credit under the senior secured revolver of $21.2 million. These balances resulted in availability of $96.8 million under the credit facility. The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 3.76% as of March 28, 2018. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 3.53% as of March 28, 2018.

A commitment fee is paid on the unused portion of the credit facility and was 0.30% as of March 28, 2018. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was set at LIBOR plus 200 basis points as of March 28, 2018. The maturity date for the credit facility is October 26, 2022.

27




The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by the Company and its material subsidiaries and is secured by assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We were in compliance with all financial covenants as of March 28, 2018.

Interest Rate Hedges

We have interest rate swaps to hedge a portion of the forecasted cash flows of our floating rate debt. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on specific notional debt obligations.

Under the interest rate swaps, we pay a fixed rate on the notional amount in addition to the current interest rate as determined by our consolidated leverage ratio in effect at the time. A summary of our interest rate swaps as of March 28, 2018 is as follows:

Trade Date
 
Effective Date
 
Maturity Date
 
Notional Amount
 
Fixed Rate
 
 
 
 
 
 
(In thousands)
 
 
April 30, 2013
 
March 31, 2015
 
March 29, 2018
 
$
120,000

 
1.13
%
March 20, 2015
 
March 29, 2018
 
March 31, 2025
 
120,000

 
2.44
%
October 1, 2015
 
March 29, 2018
 
March 31, 2026
 
50,000

 
2.46
%
February 15, 2018
 
March 31, 2020
 
December 31, 2033
 
80,000

(1) 
3.19
%

(1)
The notional amount of the swaps entered into on February 15, 2018 increases annually beginning September 28, 2020 until they reach the maximum notional amount of $425.0 million on September 26, 2029.

As of March 28, 2018, the fair value of the interest rate swaps was a net liability of $6.4 million, which is comprised of assets of $1.7 million recorded as a component of other noncurrent assets and liabilities of $8.1 million recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets.

Contractual Obligations

Other than the items discussed below, there have been no material changes in our total obligations during the quarter ended March 28, 2018 outside of the normal course of our business. See 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 27, 2017 for information concerning other future contractual obligations and commitments.
 
 
Payments Due by Period
 
Total
 
Less than 1 Year
 
1-2 Years
 
3-4 Years
 
5 Years and Thereafter
 
(In thousands)
Long-term debt 
$
282,000

 
$

 
$

 
$
282,000

 
$

Interest obligations (a)
54,698

 
11,934

 
23,868

 
18,896

 

Total 
$
336,698

 
$
11,934

 
$
23,868

 
$
300,896

 
$

 
(a)
Interest obligations represent payments related to our long-term debt outstanding at March 28, 2018. For long-term debt with variable rates, we have used the rate applicable at March 28, 2018 to project interest over the periods presented in the table above, taking into consideration the impact of the interest rate swaps for the applicable periods.


28



Implementation of New Accounting Standards

Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

As of March 28, 2018, interest rate swaps effectively increased our ratio of fixed rate debt from approximately 10% of total debt to approximately 48% of total debt. The current swap terminated on March 29, 2018 and two new swaps became effective. These swaps increase our ratio of fixed rate debt to approximately 64% of total debt. We expect to reclassify approximately $1.0 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. This amount will be included as a component of interest expense in our Condensed Consolidated Statements of Income. For additional information related to our interest rate swaps, including changes in the fair value, refer to Notes 8, 9 and 15 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this report.
 
Based on the levels of borrowings under the credit facility at March 28, 2018, if interest rates changed by 100 basis points, our annual cash flow and income before taxes would change by approximately $1.1 million. This computation is determined by considering the impact of hypothetical interest rates on the variable rate portion of the credit facility at March 28, 2018, taking into consideration the interest rate swaps that will be in effect during the annual period. However, the nature and amount of our borrowings may vary as a result of future business requirements, market conditions and other factors.

With the exception of the items noted above, there have been no material changes in our quantitative and qualitative market risks since the prior reporting period.
 
Item 4.     Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management conducted an evaluation (under the supervision and with the participation of our President and Chief Executive Officer, John C. Miller, and our Executive Vice President, Chief Administrative Officer and Chief Financial Officer, F. Mark Wolfinger) as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Messrs. Miller and Wolfinger each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Messrs. Miller and Wolfinger, as appropriate to allow timely decisions regarding required disclosure. 

During the first quarter of 2018, we implemented new controls in connection with our adoption of the Accounting Standards Updates related to Topic 606, Revenue from Contracts with Customers. There were no significant changes to our internal control over financial reporting due to the adoption of the new standards. There were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 16 to our unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report.

Item 1A.     Risk Factors

There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2017.


29



Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities by the Issuer
 
The table below provides information concerning repurchases of shares of our common stock during the quarter ended March 28, 2018
 
Period
 
Total Number of Shares Purchased
 
 Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs (2)
 
(In thousands, except per share amounts)
December 28, 2017 - January 24, 2018
281

 
$
14.46

 
281

 
$
192,249

January 25, 2018 - February 21, 2018
291

 
14.92

 
291

 
$
187,898

February 22, 2018 - March 28, 2018
500

 
15.52

 
500

 
$
180,127

Total
1,072

 
$
15.08

 
1,072

 
 

(1)
Average price paid per share excludes commissions.
(2)
On October 27, 2017, we announced that our Board of Directors approved a new share repurchase program, authorizing us to repurchase up to an additional $200 million of our common stock (in addition to prior authorizations). Such repurchases may take place from time to time in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended March 28, 2018, we purchased 1,071,910 shares of our common stock for an aggregate consideration of approximately $16.2 million pursuant to the share repurchase program.

Item 6.     Exhibits
 
The following are included as exhibits to this report: 
Exhibit No.
 
Description 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

30



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
DENNY'S CORPORATION
 
 
 
 
 
 
Date:
May 4, 2018
By:    
/s/ F. Mark Wolfinger
 
 
 
 
F. Mark Wolfinger
 
 
 
 
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
 
 
 
 
 
 
Date:
May 4, 2018
By:    
/s/ Jay C. Gilmore
 
 
 
 
Jay C. Gilmore
 
 
 
 
Vice President,
Chief Accounting Officer and
Corporate Controller
 

31