Company Quick10K Filing
Quick10K
Dennys
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.69 63 $1,110
10-Q 2018-09-26 Quarter: 2018-09-26
10-Q 2018-06-27 Quarter: 2018-06-27
10-Q 2018-03-28 Quarter: 2018-03-28
10-K 2017-12-27 Annual: 2017-12-27
10-Q 2017-09-27 Quarter: 2017-09-27
10-Q 2017-06-28 Quarter: 2017-06-28
10-Q 2017-03-29 Quarter: 2017-03-29
10-K 2016-12-28 Annual: 2016-12-28
10-Q 2016-09-28 Quarter: 2016-09-28
10-Q 2016-06-29 Quarter: 2016-06-29
10-Q 2016-03-30 Quarter: 2016-03-30
10-K 2015-12-30 Annual: 2015-12-30
8-K 2019-02-12 Earnings, Exhibits
8-K 2019-01-14 Earnings, Regulation FD, Exhibits
8-K 2018-11-15 Regulation FD, Other Events, Exhibits
8-K 2018-11-07 Amend Bylaw, Exhibits
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-08-20 Other Events
8-K 2018-08-14 Regulation FD, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-06-01 Other Events
8-K 2018-05-30 Regulation FD, Exhibits
8-K 2018-05-09 Shareholder Vote
8-K 2018-05-01 Earnings, Exhibits
8-K 2018-03-19 Other Events
8-K 2018-02-27 Regulation FD, Exhibits
8-K 2018-02-13 Earnings, Exhibits
8-K 2018-01-08 Earnings, Regulation FD, Exhibits
SONC Sonic
PZZA Papa John's
BJRI BJS Restaurants
LOCO El Pollo Loco
NYNY Empire Resorts
BH Biglari
ARKR Ark Restaurants
DAVE Famous Daves
KONA Kona Grill
BURG Chanticleer Holdings
DENN 2018-09-26
Part I - Financial Information
Item 1. Financial Statements
Note 1. Introduction and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Revenues
Note 4. Receivables
Note 5. Goodwill and Other Intangible Assets
Note 6. Other Current Liabilities
Note 7. Operating (Gains), Losses and Other Charges, Net
Note 8. Fair Value of Financial Instruments
Note 9. Long-Term Debt
Note 10. Share-Based Compensation
Note 11. Income Taxes
Note 12. Net Income per Share
Note 13. Supplemental Cash Flow Information
Note 14. Shareholders' Equity
Note 15. Commitments and Contingencies
Note 16. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 q32018ex101.htm
EX-10.2 q32018ex102.htm
EX-31.1 q32018ex311.htm
EX-31.2 q32018ex312.htm
EX-32.1 q32018ex321.htm

Dennys Earnings 2018-09-26

DENN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q3201810-q.htm 10-Q 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 September 26, 2018

OR

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

dennyslogo2017a06.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 every Interactive Data File required to be submitted 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 such files).
Yes  þ  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
¨
 
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 October 24, 2018, 62,587,274 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)
 
September 26, 2018
 
December 27, 2017
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,871

 
$
4,983

Investments
1,709

 

Receivables, net
17,186

 
21,384

Inventories
3,051

 
3,134

Assets held for sale
193

 

Prepaid and other current assets
10,495

 
11,788

Total current assets
34,505

 
41,289

Property, net of accumulated depreciation of $248,062 and $243,325, respectively
143,459

 
139,856

Goodwill
39,843

 
38,269

Intangible assets, net
59,907

 
57,109

Deferred financing costs, net
2,487

 
2,942

Deferred income taxes
15,595

 
16,945

Other noncurrent assets
32,962

 
27,372

Total assets
$
328,758

 
$
323,782

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of capital lease obligations
$
3,282

 
$
3,168

Accounts payable
20,327

 
32,487

Other current liabilities
53,911

 
59,246

Total current liabilities
77,520

 
94,901

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
278,000

 
259,000

Capital lease obligations, less current maturities
27,305

 
27,054

Liability for insurance claims, less current portion
12,025

 
12,236

Other noncurrent liabilities
43,888

 
27,951

Total long-term liabilities
361,218

 
326,241

Total liabilities
438,738

 
421,142

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity (deficit)
 

 
 

Common stock $0.01 par value; shares authorized - 135,000; September 27, 2018: 108,493 shares issued and 62,905 shares outstanding; December 27, 2017: 107,740 shares issued and 64,589 shares outstanding
$
1,085

 
$
1,077

Paid-in capital
597,344

 
594,166

Deficit
(317,917
)
 
(334,661
)
Accumulated other comprehensive income (loss), net of tax
2,541

 
(2,316
)
Shareholders’ equity before treasury stock
283,053

 
258,266

Treasury stock, at cost, 45,588 and 43,151 shares, respectively
(393,033
)
 
(355,626
)
Total shareholders' deficit
(109,980
)
 
(97,360
)
Total liabilities and shareholders' deficit
$
328,758

 
$
323,782


See accompanying notes

3



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

 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
103,609

 
$
97,915

 
$
307,543

 
$
290,049

Franchise and license revenue
54,414

 
34,469

 
163,087

 
103,621

Total operating revenue
158,023

 
132,384

 
470,630

 
393,670

Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
25,303

 
24,896

 
75,292

 
72,798

Payroll and benefits
41,041

 
37,332

 
123,332

 
113,221

Occupancy
6,083

 
5,054

 
17,165

 
15,291

Other operating expenses
15,419

 
14,040

 
45,490

 
39,544

Total costs of company restaurant sales
87,846

 
81,322

 
261,279

 
240,854

Costs of franchise and license revenue
28,174

 
9,493

 
85,779

 
29,483

General and administrative expenses
15,981

 
16,446

 
48,138

 
50,536

Depreciation and amortization
6,760

 
5,958

 
19,965

 
17,493

Operating (gains), losses and other charges, net
793

 
630

 
1,615

 
3,459

Total operating costs and expenses, net
139,554

 
113,849

 
416,776

 
341,825

Operating income
18,469

 
18,535

 
53,854

 
51,845

Interest expense, net
5,314

 
4,067

 
15,324

 
11,348

Other nonoperating income, net
(460
)
 
(286
)
 
(877
)
 
(1,053
)
Net income before income taxes
13,615

 
14,754

 
39,407

 
41,550

Provision for income taxes
2,810

 
5,429

 
7,217

 
15,103

Net income
$
10,805

 
$
9,325

 
$
32,190

 
$
26,447

 
 
 
 
 
 
 
 
Basic net income per share
$
0.17

 
$
0.14

 
$
0.50

 
$
0.38

Diluted net income per share
$
0.16

 
$
0.13

 
$
0.49

 
$
0.37

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
63,246

 
66,873

 
63,774

 
69,095

Diluted weighted average shares outstanding
65,522

 
69,210

 
66,122

 
71,377

 
See accompanying notes

4


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

 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(In thousands)
Net income
$
10,805

 
$
9,325

 
$
32,190

 
$
26,447

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax of $7, $9, $20 and $27, respectively
21

 
14

 
64

 
42

Recognition of unrealized gain (loss) on hedge transactions, net of tax of $1,583, $133, $1,673 and $(1,249), respectively
4,537

 
209

 
4,793

 
(1,958
)
Other comprehensive income (loss)
4,558

 
223

 
4,857

 
(1,916
)
Total comprehensive income
$
15,363

 
$
9,548

 
$
37,047

 
$
24,531


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
Income
(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

 

 

 

 

 
32,190

 

 
32,190

Other comprehensive income

 

 

 

 

 

 
4,857

 
4,857

Share-based compensation on equity classified awards, net

 

 

 

 
2,128

 

 

 
2,128

Purchase of treasury stock

 

 
(2,437
)
 
(37,407
)
 

 

 

 
(37,407
)
Issuance of common stock for share-based compensation
447

 
5

 

 

 
(5
)
 

 

 

Exercise of common stock options
306

 
3

 

 

 
1,055

 

 

 
1,058

Balance, September 26, 2018
108,493

 
$
1,085

 
(45,588
)
 
$
(393,033
)
 
$
597,344

 
$
(317,917
)
 
$
2,541

 
$
(109,980
)
 
See accompanying notes

6



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
32,190

 
$
26,447

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
19,965

 
17,493

Operating (gains), losses and other charges, net
1,615

 
3,459

Amortization of deferred financing costs
455

 
446

(Gain) loss on early extinguishments of debt and leases
(159
)
 
68

Deferred income tax expense
5,044

 
9,936

Share-based compensation
3,661

 
6,546

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
3,582

 
3,279

Inventories
83

 
(55
)
Other current assets
1,292

 
834

Other assets
(565
)
 
(5,068
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(11,948
)
 
(5,121
)
Accrued salaries and vacations
(858
)
 
(9,094
)
Accrued taxes
1,974

 
1,474

Other accrued liabilities
(7,733
)
 
(4,834
)
Other noncurrent liabilities
(2,339
)
 
(2,285
)
Net cash flows provided by operating activities
46,259

 
43,525

Cash flows from investing activities:
 
 
 
Capital expenditures
(17,294
)
 
(13,558
)
Acquisition of restaurants and real estate
(10,416
)
 
(10,043
)
Proceeds from disposition of property
969

 
2,318

Investment purchases
(1,709
)
 

Collections on notes receivable
2,478

 
3,773

Issuance of notes receivable
(2,525
)
 
(2,278
)
Net cash flows used in investing activities
(28,497
)
 
(19,788
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
91,000

 
105,900

Revolver payments
(72,000
)
 
(62,600
)
Long-term debt payments
(2,429
)
 
(2,467
)
Proceeds from exercise of stock options
1,058

 
173

Tax withholding on share-based payments
(1,714
)
 

Purchase of treasury stock
(37,108
)
 
(65,951
)
Net bank overdrafts
319

 
279

Net cash flows used in financing activities
(20,874
)
 
(24,666
)
Decrease in cash and cash equivalents
(3,112
)
 
(929
)
Cash and cash equivalents at beginning of period
4,983

 
2,592

Cash and cash equivalents at end of period
$
1,871

 
$
1,663

 
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 September 26, 2018, the Denny's brand consisted of 1,715 restaurants, 1,534 of which were franchised/licensed restaurants and 181 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 ("ASU") 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 a company 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 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.

8




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 of the 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 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.

Effective September 26, 2018, we early adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirements on fair value measurements. The adoption of this guidance did not have any impact on our disclosures.

Effective September 26, 2018, we early adopted ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. The adoption of this guidance will have an immaterial impact on our annual disclosures.

Effective September 26, 2018, we early adopted ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance was adopted on a prospective basis and did not have a material impact on our Consolidated Financial Statements.

Additional new accounting guidance became effective for us as of December 28, 2017 that we reviewed and concluded was either not applicable to our operations or had no material effect on the our Consolidated Financial Statements and related disclosures.

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 a right-of-use asset and a lease liability for all operating and capital (financing) leases with lease terms greater than 12 months. The FASB has subsequently amended this guidance by issuing ASU 2018-10 and ASU 2018-11 in July 2018 to provide clarification and further guidance around areas identified as potential implementation issues and to allow an alternative transition method. The alternative transition method allows entities to initially apply the new leases standard at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than retroactive restatement of all periods presented. All of the standards are effective for annual and interim periods beginning after December 15, 2018 (our fiscal 2019) with early adoption permitted. The guidance will be adopted using the alternative transition method.

The adoption of ASU 2016-02 will have a material impact on our Consolidated Balance Sheets resulting from the recognition of operating lease right-of-use assets and liabilities. Although the new guidance is also expected to impact the measurement and presentation of certain expenses and cash flows related to leasing arrangements, we do not believe there will be a material impact to our Consolidated Statements of Income or Consolidated Statements of Cash Flows. We do not expect the recognition of the additional operating lease liabilities will impact any credit facility debt covenants as these liabilities are not considered to be debt.

We have decided to elect the package of practical expedients that do not require us to reassess whether existing contracts are or contain leases, lease classification or initial direct costs. In addition, we have decided not to elect the hindsight practical expedient which would allow us to reassess lease terms and impairment of the right-to-use assets. We have completed the implementation of a new lease management system in preparation for adoption and continue to assess the impact that the new guidance will have on our financial statements and related disclosures.

9




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.

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
Three Quarters Ended
 
September 26, 2018
September 27, 2017 (1)
September 26, 2018
September 27, 2017 (1)
 
(Dollars in thousands)
Company restaurant sales
$
103,609

 
$
97,915

 
$
307,543

 
$
290,049

Franchise and license revenue:
 
 
 
 
 
 
 
Royalties
25,518

 
25,174

 
75,875

 
75,056

Advertising revenue
19,546

 

 
58,386

 

Initial and other fees
1,415

 
507

 
4,642

 
1,579

Occupancy revenue 
7,935

 
8,788

 
24,184

 
26,986

Franchise and license revenue 
54,414

 
34,469

 
163,087

 
103,621

Total operating revenue
$
158,023

 
$
132,384

 
$
470,630

 
$
393,670


(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.

Under franchise agreements we provide franchisees with a license of our brand’s symbolic intellectual property, administration of advertising programs (including local co-operatives), and other ongoing support functions. These services are highly interrelated so we do not consider them to be individually distinct performance obligations, 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.


10



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 obligation 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”). 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.
Initial and other fees also includes revenue that are distinct from the franchise agreement and are separate performance obligations. 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.

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).
Financial Statement Impact of Adoption
The following tables summarize the impact of adopting Topic 606 on our financial statement line items as of September 26, 2018 and for the quarter and three quarters ended September 26, 2018.

 
Quarter ended September 26, 2018
Consolidated Balance Sheet
As Reported
 
Adjustments
 
Amounts without adoption of Topic 606
 
(In thousands)
Prepaid and other current assets
$
10,495

 
$
509

 
$
11,004

Deferred income taxes
15,595

 
(5,040
)
 
10,555

Other current liabilities
53,911

 
(360
)
 
53,551

Other noncurrent liabilities
43,888

 
(18,618
)
 
25,270

Deficit
(317,917
)
 
14,447

 
(303,470
)


11



 
Quarter ended September 26, 2018
 
Three quarters ended September 26, 2018
Consolidated Statement of Income
As Reported
 
Adjustments
 
Amounts without adoption of Topic 606
 
As Reported
 
Adjustments
 
Amounts without adoption of Topic 606
 
(In thousands, except per share amounts)
Franchise and license revenue
$
54,414

 
$
(20,397
)
 
$
34,017

 
$
163,087

 
$
(61,653
)
 
$
101,434

Costs of franchise and license revenue
28,174

 
(20,007
)
 
8,167

 
85,779

 
(60,306
)
 
25,473

Provision for income taxes
2,810

 
(101
)
 
2,709

 
7,217

 
(348
)
 
6,869

Net income
10,805

 
(289
)
 
10,516

 
32,190

 
(999
)
 
31,191

Basic net income per share
$
0.17

 
$

 
$
0.17

 
$
0.50

 
$
(0.01
)
 
$
0.49

Diluted net income per share
$
0.16

 
$

 
$
0.16

 
$
0.49

 
$
(0.02
)
 
$
0.47


 
Quarter ended September 26, 2018
 
Three quarters ended September 26, 2018
Consolidated Statement of Comprehensive Income
As Reported
 
Adjustments
 
Amounts without adoption of Topic 606
 
As Reported
 
Adjustments
 
Amounts without adoption of Topic 606
 
(In thousands)
Net income
$
10,805

 
$
(289
)
 
$
10,516

 
$
32,190

 
$
(999
)
 
$
31,191

Total comprehensive income
15,363

 
(289
)
 
15,074

 
37,047

 
(999
)
 
36,048


 
Three quarters ended September 26, 2018
Consolidated Statement of Cash Flow
As Reported
 
Adjustments
 
Amounts without adoption of Topic 606
 
(In thousands)
Net income
$
32,190

 
$
(999
)
 
$
31,191

Deferred income tax expense
5,044

 
(348
)
 
4,696

Changes in assets and liabilities:
 
 
 
 
 
Other current assets
1,292

 
(509
)
 
783

Other accrued liabilities
(7,733
)
 
621

 
(7,112
)
Other noncurrent liabilities
(2,339
)
 
1,235

 
(1,104
)
Net cash flows provided by operating activities
46,259

 

 
46,259


The following significant changes impacted our financial statement line items as of September 26, 2018 and for the quarter and three quarters ended September 26, 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.

12



We recognized franchise and license revenue and costs of franchise and license revenue of $19.5 million for the quarter and $58.4 million year-to-date 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 additional franchise and license revenue of $0.4 million for the quarter and $1.4 million year-to-date under Topic 606 than we would have recognized under Topic 605, resulting from the timing of recognition of initial franchise fees.

We recognized franchise and license revenue and costs of franchise and license revenue of $0.5 million for the quarter and $1.9 million year-to-date 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 sales-based royalties and advertising. The components of the change in deferred franchise revenue are as follows:

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

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

Fees received from franchisees
795

Revenue recognized (1)
(2,628
)
Balance, September 26, 2018
20,786

Less current portion included in other current liabilities
2,168

Deferred franchise revenue included in other noncurrent liabilities
$
18,618


(1) Of this amount $2.6 million was included in either the deferred franchise revenue balance as of December 27, 2017 or the cumulative effect adjustment.

As of September 26, 2018, the deferred franchise revenue expected to be recognized in the future is as follows:

 
(In thousands)
Remainder of 2018
$
546

2019
2,114

2020
1,967

2021
1,783

2022
1,675

Thereafter
12,701

Deferred franchise revenue
$
20,786


Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. We recognize 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 September 26, 2018 and December 27, 2017 was $4.1 million and $6.5 million, respectively. During the three quarters ended September 26, 2018, we recognized revenue of $1.4 million from gift card redemptions at company restaurants.


13



Note 4.     Receivables
 
Receivables were comprised of the following:
 
 
September 26, 2018
 
December 27, 2017
 
(In thousands)
Receivables, net:
 
 
 
Trade accounts receivable from franchisees
$
9,267

 
$
10,688

Financing receivables from franchisees
3,559

 
5,084

Vendor receivables
2,039

 
3,256

Credit card receivables
1,030

 
1,870

Other
1,566

 
762

Allowance for doubtful accounts
(275
)
 
(276
)
Total receivables, net
$
17,186

 
$
21,384

 
 
 
 
Other noncurrent assets:
 
 
 
Financing receivables from franchisees
$
1,110

 
$
427


During the three quarters ended September 26, 2018, we recorded an allowance for doubtful accounts of $0.2 million of financing receivables from a franchisee.

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 acquisitions
1,574

Balance, September 26, 2018
$
39,843


Other intangible assets were comprised of the following:
 
 
September 26, 2018
 
December 27, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,087

 
$

 
$
44,080

 
$

Liquor licenses
166

 

 
166

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Reacquired franchise rights
20,121

 
4,467

 
15,252

 
2,389

Intangible assets, net
$
64,374

 
$
4,467

 
$
59,498

 
$
2,389

 
During the three quarters ended September 26, 2018, we acquired six franchised restaurants for $8.1 million, of which $5.4 million was allocated to reacquired franchise rights, $1.1 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.


14



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

 
September 26, 2018
 
December 27, 2017
 
(In thousands)
Accrued payroll
$
20,214

 
$
20,998

Accrued insurance, primarily current portion of liability for insurance claims
7,067

 
6,922

Accrued taxes
9,358

 
7,384

Accrued advertising
4,738

 
8,417

Gift cards
4,129

 
6,480

Other
8,405

 
9,045

Other current liabilities
$
53,911

 
$
59,246


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

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(In thousands)
Software implementation costs
$

 
$
1,001

 
$

 
$
4,669

Gains on sales of assets and other, net
(695
)
 
(411
)
 
(759
)
 
(1,646
)
Restructuring charges and exit costs
48

 
40

 
816

 
436

Impairment charges
1,440

 

 
1,558

 

Operating (gains), losses and other charges, net
$
793

 
$
630

 
$
1,615

 
$
3,459

 
Software implementation costs of $4.7 million for the three quarters ended September 27, 2017 were the result of our investment in a new cloud-based Enterprise Resource Planning system. Gains on sales of assets and other, net for the quarter and three quarters ended September 26, 2018 primarily related to insurance settlements on fire-damaged restaurants. Gains on sales of assets and other, net of $1.6 million for the three quarters ended September 27, 2017 primarily related to real estate sold to franchisees.

Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(In thousands)
Exit costs
$
48

 
$
40

 
$
347

 
$
366

Severance and other restructuring charges

 

 
469

 
70

Total restructuring charges and exit costs
$
48

 
$
40

 
$
816

 
$
436



15



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

Exit costs (1)
347

Payments, net of sublease receipts
(440
)
Interest accretion
57

Balance, September 26, 2018
1,144

Less current portion included in other current liabilities
489

Long-term portion included in other noncurrent liabilities
$
655


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

As of September 26, 2018 and December 27, 2017, we had accrued severance and other restructuring charges of $0.1 million and less than $0.1 million, respectively. The balance as of September 26, 2018 is expected to be paid during the next 12 months.

Impairment charges for the quarter and three quarters ended September 26, 2018 primarily resulted from the impairment of an underperforming unit.

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)
 
(In thousands)
Fair value measurements as of September 26, 2018:
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
12,808

 
$
12,808

 
$

 
$

Interest rate swaps, net (2)
4,280

 

 
4,280

 

Investments (3)
1,709

 

 
1,709

 

Total
$
18,797

 
$
12,808

 
$
5,989

 
$

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

 
$
12,663

 
$

 
$

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

 
(2,187
)
 

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.
(3)
The fair value of investments is valued using a readily determinable net asset value per share based on the fair value of the underlying securities. There are no significant redemption restrictions associated with these investments.


16



Note 9.     Long-Term Debt

Denny's 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 September 26, 2018, we had outstanding revolver loans of $278.0 million and outstanding letters of credit under the senior secured revolver of $19.8 million. These balances resulted in availability of $102.2 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 4.12% and 3.42% as of September 26, 2018 and December 27, 2017, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 4.35% and 3.32% as of September 26, 2018 and December 27, 2017, respectively.

A commitment fee, which is based on our consolidated leverage ratio, is paid on the unused portion of the credit facility and was 0.30% as of September 26, 2018. Borrowings under the credit facility bear a tiered interest rate, also based on our leverage ratio, and was set at LIBOR plus 200 basis points as of September 26, 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 Denny's and its material subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than our insurance captive subsidiary). 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 September 26, 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 forecasted 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 September 26, 2018 is as follows:

Trade Date
 
Effective Date
 
Maturity Date
 
Notional Amount
 
Fixed Rate
 
 
 
 
 
 
(In thousands)
 
 
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 September 26, 2018, the fair value of the interest rate swaps was a net asset of $4.3 million, which is comprised of assets of $5.2 million recorded as a component of other noncurrent assets and liabilities of $0.9 million recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets. See Note 14 for the amounts recorded in accumulated other comprehensive loss related to the interest rate swaps.


17



Note 10.     Share-Based Compensation

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

 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(In thousands)
Performance share awards
$
902

 
$
2,246

 
$
2,922

 
$
6,090

Restricted stock units for board members
198

 
247

 
739

 
456

Total share-based compensation
$
1,100

 
$
2,493

 
$
3,661

 
$
6,546

 
Performance Share Units
 
During the three quarters ended September 26, 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 three quarters ended September 26, 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 September 26, 2018, we had approximately $9.3 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which have a weighted average remaining contractual term of 1.2 years.
 
Restricted Stock Units for Board Members

During the three quarters ended September 26, 2018, we granted less than 0.1 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $15.50 per unit to non-employee members of our Board of Directors. The deferred stock units vest after a one year service period. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of our Board of Directors) or upon termination as a member of our Board of Directors. During the three quarters ended September 26, 2018, 0.2 million deferred stock units were converted into shares of common stock. As of September 26, 2018, we had approximately $0.6 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which have a weighted average remaining contractual term of 0.6 years.
 
Note 11.     Income Taxes

The effective income tax rate was 20.6% for the quarter ended September 26, 2018 and 18.3% for the three quarters ended September 26, 2018 compared to 36.8% and 36.3%, respectively, for the prior year periods. The 2018 periods were impacted by the Tax Act. In addition, the 2018 quarterly and year-to-date rates benefited from a discrete item relating to share-based compensation of 0.4% and 3.1%, respectively. 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.
 

18



Note 12.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(In thousands, except for per share amounts)
Net income
$
10,805

 
$
9,325

 
$
32,190

 
$
26,447

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
63,246

 
66,873

 
63,774

 
69,095

Effect of dilutive share-based compensation awards
2,276

 
2,337

 
2,348

 
2,282

Weighted average shares outstanding - diluted
65,522

 
69,210

 
66,122

 
71,377

 
 
 
 
 
 
 
 
Basic net income per share
$
0.17

 
$
0.14

 
$
0.50

 
$
0.38

Diluted net income per share
$
0.16

 
$
0.13

 
$
0.49

 
$
0.37

 
 
 
 
 
 
 
 
Anti-dilutive share-based compensation awards

 
606

 
471

 
606

    
Note 13.     Supplemental Cash Flow Information

 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
(In thousands)
Income taxes paid, net
$
2,347

 
$
5,039

Interest paid
$
14,349

 
$
10,547

 
 
 
 
Noncash investing and financing activities:
 
 
 
Property acquisition payable
$

 
$
500

Insurance proceeds receivable
$
19

 
$

Issuance of common stock, pursuant to share-based compensation plans
$
4,671

 
$
4,961

Execution of capital leases
$
2,850

 
$
4,959

Treasury stock payable
$
419

 
$
741

Notes received in connection with disposition of property
$

 
$
1,750

 
Note 14.     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 three quarters ended September 26, 2018, we repurchased 2.4 million shares of our common stock for approximately $37.4 million. This brings the total amount repurchased under the current repurchase program to 2.7 million shares of our common stock for approximately $41.1 million, leaving approximately $158.9 million that can be used to repurchase our common stock under this program as of September 26, 2018. Repurchased shares are included as treasury stock in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statement of Shareholders' Equity.

19




Accumulated Other Comprehensive Income (Loss)

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

 
Defined Benefit Plans
 
Derivatives
 
Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of December 27, 2017
$
(982
)
 
$
(1,334
)
 
$
(2,316
)
Amortization of net loss (1)
84

 

 
84

Net change in fair value of derivatives

 
6,225

 
6,225

Reclassification of derivatives to interest expense, net (2)

 
241

 
241

Income tax (expense) benefit related to items of other comprehensive loss
(20
)
 
(1,673
)
 
(1,693
)
Balance as of September 26, 2018
$
(918
)
 
$
3,459

 
$
2,541


(1)
Before-tax amount related to our 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 three quarters ended September 26, 2018.
(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 $0.6 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. See Note 9 for additional details.

Note 15.     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 September 26, 2018, no events had occurred that caused us to make payments under these guarantees. There were $2.8 million and $5.1 million of loans outstanding under these programs as of September 26, 2018 and December 27, 2017, respectively. As of September 26, 2018, the maximum amount payable under the loan guarantees was $0.9 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both September 26, 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 16.     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
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
103,609

 
65.6
 %
 
$
97,915

 
74.0
 %
 
$
307,543

 
65.3
 %
 
$
290,049

 
73.7
 %
Franchise and license revenue
54,414

 
34.4
 %
 
34,469

 
26.0
 %
 
163,087

 
34.7
 %
 
103,621

 
26.3
 %
Total operating revenue
158,023

 
100.0
 %
 
132,384

 
100.0
 %
 
470,630

 
100.0
 %
 
393,670

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Product costs
25,303

 
24.4
 %
 
24,896

 
25.4
 %
 
75,292

 
24.5
 %
 
72,798

 
25.1
 %
Payroll and benefits
41,041

 
39.6
 %
 
37,332

 
38.1
 %
 
123,332

 
40.1
 %
 
113,221

 
39.0
 %
Occupancy
6,083

 
5.9
 %
 
5,054

 
5.2
 %
 
17,165

 
5.6
 %
 
15,291

 
5.3
 %
Other operating expenses
15,419

 
14.9
 %
 
14,040

 
14.3
 %
 
45,490

 
14.8
 %
 
39,544

 
13.6
 %
Total costs of company restaurant sales
87,846

 
84.8
 %
 
81,322

 
83.1
 %
 
261,279

 
85.0
 %
 
240,854

 
83.0
 %
Costs of franchise and license revenue (a)
28,174

 
51.8
 %
 
9,493

 
27.5
 %
 
85,779

 
52.6
 %
 
29,483

 
28.5
 %
General and administrative expenses
15,981

 
10.1
 %
 
16,446

 
12.4
 %
 
48,138

 
10.2
 %
 
50,536

 
12.8
 %
Depreciation and amortization
6,760

 
4.3
 %
 
5,958

 
4.5
 %
 
19,965

 
4.2
 %
 
17,493

 
4.4
 %
Operating (gains), losses and other charges, net
793

 
0.5
 %
 
630

 
0.5
 %
 
1,615

 
0.3
 %
 
3,459

 
0.9
 %
Total operating costs and expenses, net
139,554

 
88.3
 %
 
113,849

 
86.0
 %
 
416,776

 
88.6
 %
 
341,825

 
86.8
 %
Operating income
18,469

 
11.7
 %
 
18,535

 
14.0
 %
 
53,854

 
11.4
 %
 
51,845

 
13.2
 %
Interest expense, net
5,314

 
3.4
 %
 
4,067

 
3.1
 %
 
15,324

 
3.3
 %
 
11,348

 
2.9
 %
Other nonoperating income, net
(460
)
 
(0.3
)%
 
(286
)
 
(0.2
)%
 
(877
)
 
(0.2
)%
 
(1,053
)
 
(0.3
)%
Net income before income taxes
13,615

 
8.6
 %
 
14,754

 
11.1
 %
 
39,407

 
8.4
 %
 
41,550

 
10.6
 %
Provision for income taxes
2,810

 
1.8
 %
 
5,429

 
4.1
 %
 
7,217

 
1.5
 %
 
15,103

 
3.8
 %
Net income
$
10,805

 
6.8
 %
 
$
9,325

 
7.0
 %
 
$
32,190

 
6.8
 %
 
$
26,447

 
6.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Company average unit sales
$
582

 
 

 
$
577

 
 

 
$
1,716

 
 

 
$
1,706

 
 

Franchise average unit sales
$
409

 
 

 
$
403

 
 

 
$
1,207

 
 

 
$
1,188

 
 

Company equivalent units (b)
178

 
 

 
170

 
 

 
179

 
 

 
170

 
 

Franchise equivalent units (b)
1,536

 
 

 
1,550

 
 

 
1,541

 
 

 
1,557

 
 

Company same-store sales increase (c)(d)
2.1
%
 
 

 
0.6
%
 
 

 
1.7
%
 
 

 
0.6
%
 
 

Domestic franchise same-store sales increase (c)(d)
0.8
%
 
 

 
0.6
%
 
 

 
0.4
%
 
 

 
0.7
%
 
 

            
(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
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
Company restaurants, beginning of period
180

 
172

 
178

 
169

Units opened
1

 
1

 
1

 
2

Units acquired from franchisees

 
1

 
6

 
7

Units sold to franchisees

 

 

 
(4
)
Units closed

 

 
(4
)
 

End of period
181

 
174

 
181

 
174

 
 
 
 
 
 
 
 
Franchised and licensed restaurants, beginning of period
1,540

 
1,552

 
1,557

 
1,564

Units opened 
6

 
8

 
24

 
23

Units purchased from Company

 

 

 
4

Units acquired by Company

 
(1
)
 
(6
)
 
(7
)
Units closed
(12
)
 
(8
)
 
(41
)
 
(33
)
End of period
1,534

 
1,551

 
1,534

 
1,551

Total restaurants, end of period
1,715

 
1,725

 
1,715

 
1,725


Company Restaurant Operations
 
During the quarter ended September 26, 2018, company restaurant sales increased $5.7 million, or 5.8%, primarily resulting from an eight equivalent unit increase in company restaurants as compared to the prior year period and a 2.1% increase in company same-store sales. During the three quarters ended September 26, 2018, company restaurant sales increased $17.5 million, or 6.0%, primarily resulting from a nine equivalent unit increase in company restaurants as compared to the prior year period and a 1.7% increase in company same-store sales.
 
Total costs of company restaurant sales as a percentage of company restaurant sales increased to 84.8% for the quarter and 85.0% year-to-date from 83.1% and 83.0%, respectively, in the prior year periods.

Product costs were 24.4% for the quarter and 24.5% year-to-date compared to 25.4% and 25.1%, respectively, for the prior year periods. The decrease for the quarter was primarily due to leverage gained from increased pricing and lower commodity costs. The decrease year-to-date was primarily due to leverage gained from increased pricing.

Payroll and benefits were 39.6% for the quarter and 40.1% year-to-date compared to 38.1% and 39.0%, respectively, in the prior year periods. The increase for the quarter was primarily due to a 0.6 percentage point increase in workers' compensation costs and a 0.7 percentage point increase in labor costs partially resulting from minimum wage increases. The quarter ended September 26, 2018 included $0.7 million in favorable workers' compensation experience, as compared to $1.3 million of favorable workers' compensation experience in the prior year period. The increase year-to-date was primarily due to a 0.9 percentage point increase in labor costs resulting from minimum wage increases and a 0.3 percentage point increase in workers' compensation costs. The three quarters ended September 26, 2018 included $0.6 million in favorable workers' compensation experience, as compared to $1.6 million of favorable workers' compensation experience in the prior year period.

Occupancy costs were 5.9% for the quarter and 5.6% year-to-date compared to 5.2% and 5.3%, respectively, for the prior year periods. The increases for the quarter and year-to-date periods were primarily related to increases in general liability insurance costs, as the current year periods included negative claims development of $0.4 million and $0.3 million, respectively, and the prior year periods included favorable claims development of $0.2 million and $0.5 million, respectively.


23



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

 
Quarter Ended
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018
 
September 27, 2017
 
(Dollars in thousands)
Utilities
$
3,926

 
3.8
%
 
$
3,767

 
3.8
%
 
$
10,690

 
3.5
%
 
$
9,873

 
3.4
%
Repairs and maintenance
1,870

 
1.8
%
 
1,642

 
1.7
%
 
5,647

 
1.8
%
 
4,972

 
1.7
%
Marketing
3,791

 
3.7
%
 
3,740

 
3.8
%
 
11,267

 
3.7
%
 
10,982

 
3.8
%
Other direct costs
5,832

 
5.6
%
 
4,891

 
5.0
%
 
17,886

 
5.8
%
 
13,717

 
4.7
%
Other operating expenses
$
15,419

 
14.9
%
 
$
14,040

 
14.3
%
 
$
45,490

 
14.8
%
 
$
39,544

 
13.6
%

The increase in other direct costs was primarily related to increased delivery sales resulting in higher third party delivery fees of $0.7 million for the quarter and $2.2 million year-to-date.

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
 
Three Quarters Ended
 
September 26, 2018
 
September 27, 2017
 
September 26, 2018