10-Q 1 denn-20230927.htm 10-Q denn-20230927
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________

Commission File Number 0-18051

Dennys.gif

DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
203 East Main Street
Spartanburg, South Carolina29319-0001
(Address of principal executive offices)(Zip Code)
(864) 597-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s) Name of each exchange on which registered
$.01 Par Value, Common StockDENN The Nasdaq Stock Market LLC
 
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  ý 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  ý  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 FilerAccelerated FilerýNon-Accelerated FilerSmaller Reporting CompanyEmerging 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  ý

As of October 26, 2023, 53,085,444 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.



TABLE OF CONTENTS
 
2


PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 September 27, 2023December 28, 2022
 (In thousands, except per share amounts)
Assets  
Current assets:  
Cash and cash equivalents$1,022 $3,523 
Investments1,255 1,746 
Receivables, net16,950 25,576 
Inventories2,354 5,538 
Assets held for sale1,557 1,403 
Prepaid and other current assets11,816 12,529 
Total current assets34,954 50,315 
Property, net of accumulated depreciation of $158,275 and $153,334, respectively
91,248 94,469 
Finance lease right-of-use assets, net of accumulated amortization of $9,205 and $9,847, respectively
5,988 6,499 
Operating lease right-of-use assets, net119,436 126,065 
Goodwill72,142 72,740 
Intangible assets, net93,845 95,034 
Deferred financing costs, net1,861 2,337 
Other noncurrent assets60,361 50,876 
Total assets$479,835 $498,335 
Liabilities  
Current liabilities:  
Current finance lease liabilities$1,393 $1,683 
Current operating lease liabilities14,917 15,310 
Accounts payable15,560 19,896 
Other current liabilities59,071 56,762 
Total current liabilities90,941 93,651 
Long-term liabilities:  
Long-term debt248,100 261,500 
Noncurrent finance lease liabilities9,094 9,555 
Noncurrent operating lease liabilities117,027 123,404 
Liability for insurance claims, less current portion6,693 7,324 
Deferred income taxes, net12,867 7,419 
Other noncurrent liabilities30,911 32,598 
Total long-term liabilities424,692 441,800 
Total liabilities515,633 535,451 
Shareholders' deficit  
Common stock $0.01 par value; 135,000 shares authorized; September 27, 2023: 65,711 shares issued and 54,031 outstanding; December 28, 2022: 64,998 shares issued and 56,728 shares outstanding
$657 $650 
Paid-in capital147,393 142,136 
Deficit(24,686)(41,729)
Accumulated other comprehensive loss, net(27,760)(42,697)
Treasury stock, at cost, 11,680 and 8,270 shares, respectively
(131,402)(95,476)
Total shareholders' deficit(35,798)(37,116)
Total liabilities and shareholders' deficit$479,835 $498,335 

See accompanying notes
3


Denny’s Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands, except per share amounts)
Revenue:   
Company restaurant sales$53,153 $52,211 $161,486 $145,354 
Franchise and license revenue61,030 65,245 187,083 190,226 
Total operating revenue114,183 117,456 348,569 335,580 
Costs of company restaurant sales, excluding depreciation and amortization:
    
Product costs13,587 14,462 41,796 38,874 
Payroll and benefits19,754 20,176 60,482 55,598 
Occupancy4,182 4,294 12,381 11,316 
Other operating expenses8,370 9,519 24,294 26,116 
Total costs of company restaurant sales, excluding depreciation and amortization45,893 48,451 138,953 131,904 
Costs of franchise and license revenue, excluding depreciation and amortization29,810 34,579 92,657 100,513 
General and administrative expenses18,237 16,607 58,515 50,188 
Depreciation and amortization3,605 3,914 10,878 11,052 
Operating (gains), losses and other charges, net
2,620 (1,897)2,467 (1,051)
Total operating costs and expenses, net
100,165 101,654 303,470 292,606 
Operating income14,018 15,802 45,099 42,974 
Interest expense, net4,381 3,691 13,288 9,529 
Other nonoperating expense (income), net43 (10,461)9,470 (49,871)
Income before income taxes9,594 22,572 22,341 83,316 
Provision for income taxes1,686 5,489 5,298 21,375 
Net income$7,908 $17,083 $17,043 $61,941 
Net income per share - basic$0.14 $0.29 $0.30 $1.01 
Net income per share - diluted$0.14 $0.29 $0.30 $1.00 
Basic weighted average shares outstanding
55,869 59,020 56,764 61,558 
Diluted weighted average shares outstanding
56,082 59,040 56,973 61,686 
 
See accompanying notes
4


Denny’s Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Net income$7,908 $17,083 $17,043 $61,941 
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment, net of tax of $4, $8, $30 and $23, respectively
9 23 86 69 
Changes in the fair value of cash flow hedges, net of tax of $4,597, $956, $5,893 and $3,242, respectively
13,516 2,868 17,328 9,723 
Reclassification of cash flow hedges to interest expense, net of tax of $(352), $27, $(901) and $455, respectively
(1,034)80 (2,650)1,363 
Amortization of unrealized losses related to interest rate swaps to interest expense, net of tax of $24, $3, $59 and $4, respectively
70 7 173 12 
Other comprehensive income12,561 2,978 14,937 11,167 
Total comprehensive income$20,469 $20,061 $31,980 $73,108 

See accompanying notes
5


Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Quarters Ended September 27, 2023 and September 28, 2022
(Unaudited)
 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, June 28, 202365,708 $657 (10,000)$(114,866)$144,506 $(32,594)$(40,321)$(42,618)
Net income— — — — — 7,908 — 7,908 
Other comprehensive income— — — — — — 12,561 12,561 
Share-based compensation on equity classified awards, net of withholding tax— — — — 2,887 — — 2,887 
Purchase of treasury stock, including excise tax— — (1,680)(16,536)— — — (16,536)
Issuance of common stock for share-based compensation3 — — — — — — — 
Balance, September 27, 2023
65,711 $657 (11,680)$(131,402)$147,393 $(24,686)$(27,760)$(35,798)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, June 29, 202264,998 $650 (6,654)$(79,841)$138,347 $(71,583)$(46,281)$(58,708)
Net income— — — — — 17,083 — 17,083 
Other comprehensive income— — — — — — 2,978 2,978 
Share-based compensation on equity classified awards, net of withholding tax— — — — 1,887 — — 1,887 
Purchase of treasury stock— — (843)(7,870)— — — (7,870)
Balance, September 28, 2022
64,998 $650 (7,497)$(87,711)$140,234 $(54,500)$(43,303)$(44,630)

See accompanying notes





6


Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Three Quarters Ended September 27, 2023 and September 28, 2022
(Unaudited)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 28, 202264,998 $650 (8,270)$(95,476)$142,136 $(41,729)$(42,697)$(37,116)
Net income— — — — — 17,043 — 17,043 
Other comprehensive income— — — — — — 14,937 14,937 
Share-based compensation on equity classified awards, net of withholding tax
— — — — 5,264 — — 5,264 
Purchase of treasury stock, including excise tax— — (3,410)(35,926)— — — (35,926)
Issuance of common stock for share-based compensation713 7 — — (7)— —  
Balance, September 27, 2023
65,711 $657 (11,680)$(131,402)$147,393 $(24,686)$(27,760)$(35,798)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 29, 202164,200 $642 (1,990)$(30,592)$135,596 $(116,441)$(54,470)$(65,265)
Net income— — — — — 61,941 — 61,941 
Other comprehensive income— — — — — — 11,167 11,167 
Share-based compensation on equity classified awards, net of withholding tax
— — — — 4,646 — — 4,646 
Purchase of treasury stock— — (5,507)(57,119)— — — (57,119)
Issuance of common stock for share-based compensation798 8 — — (8)— —  
Balance, September 28, 2022
64,998 $650 (7,497)$(87,711)$140,234 $(54,500)$(43,303)$(44,630)

See accompanying notes





7


Denny’s Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Three Quarters Ended
 September 27, 2023September 28, 2022
 (In thousands)
Cash flows from operating activities:  
Net income$17,043 $61,941 
Adjustments to reconcile net income to cash flows provided by operating activities:  
Depreciation and amortization10,878 11,052 
Operating (gains), losses and other charges, net2,467 (1,051)
Losses (gains) and amortization on interest rate swaps, net10,838 (52,678)
Amortization of deferred financing costs476 475 
(Gains) losses on investments(59)289 
Gains on early termination of debt and leases (29)
Deferred income tax expense369 15,669 
Share-based compensation expense8,477 9,467 
Changes in assets and liabilities, excluding acquisitions and dispositions:  
Receivables8,235 (4,788)
Inventories3,184 (3,866)
Prepaids and other current assets712 1,683 
Other noncurrent assets(902)3,189 
   Operating lease assets and liabilities(479)(560)
Accounts payable(7,079)(3,115)
Other accrued liabilities(1,319)(3,483)
Other noncurrent liabilities(2,073)(9,245)
Net cash flows provided by operating activities50,768 24,950 
Cash flows from investing activities:  
Capital expenditures(5,499)(10,146)
Acquisition of restaurant and real estate(1,227)(750)
Acquisition of Keke's Breakfast Cafe (81,500)
Initial operating lease direct costs(400) 
Proceeds from sales of restaurants, real estate and other assets3,161 4,114 
Investment purchases(1,300)(1,200)
Proceeds from sale of investments1,850 1,700 
Refund of deposits for real estate acquisitions 3,624 
Collections on notes receivable391 184 
Net cash flows used in investing activities(3,024)(83,974)
Cash flows from financing activities:  
Revolver borrowings100,300 156,325 
Revolver payments(113,700)(59,825)
Repayments of finance leases(1,359)(1,513)
Tax withholding on share-based payments(3,007)(4,781)
Purchase of treasury stock(35,415)(57,460)
Net bank overdrafts2,936  
Net cash flows (used in) provided by financing activities(50,245)32,746 
Decrease in cash and cash equivalents(2,501)(26,278)
Cash and cash equivalents at beginning of period3,523 30,624 
Cash and cash equivalents at end of period$1,022 $4,346 

See accompanying notes
8


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

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. As of September 27, 2023, the Company consisted of 1,644 restaurants, 1,570 of which were franchised/licensed restaurants and 74 of which were company operated.

The Company consists of the Denny’s brand ("Denny's") and the Keke’s Breakfast Café brand (“Keke’s”). Keke’s was acquired on July 20, 2022. As of September 27, 2023, the Denny's brand consisted of 1,588 restaurants, 1,522 of which were franchised/licensed restaurants and 66 of which were company operated. At September 27, 2023, the Keke's brand consisted of 56 restaurants, 48 of which were franchised restaurants and eight of which were company operated.

Our unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. 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 are reasonable.

These interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto as of and for the fiscal year ended December 28, 2022 which are contained in our audited Annual Report on Form 10-K for the fiscal year ended December 28, 2022. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 27, 2023. Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective rate.

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which was later clarified in January 2021 by ASU 2021-01, “Reference Rate Reform (Topic 848): Scope”. Additionally, in December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, which allows ASU 2020-04 to be adopted and applied prospectively to contract modifications made on or before December 31, 2024. The guidance provides optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The Company adopted ASU 2020-04 on March 12, 2020. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on the Company’s consolidated financial position or results of operations. The guidance is effective through December 31, 2024.

Accounting Standards to be Adopted

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.     Receivables
 
Receivables consisted of the following:
 September 27, 2023December 28, 2022
 (In thousands)
Receivables, net:  
Trade accounts receivable from franchisees$12,544 $13,314 
Notes and loan receivables from franchisees486 6,731 
Vendor receivables1,677 3,466 
Credit card receivables645 896 
Other1,795 1,545 
Allowance for doubtful accounts(197)(376)
Total receivables, net$16,950 $25,576 


Note 4.    Goodwill and Intangible Assets

The following table reflects the changes in carrying amount of goodwill:
September 27, 2023
(In thousands)
Balance, beginning of year$72,740 
Reclassifications to assets held for sale(598)
Balance, end of period$72,142 
Goodwill by segment consisted of the following:
September 27, 2023December 28, 2022
(In thousands)
Denny’s$37,527 $37,527 
Other34,615 35,213 
Total goodwill$72,142 $72,740 

Intangible assets consisted of the following:
 September 27, 2023December 28, 2022
 Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
 (In thousands)
Intangible assets with indefinite lives:
    
Trade names$79,687 $— $79,687 $— 
Liquor licenses120 — 120 — 
Intangible assets with definite lives:
    
Reacquired franchise rights9,594 5,495 10,489 5,697 
Franchise agreements10,700 761 10,700 265 
Intangible assets, net$100,101 $6,256 $100,996 $5,962 

Amortization expense for intangible assets with definite lives totaled $0.4 million and $1.2 million for the quarter and year-to-date period ended September 27, 2023, respectively. Amortization expense for intangible assets with definite lives totaled $0.4 million and $1.1 million for the quarter and year-to-date period ended September 28, 2022, respectively.

10


Note 5.     Other Current Liabilities
 
Other current liabilities consisted of the following:
 September 27, 2023December 28, 2022
 (In thousands)
Accrued payroll$15,313 $17,903 
Current portion of liability for insurance claims
3,448 3,492 
Accrued taxes6,068 4,452 
Accrued advertising7,906 6,069 
Gift cards5,720 7,675 
Accrued legal settlements5,708 5,446 
Accrued interest4,513 1,142 
Other10,395 10,583 
Other current liabilities$59,071 $56,762 

Note 6.     Fair Value of Financial Instruments

Financial assets and liabilities measured at fair value on a recurring basis are summarized below: 
 TotalQuoted 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 27, 2023:
Deferred compensation plan investments (1)
$11,211 $11,211 $ $ 
Interest rate swaps (2)
27,324  27,324  
Investments (3)
1,255  1,255  
Total$39,790 $11,211 $28,579 $ 
Fair value measurements as of December 28, 2022:
Deferred compensation plan investments (1)
$10,818 $10,818 $ $ 
Interest rate swaps (2)
20,047  20,047  
Investments (3)
1,746  1,746  
Total$32,611 $10,818 $21,793 $ 

(1)    The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments and are included in other noncurrent assets in our Consolidated Balance Sheets.
(2)    The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models. The key inputs for the valuation models are quoted market prices, interest rates, forward yield curves and credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, see Note 7.
(3)    The fair values of our investments are 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.
11


Those assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Significant Unobservable Inputs
(Level 3)


 Impairment Charges for the Quarter Ended
September 27, 2023
(In thousands)
Fair value measurements as of September 27, 2023:
Assets held and used (1)
$ $1,711 
(1)As of September 27, 2023, impaired assets were written down to their fair value. To determine fair value, we used the income approach, which assumes that the future cash flows reflect current market expectations. These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows from operations, which are not observable from the market, directly or indirectly. There is uncertainty in the projected future cash flows used in the Company's impairment analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods.

Assets that are measured at fair value on a non-recurring basis include property, operating right-of-use assets, finance right-of-use assets, goodwill and intangible assets. During the quarter and year-to-date period ended September 27, 2023, we recognized impairment charges of $1.7 million and $1.8 million, respectively, related to certain of these assets. See Note 9.

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses are deemed to approximate fair value due to the immediate or short-term maturity of these instruments. The fair value of notes receivable approximates the carrying value after consideration of recorded allowances and related risk-based interest rates. The liabilities under our credit facility are carried at historical cost, which approximates fair value. The fair value of our senior secured revolver approximates its carrying value since it is a variable rate facility (Level 2).

Note 7.     Long-Term Debt

The Company and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $25 million letter of credit sublimit). The maturity date for the credit facility is August 26, 2026. The credit facility includes an accordion feature that would allow us to increase the size of the facility to $450 million. Borrowings bear a tiered interest rate, which is based on the Company's consolidated leverage ratio. On March 31, 2023, the credit facility was amended to change the benchmark interest rate from LIBOR to Adjusted Daily Simple SOFR.

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 its subsidiaries (other than its 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 27, 2023.

As of September 27, 2023, we had outstanding revolver loans of $248.1 million and outstanding letters of credit under the credit facility of $11.5 million. These balances resulted in unused commitments of $140.4 million as of September 27, 2023 under the credit facility.

As of September 27, 2023, borrowings under the credit facility bore interest at a rate of Adjusted Daily Simple SOFR plus 2.25%. Letters of credit under the credit facility bore interest at a rate of 2.38%. The commitment fee, paid on the unused portion of the credit facility, was set to 0.35%.

Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 7.66% and 6.37% as of September 27, 2023 and December 28, 2022, respectively. Taking into consideration our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 5.28% and 5.31% as of September 27, 2023 and December 28, 2022, respectively.

12


Interest Rate Hedges
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt. A summary of our interest rate swaps as of September 27, 2023 is as follows:
Trade DateEffective DateMaturity DateNotional AmountFair ValueFixed Rate
(In thousands)
Swaps designated as cash flow hedges
March 20, 2015March 29, 2018March 31, 2025$120,000 $4,937 2.34 %
October 1, 2015March 29, 2018March 31, 2026$50,000 $2,851 2.37 %
February 15, 2018March 31, 2020December 31, 2033$31,000 (1)$19,536 3.09 %
Total$201,000 $27,324 

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase periodically until they reach the maximum notional amount of $335 million on August 31, 2033.

On March 31, 2023, the Company entered into amendments of its credit facility and interest rate swaps. The amendments transition our credit facility and interest rate swap benchmark interest rates from LIBOR to Adjusted Daily Simple SOFR, as such the fixed rates in the table above have been adjusted to the appropriate fixed rates. The conversion to Adjusted Daily Simple SOFR did not have a material impact on the Company's consolidated financial position or results of operations.

Termination and Designation of Certain Interest Rate Swaps

During the quarter ended March 29, 2023, we terminated a portion of our hedging relationship entered into in 2018 (“2018 Swaps”), reducing the previous maximum notional amount of $425 million on August 31, 2033 to $335 million. As a result, we expect our total swaps to approximate 80% of our outstanding debt prospectively. We received $1.5 million of cash as a result of the termination which is recorded as a component of operating activities in our Consolidated Statement of Cash Flows for the year-to-date period ended September 27, 2023.

In addition, during the quarter ended March 29, 2023, we designated the remaining 2018 Swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable rate interest payments due on forecasted notional amounts.

Changes in Fair Value of Interest Rate Swaps

To the extent the swaps are highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in the Consolidated Statements of Operations but are reported as a component of other comprehensive income (loss). Our interest rate swaps are designated as cash flow hedges with unrealized gains and losses recorded as a component of accumulated other comprehensive loss, net.

As of September 27, 2023, the fair value of the swaps designated as cash flow hedges was an asset of $27.3 million, recorded as a component of other noncurrent assets. The designated swaps have an offsetting amount (before taxes) recorded as a component of accumulated other comprehensive loss, net in our Consolidated Balance Sheets. See Note 13 for amounts recorded in accumulated other comprehensive loss related to interest rate swaps. We expect to reclassify $5.9 million from accumulated other comprehensive loss, net as a reduction to interest expense, net in our Consolidated Statements of Operations related to swaps designated as cash flow hedges during the next 12 months.

For the periods prior to their designation as cash flow hedges, changes in the fair value of the 2018 Swaps were recorded as a component of other nonoperating expense (income), net in our Consolidated Statements of Operations. For the year-to-date period ended September 27, 2023, we recorded expense of $10.6 million, and for the quarter and year-to-date period ended September 28, 2022, we recorded income of $10.8 million and $52.7 million, respectively, as a component of other nonoperating expense (income), net related to the 2018 Swaps resulting from changes in fair value.

Amortization of Certain Amounts Included in Accumulated Other Comprehensive Loss, Net

At September 27, 2023, we had a total of $64.3 million (before taxes) included in accumulated other comprehensive loss, net related to i) the discontinuance of hedge accounting treatment related to certain cash flow hedges in prior years and ii) the fair value of certain swaps at the date of designation as cash flow hedges that are being amortized into our Consolidated Statements of Operations as a component of interest expense, net over the remaining term of the related swap.
13



For the quarter and year-to-date period ended September 27, 2023, we recorded unrealized losses of $0.1 million and $0.2 million, respectively, to interest expense, net. For the quarter and year-to-date period ended September 28, 2022, we recorded unrealized losses of less than $0.1 million to interest expense, net. We expect to amortize $0.6 million from accumulated other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to dedesignated interest rate swaps during the next 12 months.

Note 8.     Revenues

The following table disaggregates our revenue by sales channel and type of good or service:
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Company restaurant sales$53,153 $52,211 $161,486 $145,354 
Franchise and license revenue:
Royalties29,703 28,992 90,106 84,276 
Advertising revenue19,297 18,950 58,818 56,642 
Initial and other fees3,388 7,749 10,994 20,035 
Occupancy revenue 8,642 9,554 27,165 29,273 
Franchise and license revenue 
61,030 65,245 187,083 190,226 
Total operating revenue$114,183 $117,456 $348,569 $335,580 

Franchise occupancy revenue consisted of the following:
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Operating lease revenue$6,461 $7,074 $20,015 $21,745 
Variable lease revenue
2,181 2,480 7,150 7,528 
Total occupancy revenue
$8,642 $9,554 $27,165 $29,273 

Balances related to contracts with customers consist of receivables, contract assets, deferred franchise revenue and deferred gift card revenue. See Note 3 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 28, 2022$20,751 
Fees received from franchisees1,243 
Revenue recognized (1)
(2,387)
Balance, September 27, 202319,607 
Less current portion included in other current liabilities2,179 
Deferred franchise revenue included in other noncurrent liabilities$17,428 
(1)    Of this amount $2.0 million was included in the deferred franchise revenue balance as of December 28, 2022.

We record contract assets related to incentives and subsidies provided to franchisees related to new unit openings and/or equipment upgrades. These amounts will be recognized as a component of franchise and license revenue over the remaining term of the related franchise agreements.

14


The components of the change in contract assets are as follows:
 (In thousands)
Balance, December 28, 2022$5,361 
Franchisee deferred costs2,371 
Contract asset amortization(1,032)
Balance, September 27, 20236,700 
Less current portion included in other current assets1,016 
Contract assets included in other noncurrent assets$5,684 

The Company purchases equipment related to various programs for franchise restaurants, including kitchen and point-of-sale system equipment. We bill our franchisees and recognize revenue when the related equipment is installed, less amounts contributed from the Company, which have been deferred as contract assets in the table above. We recognized $1.7 million and $4.6 million of revenue, recorded as a component of initial and other fees, related to the sale of equipment to franchisees during the quarter and year-to-date period ended September 27, 2023, respectively. We recognized $5.8 million and $13.8 million of revenue, recorded as a component of initial and other fees, related to the sale of equipment to franchisees during the quarter and year-to-date period ended September 28, 2022, respectively. As of September 27, 2023, we had $0.8 million in inventory and $0.6 million in receivables related to the purchased equipment. As of December 28, 2022, we had $3.6 million in inventory and $6.6 million in receivables related to the kitchen equipment rollout.

Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. 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 27, 2023 and December 28, 2022 was $5.7 million and $7.7 million, respectively. During the year-to-date period ended September 27, 2023, we recognized revenue of $0.4 million from gift card redemptions at company restaurants.

Note 9.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net consisted of the following:
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Gains on sales of assets and other, net$(88)$(3,066)$(2,132)$(3,311)
Restructuring charges and exit costs
997 472 2,759 1,297 
Impairment charges1,711 697 1,840 963 
Operating (gains), losses and other charges, net
$2,620 $(1,897)$2,467 $(1,051)
 
During the year-to-date period ended September 27, 2023, gains on sales of assets and other, net were primarily related to the sale of three parcels of real estate. During the quarter and year-to-date period ended September 28, 2022, gains on sales of assets and other, net were primarily related to the sale of two parcels of real estate.

As of September 27, 2023, we had recorded assets held for sale at the lesser of the carrying value or fair value amount of $1.6 million (consisting of property of $0.9 million, goodwill of $0.6 million and other assets of $0.1 million) related to one parcel of real estate and three Keke's restaurants. As of December 28, 2022, we had recorded assets held for sale at their carrying amount of $1.4 million (consisting of property of $1.1 million and other assets of $0.3 million) related to four parcels of real estate.

15


Restructuring charges and exit costs consisted of the following:
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Exit costs$12 $38 $64 $88 
Severance and other restructuring charges
985 434 2,695 1,209 
Total restructuring charges and exit costs
$997 $472 $2,759 $1,297 

Exit costs primarily consist of costs related to closed restaurants. Exit cost liabilities related to lease costs are included as a component of operating lease liabilities in our Consolidated Balance Sheets.

As of September 27, 2023 and December 28, 2022, we had accrued severance and other restructuring charges of $2.1 million and $0.7 million, respectively. The balance as of September 27, 2023 is expected to be paid primarily during the next 12 months.

We recorded impairment charges of $1.7 million and $1.8 million related to property and right-of-use assets for the quarter and year-to-date period ended September 27, 2023, respectively, resulting from our assessment of underperforming restaurants and assets being classified as held for sale. The $1.7 million included $0.9 million related to property and $0.8 million related to operating lease right-of-use assets. The $1.8 million included $1.0 million related to property and $0.8 million related to operating lease right-of-use assets.

Note 10.     Share-Based Compensation

Total share-based compensation included as a component of general and administrative expenses was as follows:
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Employee share awards$2,659 $1,706 $7,793 $8,784 
Restricted stock units for board members
205 241 684 683 
Total share-based compensation
$2,864 $1,947 $8,477 $9,467 

Employee Share Awards

During the year-to-date period ended September 27, 2023, we granted certain employees 0.3 million performance share units ("PSUs") with a weighted average grant date fair value of $18.39 per share 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 PSUs with a weighted average grant date fair value of $11.90 per share that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based PSUs contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value. The performance period for these PSUs is the three-year fiscal period beginning December 29, 2022 and ending December 31, 2025. The PSUs will vest and be earned at the end of the performance period at which point the relative TSR and Adjusted EPS growth rate achievement percentages will be applied to the vested units (from 0% to 200% of the target award). We recognize compensation cost associated with 0.5 million of these PSU awards over the entire performance period on a straight-line basis, with compensation cost for the remaining 0.1 million PSU awards recognized on a graded-vesting basis due to the accelerated vesting terms for certain retirement eligible individuals.

During the year-to-date period ended September 27, 2023, we also granted certain employees 0.7 million restricted stock units ("RSUs") with a weighted average grant date fair value of $11.83 per share. These RSUs generally vest evenly over the three-year fiscal period beginning December 29, 2022 and ending December 31, 2025. We recognize compensation cost associated with these RSU awards on a straight-line basis over the entire performance period of the award.

During the year-to-date period ended September 27, 2023, we issued 0.5 million shares of common stock related to vested PSUs and RSUs. In addition, 0.3 million shares of common stock were withheld in lieu of taxes related to vested PSUs and RSUs.
 
As of September 27, 2023, we had $16.3 million of unrecognized compensation cost related to unvested PSU awards and RSU awards outstanding, which have a weighted average remaining contractual term of 1.9 years.
16



Restricted Stock Units for Board Members

During the year-to-date period ended September 27, 2023, we granted less than 0.1 million RSUs (which are equity classified) with a grant date fair value of $10.71 per unit to non-employee members of our Board of Directors. The RSUs 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), upon termination as a member of our Board of Directors, or in three equal annual installments commencing after termination of service as a member of our Board of Directors.

During the year-to-date period ended September 27, 2023, 0.2 million RSUs were converted into shares of common stock.

As of September 27, 2023, we had $0.5 million of unrecognized compensation cost related to unvested RSU awards outstanding, which have a weighted average remaining contractual term of 0.6 years.

Note 11.     Income Taxes

The effective income tax rate was 17.6% for the quarter and 23.7% for the year-to-date period ended September 27, 2023, compared to 24.3% and 25.7% for the prior year periods, respectively. The effective income tax rate for the quarter and year-to-date period ended September 27, 2023 included discrete items relating to share-based compensation of (2.5)% and 0.4%, respectively.

Note 12.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands, except per share amounts)
Net income$7,908 $17,083 $17,043 $61,941 
Weighted average shares outstanding - basic
55,869 59,020 56,764 61,558 
Effect of dilutive share-based compensation awards213 20 209 128 
Weighted average shares outstanding - diluted
56,082 59,040 56,973 61,686 
Net income per share - basic$0.14 $0.29 $0.30 $1.01 
Net income per share - diluted$0.14 $0.29 $0.30 $1.00 
Anti-dilutive share-based compensation awards735 641 788 737 

Note 13.     Shareholders' Deficit

Share Repurchases

Our credit facility permits the repurchase of the Company's stock and the payment of cash dividends subject to certain limitations. Our Board of Directors approves share repurchases of our common stock. Under these authorizations, 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. Currently, we are operating under a $250 million share repurchase authorization approved by the Board of Directors in December 2019.
17



During the year-to-date period ended September 27, 2023, we repurchased a total of 3.4 million shares of our common stock for $35.9 million, including excise taxes. This brings the total amount repurchased under the current authorization to $133.4 million, leaving $116.6 million that can be used to repurchase our common stock under this authorization as of September 27, 2023. Repurchased shares are included as treasury stock in our Consolidated Balance Sheets and our Consolidated Statements of Shareholders' Deficit.

As of September 27, 2023, 11.7 million shares were held in treasury stock.

Accumulated Other Comprehensive Loss, Net

The components of the change in accumulated other comprehensive loss, net were as follows:
Defined Benefit PlansDerivativesAccumulated Other Comprehensive Loss, Net
(In thousands)
Balance as of December 28, 2022$(555)$(42,142)$(42,697)
Amortization of net loss (1)
116 — 116 
Changes in the fair value of cash flow hedges— 23,221 23,221 
Reclassification of cash flow hedges to interest expense, net (2)
— (3,551)(3,551)
Amortization of unrealized losses related to interest rate swaps to interest expense, net— 232 232 
Income tax expense related to items of other comprehensive income (loss)(30)(5,051)(5,081)
Balance as of September 27, 2023$(469)$(27,291)$(27,760)

(1)    Before-tax amount related to our defined benefit plans that was reclassified from accumulated other comprehensive loss, net and included as a component of pension expense within general and administrative expenses in our Consolidated Statements of Operations during the year-to-date period ended September 27, 2023.
(2)    Amounts reclassified from accumulated other comprehensive loss, net into interest expense, net in our Consolidated Statements of Operations represent payments either (received from) or made to the counterparty for the interest rate hedges. See Note 7 for additional details.

Note 14.     Commitments and Contingencies

Legal Proceedings

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 our consolidated results of operations or financial position. 

Note 15.     Supplemental Cash Flow Information
 Three Quarters Ended
 September 27, 2023September 28, 2022
 (In thousands)
Income taxes paid, net$6,531 $6,161 
Interest paid$9,346 $9,117 
Noncash investing and financing activities:  
Business acquisition payable$ $1,000 
Accrued purchase of property$102 $ 
Issuance of common stock, pursuant to share-based compensation plans$5,638 $9,547 
Receipt of real estate receivable$ $3,000 
Execution of finance leases$593 $506 
Treasury stock payable$1,053 $292 
 
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Note 16. Segment Information

We manage our business by brand and as a result have identified two operating segments, Denny’s and Keke’s. In addition, we have identified Denny’s as a reportable segment. The Denny’s reportable segment includes the results of all company and franchised and licensed Denny’s restaurants. Our Keke’s operating segment, which includes the results of all company and franchised Keke's restaurants, is included in Other.

The primary sources of revenues for all operating segments are the sale of food and beverages at our company restaurants and the collection of royalties, advertising revenue, initial and other fees, including occupancy revenue, from restaurants operated by our franchisees. We do not rely on any major customer as a source of sales and the customers and assets of all operating segments are located predominantly in the United States. There are no material transactions between segments.

Management’s measure of segment income is restaurant-level operating margin. The Company defines restaurant-level operating margin as operating income excluding the following three items: general and administrative expenses, depreciation and amortization, and operating (gains), losses and other charges, net. The Company excludes general and administrative expenses, which include primarily non restaurant-level costs associated with support of company and franchised restaurants and other activities at their corporate office. The Company excludes depreciation and amortization expense, substantially all of which is related to company restaurant-level assets, because such expenses represent historical sunk costs which do not reflect current cash outlays for the restaurants. The Company excludes operating (gains), losses and other charges, net, to provide a clearer perspective of its ongoing operating performance. Restaurant-level operating margin is used by our chief operating decision maker (“CODM”) to evaluate restaurant-level operating efficiency and performance.

The following tables present revenues by segment and a reconciliation of restaurant-level operating margin to net income:
Quarter EndedThree Quarters Ended
September 27, 2023September 28, 2022September 27, 2023September 28, 2022
Revenues by operating segment:(In thousands)
Denny’s$109,136 $113,725 $332,952 $331,849 
Other5,047 3,731 15,617 3,731 
Total operating revenue$114,183 $117,456 $348,569 $335,580 
Segment income:
Denny’s$36,944 $33,227 $111,525 $101,964 
Other1,536 1,199 5,434 1,199 
Total restaurant-level operating margin$38,480 $34,426 $116,959 $103,163 
General and administrative expenses$18,237 $16,607 $58,515 $50,188 
Depreciation and amortization3,605 3,914 10,878 11,052 
Operating (gains), losses and other charges, net2,620 (1,897)2,467 (1,051)
Total other operating expenses24,462 18,624 71,860 60,189 
Operating income14,018 15,802 45,099 42,974 
Interest expense, net4,381 3,691 13,288 9,529 
Other nonoperating expense (income), net43 (10,461)9,470 (49,871)
Income before income taxes9,594 22,572 22,341 83,316 
Provision for income taxes1,686 5,489 5,298 21,375 
Net income$7,908 $17,083 $17,043 $61,941 

September 27, 2023December 28, 2022
Segment assets:(In thousands)
Denny’s$376,123 $394,051 
Other103,712 104,284 
Total assets$479,835 $498,335 
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our Consolidated Financial Statements and the notes thereto that appear elsewhere in this report and the MD&A contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2022.

Forward-Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company urges caution in considering its current trends and any outlook on its operations and financial results disclosed in this report. In addition, certain matters discussed in this report may constitute forward-looking statements. These forward-looking statements, which reflect management's best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny’s Corporation, its subsidiaries, and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as “expect”, “anticipate”, “believe”, “intend”, “plan”, “hope”, "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: economic, public health and political conditions that impact consumer confidence and spending; commodity and labor inflation; the ability to effectively staff restaurants and support personnel; our ability to maintain adequate levels of liquidity for our cash needs, including debt obligations, payment of dividends, planned share repurchases and capital expenditures as well as the ability of our customers, suppliers, franchisees and lenders to access sources of liquidity to provide for their own cash needs; competitive pressures from within the restaurant industry; our ability to integrate and derive the expected benefits from our acquisition of Keke's; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment and geopolitical events (including acts of war and terrorism); and other factors from time to time set forth in the Company’s SEC reports and other filings, including but not limited to the discussion in Management’s Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2022 and in the Company's subsequent quarterly reports on Form 10-Q.

Overview

We manage our business by brand and as a result have identified two operating segments, Denny’s and Keke’s. As of September 27, 2023, the Denny's brand consisted of 1,588 restaurants, 1,522 of which were franchised/licensed restaurants and 66 of which were company operated. At September 27, 2023, the Keke's brand consisted of 56 restaurants, 48 of which were franchised restaurants and eight of which were company operated.

In addition, we have identified Denny’s as a reportable segment. The Denny’s reportable segment includes the results of all company and franchised and licensed Denny’s restaurants. We completed the acquisition of Keke's on July 20, 2022. Total revenues at Keke’s for the quarter and three quarters ended September 27, 2023 represented less than 5% of total consolidated revenues, therefore, the Keke’s operating segment is included in Other for segment reporting purposes.

Information discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Denny’s brand unless otherwise noted.
20


Statements of Operations
 
The following table contains information derived from our Consolidated Statements of Operations expressed as a percentage of total operating revenue, except as noted below. Percentages may not add due to rounding.
 Quarter EndedThree Quarters Ended
 September 27, 2023September 28, 2022September 27, 2023September 28, 2022
 (In thousands)
Revenue:        
Company restaurant sales$53,153 46.6 %$52,211 44.5 %$161,486 46.3 %$145,354 43.3 %
Franchise and license revenue61,030 53.4 %65,245 55.5 %187,083 53.7 %190,226 56.7 %
Total operating revenue114,183 100.0 %117,456 100.0 %348,569 100.0 %335,580 100.0 %
Costs of company restaurant sales, excluding depreciation and amortization (a):
    
Product costs13,587 25.6 %14,462 27.7 %41,796 25.9 %38,874 26.7 %
Payroll and benefits19,754 37.2 %20,176 38.6 %60,482 37.5 %55,598 38.3 %
Occupancy4,182 7.9 %4,294 8.2 %12,381 7.7 %11,316 7.8 %
Other operating expenses8,370 15.7 %9,519 18.2 %24,294 15.0 %26,116 18.0 %
Total costs of company restaurant sales, excluding depreciation and amortization45,893 86.3 %48,451 92.8 %138,953 86.0 %131,904 90.7 %
Costs of franchise and license revenue, excluding depreciation and amortization (a)29,810 48.8 %34,579 53.0 %92,657 49.5 %100,513 52.8 %
General and administrative expenses18,237 16.0 %16,607 14.1 %58,515 16.8 %50,188 15.0 %
Depreciation and amortization3,605 3.2 %3,914 3.3 %10,878 3.1 %11,052 3.3 %
Operating (gains), losses and other charges, net
2,620 2.3 %(1,897)(1.6)%2,467 0.7 %(1,051)(0.3)%
Total operating costs and expenses, net
100,165 87.7 %101,654 86.5