Company Quick10K Filing
Quick10K
Dennys
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$19.41 60 $1,170
10-Q 2019-06-26 Quarter: 2019-06-26
10-Q 2019-03-27 Quarter: 2019-03-27
10-K 2018-12-26 Annual: 2018-12-26
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
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-07-01 Quarter: 2015-07-01
10-Q 2015-04-01 Quarter: 2015-04-01
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-24 Quarter: 2014-09-24
10-Q 2014-06-25 Quarter: 2014-06-25
10-Q 2014-03-26 Quarter: 2014-03-26
10-K 2013-12-25 Annual: 2013-12-25
8-K 2019-07-30 Earnings, Regulation FD, Exhibits
8-K 2019-06-03 Other Events
8-K 2019-05-14 Regulation FD, Exhibits
8-K 2019-05-08 Shareholder Vote
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-03-18 Other Events
8-K 2019-02-26 Regulation FD, Exhibits
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
XRAY Dentsply Sirona 12,870
HP Helmerich & Payne 6,390
CXP Columbia Property Trust 2,570
FIX Comfort Systems 1,840
GERN Geron 325
AFMD Affimed 230
ATLC Atlanticus 52
CPAH Counterpath 11
CSGN Chase General 0
GIGA Giga Tronics 0
DENN 2019-06-26
Part I - Financial Information
Item 1. Financial Statements
Note 1. Introduction and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Leases
Note 4. Refranchisings and Acquisitions
Note 5. Operating (Gains), Losses and Other Charges, Net
Note 6. Receivables
Note 7. Goodwill and Other Intangible Assets
Note 8. Other Current Liabilities
Note 9. Fair Value of Financial Instruments
Note 10. Long-Term Debt
Note 11. Revenues
Note 12. Share-Based Compensation
Note 13. Income Taxes
Note 14. Net Income per Share
Note 15. Supplemental Cash Flow Information
Note 16. Shareholders' Deficit
Note 17. Commitments and Contingencies
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 q22019ex101.htm
EX-31.1 q22019ex311.htm
EX-31.2 q22019ex312.htm
EX-32.1 q22019ex321.htm

Dennys Earnings 2019-06-26

DENN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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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 June 26, 2019

OR

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

dennyslogo2017a11.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 incorporation or organization
 
(I.R.S. Employer 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 are a code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
$.01 Par Value, Common Stock
 
DENN
 
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  ☒  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  ☒  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
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  ☒

As of July 24, 2019, 59,427,331 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)
 
June 26, 2019
 
December 26, 2018
 
(In thousands, except per share amounts)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,292

 
$
5,026

Investments
3,115

 
1,709

Receivables, net
18,628

 
26,283

Inventories
2,347

 
2,993

Assets held for sale
15,420

 
723

Prepaid and other current assets
15,615

 
10,866

Total current assets
57,417

 
47,600

Property, net of accumulated depreciation of $160,548 and $226,620, respectively
97,047

 
117,251

Financing lease right-of-use assets, net of accumulated amortization of $13,282 and $15,526, respectively
16,701

 
22,753

Operating lease right-of-use assets
115,338

 

Goodwill
37,080

 
39,781

Intangible assets, net
55,736

 
59,067

Deferred financing costs, net
2,031

 
2,335

Deferred income taxes
20,848

 
17,333

Other noncurrent assets
36,538

 
29,229

Total assets
$
438,736

 
$
335,349

Liabilities
 

 
 

Current liabilities:
 

 
 

Current finance lease liabilities
$
2,651

 
$
3,410

Current operating lease liabilities
16,999

 

Accounts payable
25,237

 
29,527

Other current liabilities
53,842

 
61,790

Total current liabilities
98,729

 
94,727

Long-term liabilities:
 

 
 

Long-term debt
271,000

 
286,500

Noncurrent finance lease liabilities
20,470

 
27,181

Noncurrent operating lease liabilities
107,368

 

Liability for insurance claims, less current portion
12,642

 
12,199

Other noncurrent liabilities
71,099

 
48,087

Total long-term liabilities
482,579

 
373,967

Total liabilities
581,308

 
468,694

Shareholders' deficit
 

 
 

Common stock $0.01 par value; 135,000 shares authorized; June 26, 2019: 109,291 shares issued and 59,807 shares outstanding; December 26, 2018: 108,585 shares issued and 61,533 shares outstanding
$
1,093

 
$
1,086

Paid-in capital
601,902

 
592,944

Deficit
(257,079
)
 
(306,414
)
Accumulated other comprehensive loss, net of tax
(26,913
)
 
(4,146
)
Treasury stock, at cost, 49,484 and 47,052 shares, respectively
(461,575
)
 
(416,815
)
Total shareholders' deficit
(142,572
)
 
(133,345
)
Total liabilities and shareholders' deficit
$
438,736

 
$
335,349


See accompanying notes

3



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

 
Quarter Ended
 
Two Quarters Ended
 
June 26, 2019
 
June 27, 2018
 
June 26, 2019
 
June 27, 2018
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
95,447

 
$
102,741

 
$
193,992

 
$
203,934

Franchise and license revenue
56,437

 
54,593

 
109,303

 
108,673

Total operating revenue
151,884

 
157,334

 
303,295

 
312,607

Costs of company restaurant sales, excluding depreciation and amortization:
 
 
 
 
 
 
 
Product costs
23,363

 
25,054

 
47,268

 
49,989

Payroll and benefits
36,866

 
41,065

 
76,698

 
82,291

Occupancy
5,498

 
5,435

 
11,282

 
11,082

Other operating expenses
14,103

 
15,021

 
28,695

 
30,071

Total costs of company restaurant sales
79,830

 
86,575

 
163,943

 
173,433

Costs of franchise and license revenue, excluding depreciation and amortization
28,871

 
29,049

 
55,929

 
57,605

General and administrative expenses
18,453

 
15,597

 
37,264

 
32,157

Depreciation and amortization
5,048

 
6,691

 
11,281

 
13,205

Operating (gains), losses and other charges, net
(26,433
)
 
462

 
(35,368
)
 
822

Total operating costs and expenses, net
105,769

 
138,374

 
233,049

 
277,222

Operating income
46,115

 
18,960

 
70,246

 
35,385

Interest expense, net
5,382

 
5,385

 
10,789

 
10,010

Other nonoperating income, net
(273
)
 
(629
)
 
(1,696
)
 
(417
)
Income before income taxes
41,006

 
14,204

 
61,153

 
25,792

Provision for income taxes
6,767

 
2,578

 
11,424

 
4,407

Net income
$
34,239

 
$
11,626

 
$
49,729

 
$
21,385

 
 
 
 
 
 
 
 
Basic net income per share
$
0.57

 
$
0.18

 
$
0.82

 
$
0.33

Diluted net income per share
$
0.55

 
$
0.18

 
$
0.79

 
$
0.32

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
60,290

 
63,644

 
60,970

 
64,038

Diluted weighted average shares outstanding
62,082

 
66,128

 
62,937

 
66,552

 
See accompanying notes

4


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

 
Quarter Ended
 
Two Quarters Ended
 
June 26, 2019
 
June 27, 2018
 
June 26, 2019
 
June 27, 2018
 
(In thousands)
Net income
$
34,239

 
$
11,626

 
$
49,729

 
$
21,385

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax of $5, $7, $11 and $13, respectively
16

 
21

 
32

 
43

Changes in the effective portion of the fair value of derivatives, net of tax of $(3,701), $1,117, $(8,323) and $68, respectively
(10,619
)
 
3,201

 
(22,771
)
 
192

Reclassification of derivatives to interest expense, net of tax of $(3), $58, $(10) and $22, respectively
(11
)
 
168

 
(28
)
 
64

Other comprehensive (loss) income
(10,614
)
 
3,390

 
(22,767
)
 
299

Total comprehensive income
$
23,625

 
$
15,016

 
$
26,962

 
$
21,684


See accompanying notes

5



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended June 26, 2019 and June 27, 2018
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Deficit
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, March 27, 2019
108,986

 
$
1,090

 
(47,948
)
 
$
(432,519
)
 
$
598,825

 
$
(291,318
)
 
$
(16,299
)
 
$
(140,221
)
Net income

 

 

 

 

 
34,239

 

 
34,239

Other comprehensive loss

 

 

 

 

 

 
(10,614
)
 
(10,614
)
Share-based compensation on equity classified awards

 

 

 

 
2,637

 

 

 
2,637

Purchase of treasury stock

 

 
(1,536
)
 
(29,056
)
 

 

 

 
(29,056
)
Issuance of common stock for share-based compensation
118

 
2

 

 

 
(2
)
 

 

 

Exercise of common stock options
187

 
1

 

 

 
442

 

 

 
443

Balance, June 26, 2019
109,291

 
$
1,093

 
(49,484
)
 
$
(461,575
)
 
$
601,902

 
$
(257,079
)
 
$
(26,913
)
 
$
(142,572
)

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Deficit
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, March 28, 2018
108,259

 
$
1,083

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

 
$
(340,348
)
 
$
(5,407
)
 
$
(121,415
)
Net income

 

 

 

 

 
11,626

 

 
11,626

Other comprehensive income

 

 

 

 
 
 

 
3,390

 
3,390

Share-based compensation on equity classified awards

 

 

 

 
1,180

 

 

 
1,180

Purchase of treasury stock

 

 
(792
)
 
(12,658
)
 

 

 

 
(12,658
)
Issuance of common stock for share-based compensation
211

 
1

 

 

 
(1
)
 

 

 

Balance, June 27, 2018
108,470

 
$
1,084

 
(45,014
)
 
$
(384,470
)
 
$
596,248

 
$
(328,722
)
 
$
(2,017
)
 
$
(117,877
)

 
See accompanying notes

6




Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Two Quarters Ended June 26, 2019 and June 27, 2018
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Deficit
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, December 26, 2018
108,585

 
$
1,086

 
(47,052
)
 
$
(416,815
)
 
$
592,944

 
$
(306,414
)
 
$
(4,146
)
 
$
(133,345
)
Cumulative effect adjustment

 

 

 

 

 
(394
)
 

 
(394
)
Net income

 

 

 

 

 
49,729

 

 
49,729

Other comprehensive loss

 

 

 

 

 

 
(22,767
)
 
(22,767
)
Share-based compensation on equity classified awards

 

 

 

 
1,652

 

 

 
1,652

Purchase of treasury stock

 

 
(2,043
)
 
(37,997
)
 

 

 

 
(37,997
)
Equity forward contract settlement

 

 
(389
)
 
(6,763
)
 
6,763

 

 

 

Issuance of common stock for share-based compensation
465

 
5

 

 

 
(5
)
 

 

 

Exercise of common stock options
241

 
2

 

 

 
548

 

 

 
550

Balance, June 26, 2019
109,291

 
$
1,093

 
(49,484
)
 
$
(461,575
)
 
$
601,902

 
$
(257,079
)
 
$
(26,913
)
 
$
(142,572
)

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

 
$
1,077

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

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

 

 

 

 

 
(15,446
)
 

 
(15,446
)
Net income

 

 

 

 

 
21,385

 

 
21,385

Other comprehensive income

 

 

 

 

 

 
299

 
299

Share-based compensation on equity classified awards

 

 

 

 
1,076

 

 

 
1,076

Purchase of treasury stock

 

 
(1,863
)
 
(28,844
)
 

 

 

 
(28,844
)
Issuance of common stock for share-based compensation
444

 
4

 

 

 
(4
)
 

 

 

Exercise of common stock options
286

 
3

 

 

 
1,010

 

 

 
1,013

Balance, June 27, 2018
108,470

 
$
1,084

 
(45,014
)
 
$
(384,470
)
 
$
596,248

 
$
(328,722
)
 
$
(2,017
)
 
$
(117,877
)

See accompanying notes

7



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Two Quarters Ended
 
June 26, 2019
 
June 27, 2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
49,729

 
$
21,385

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
11,281

 
13,205

Operating (gains), losses and other charges, net
(35,368
)
 
822

Amortization of deferred financing costs
304

 
303

Gain on investments
(106
)
 

Gain on early extinguishments of debt and leases
(83
)
 
(161
)
Deferred income tax expense
4,944

 
2,896

Share-based compensation
4,966

 
2,561

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
7,545

 
2,323

Inventories
646

 
38

Other current assets
(4,748
)
 
(253
)
Other assets
6,110

 
(445
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(2,190
)
 
(7,280
)
Accrued salaries and vacations
(4,597
)
 
(2,029
)
Accrued taxes
(952
)
 
428

Other accrued liabilities
(4,264
)
 
(6,352
)
Other noncurrent liabilities
(8,062
)
 
(1,345
)
Net cash flows provided by operating activities
25,155

 
26,096

Cash flows from investing activities:
 
 
 
Capital expenditures
(6,777
)
 
(9,512
)
Acquisition of restaurants and real estate
(4,706
)
 
(10,416
)
Deposits on acquisitions of real estate
(4,320
)
 

Proceeds from sales of restaurants, real estate and other assets
47,938

 
4

Investment purchases
(1,300
)
 

Collections on notes receivable
858

 
1,921

Issuance of notes receivable
(718
)
 
(2,455
)
Net cash flows provided by (used in) investing activities
30,975

 
(20,458
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
66,500

 
66,500

Revolver payments
(82,000
)
 
(43,500
)
Long-term debt payments
(1,547
)
 
(1,643
)
Proceeds from exercise of stock options
550

 
1,013

Tax withholding on share-based payments
(3,178
)
 
(1,696
)
Purchase of treasury stock
(37,266
)
 
(28,964
)
Net bank overdrafts
(1,923
)
 
1,419

Net cash flows used in financing activities
(58,864
)
 
(6,871
)
Decrease in cash and cash equivalents
(2,734
)
 
(1,233
)
Cash and cash equivalents at beginning of period
5,026

 
4,983

Cash and cash equivalents at end of period
$
2,292

 
$
3,750

 
See accompanying notes

8



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 June 26, 2019, the Denny's brand consisted of 1,702 restaurants, 1,569 of which were franchised/licensed restaurants and 133 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 are reasonable.

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the fiscal year ended December 26, 2018 which are contained in our Annual Report on Form 10-K for the fiscal year ended December 26, 2018. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 25, 2019.

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

Effective December 27, 2018, the first day of fiscal 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The new guidance established a right-of-use model (“ROU”) that requires lessees to recognize a ROU asset and a lease liability for all leases with terms greater than 12 months. Lessees classify leases as financing or operating. The guidance requires lessors to classify leases as sales-type, direct financing or operating. We elected to apply the modified retrospective transition approach as the date of initial application without restating comparative period financial statements. Results for reporting periods beginning after December 26, 2018 are presented under Topic 842. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 840. Our transition to Topic 842 represents a change in accounting principle.

The new guidance provided a number of optional practical expedients in transition. We elected the package of practical expedients that permitted us not to reassess our prior conclusions regarding lease identification, lease classification or initial direct costs. In addition, we did not elect the practical expedient which would have permitted us to use hindsight in evaluating our leases, nor did we elect the land easement practical expedient. In preparation for adoption, we implemented a new lease management system.

Upon adoption of Topic 842, we recorded operating lease liabilities of $101.3 million and ROU assets of $94.1 million related to existing operating leases. In addition, we recorded a cumulative effect adjustment increasing opening deficit by $0.4 million and deferred tax assets by $0.1 million. The lease liabilities were based on the present value of remaining rental payments under previous leasing standards for existing operating leases primarily related to real estate leases. Exit cost and straight-line lease liabilities that existed at the adoption date were reclassified against the ROU assets upon adoption. The amount recorded to opening deficit represents the initial impairment of ROU assets, net of the deferred tax impact.

See Note 3 for further information about our transition to Topic 842 and the newly required disclosures.

Additional new accounting guidance became effective for us as of December 27, 2018 that we reviewed and concluded was either not applicable to our operations or had no material effect on our consolidated financial statements and related disclosures.


9



Accounting Standards to be Adopted

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.     Leases

Lessee

We lease certain real estate and equipment for our restaurants and support facilities. At contract inception, we determine whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. We recognize a lease liability and an ROU asset at the lease commencement date.

For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently measured at amortized cost using the effective interest method.

Operating lease ROU assets are initially and subsequently measured throughout the lease term at the carrying amount of the lease liability adjusted for initial direct costs, prepayments, accrued payments and lease incentives, if any. Lease cost is recognized on a straight-line basis over the lease term. Finance lease ROU assets are initially measured at cost and subsequently amortized on a straight-line basis over the lesser of the useful life or the lease term. ROU assets are assessed for impairment using the long-lived assets impairment guidance.

The new lease guidance provides practical expedients and accounting elections for our ongoing accounting after adoption. We elected the practical expedient to not separate nonlease components (such as common area maintenance) from lease components in regard to all leases and the portfolio approach in applying the discount rate to our leases.

Key estimates and judgments include how we determine (1) lease payments, (2) lease term and (3) the discount rate used to discount the unpaid lease payments to present value.

We have certain lease agreements structured with both a fixed base rent and a contingent rent based on a percentage of sales over contractual levels, others with only contingent rent based on a percentage of sales and some with a fixed base rent adjusted periodically for inflation or changes in fair market value of the underlying real estate. Contingent rent is recognized as sales occur. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The exercise of lease renewal options is at our sole discretion, except in certain sublease situations in which we have determined that it is reasonably certain that one or more options will be exercised, including where the exercise of a sublease option compels us to exercise the renewal option of the underlying master lease. Renewal option periods are included in the measurement of lease ROU asset and lease liability where the exercise is reasonably certain to occur. Initial terms of real estate leases generally range from 10 to 20 years, exclusive of options to renew, which are typically for five year periods. Leases of equipment consist primarily of restaurant equipment, computer equipment and vehicles. Initial terms of equipment leases generally range from three to five years.

The discount rate used to determine the present value of the lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as we generally cannot determine the interest rate implicit in the lease.


10



Lessor

We lease or sublease certain restaurant properties to our franchisees and occasionally to third parties. The lease descriptions, terms, variable lease payments and renewal options are the same as the lessee leases described above. Similar to our lessee accounting, we elected the lessor practical expedient to not separate nonlease components from lease components in regard to all leases.

The components of lease costs were as follows:

 
 
 
Quarter Ended
 
Two Quarters Ended
 
Classification
 
June 26, 2019
 
June 26, 2019
 
 
 
(In thousands)
Lease costs
 
 
 
 
 
Finance lease costs:
 
 
 
 
 
Amortization of right-of-use assets
Depreciation and amortization
 
$
885

 
$
1,881

Interest on lease liabilities
Interest expense, net
 
1,318

 
2,834

Operating lease costs:
 
 
 
 
 
Operating lease costs - company
Occupancy
 
2,476

 
4,979

Operating lease costs - franchise
Costs of franchise and license revenue
 
3,611

 
7,076

Operating lease costs - general and administrative
General and administrative expenses
 
27

 
53

Variable lease costs:
 
 
 
 
 
Variable lease costs - company
Occupancy
 
1,812

 
3,668

Variable lease costs - franchise
Costs of franchise and license revenue
 
1,512

 
2,938

Variable lease costs - general and administrative
General and administrative expenses
 
5

 
10

Variable lease costs - closed stores
Restructuring charges and exit costs
 

 
55

Sublease income
Franchise and license revenue
 
(6,249
)
 
(12,008
)
Total lease costs
 
 
$
5,397

 
$
11,486



Lease terms and discount rates were as follows:

 
June 26, 2019
Weighted-average remaining lease term (in years)
 
Finance leases
9.0

Operating leases
9.5

Weighted-average discount rate
 
Finance leases
24.3
%
Operating leases
6.4
%


11




The components of lease income were as follows:

 
 
 
Quarter Ended
 
Two Quarters Ended
 
Classification
 
June 26, 2019
 
June 26, 2019
 
 
 
(In thousands)
Lease income
 
 
 
 
 
Operating lease income - franchise
Franchise and license revenue
 
$
5,846

 
$
11,271

Operating lease income - closed stores
Restructuring and exist costs
 
66

 
132

Variable lease income - franchise
Franchise and license revenue
 
2,280

 
4,400

Variable lease income - closed stores
Restructuring charges and exit costs
 
12

 
24

Total lease income
 
 
$
8,204

 
$
15,827



Cash and supplemental noncash amounts were as follows:

 
Quarter Ended
 
Two Quarters Ended
 
June 26, 2019
 
June 26, 2019
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from finance leases
$
1,318

 
$
2,834

Operating cash flows from operating leases
6,441

 
12,752

Financing cash flows from finance leases
752

 
1,547

Right-of-use assets obtained in exchange for new finance lease liabilities
305

 
305

Right-of-use assets obtained in exchange for new operating lease liabilities
22,481

 
27,531




12



Maturities of lease liabilities and receipts in accordance with Topic 842 as of June 26, 2019 were as follows:
 
Lease Liabilities
 
Lease Receipts
 
Finance
 
Operating
 
Operating
 
(In thousands)
Remainder of 2019
$
3,554

 
$
12,440


$
13,070

2020
6,625

 
22,390


24,202

2021
6,101

 
19,576


22,100

2022
5,836

 
17,309


19,961

2023
5,149

 
14,536


17,012

Thereafter
29,974

 
82,149


105,310

Total undiscounted cash flows
57,239

 
168,400


$
201,655

Less: interest
34,118

 
44,033


 
Present value of lease liabilities
23,121

 
124,367


 
Less: current lease liabilities
2,651

 
16,999


 
Long-term lease liabilities
$
20,470

 
$
107,368


 


Maturities of lease liabilities in accordance with Topic 840 as of December 26, 2018 were as follows:

 
Commitments
 
Lease Receipts
 
Capital
 
Operating
 
Operating
 
(In thousands)
2019
$
9,271

 
$
23,504

 
$
21,001

2020
8,664

 
20,161

 
18,493

2021
8,010

 
17,316

 
16,573

2022
7,320

 
14,646

 
14,887

2023
6,451

 
11,881

 
12,932

Thereafter
33,670

 
49,004

 
65,273

Total
73,386

 
$
136,512

 
$
149,159

Less imputed interest
42,795

 
 
 
 
Present value of capital lease obligations
$
30,591

 
 
 
 



13



Note 4.     Refranchisings and Acquisitions
 
Refranchisings

The following table summarizes the activity related to our current refranchising and development strategy. Gains on the sales of company restaurants and real estate are included as a component of operating (gains), losses and other charges, net in our Condensed Consolidated Statements of Income. See Note 5.

 
Quarter Ended

Two Quarters Ended
 
June 26, 2019

June 27, 2018

June 26, 2019

June 27, 2018
 
(Dollars in thousands)
Restaurants sold to franchisees
37




40



Gains on sales of company restaurants:











Cash proceeds
$
36,004


$


$
38,837


$

Notes receivable
470

 

 
470

 

Less: Property sold
(9,675
)



(10,225
)


Less: Goodwill
(925
)



(1,004
)


Less: Intangibles
(1,646
)


 
(1,646
)
 

Total gains of sales of company restaurants
$
24,228

 
$


$
26,432


$













Real estate parcels sold
3




4



Gains on sales of real estate:











Cash proceeds
$
3,850

 
$

 
$
8,538

 
$

Noncash consideration

 

 
3,000

 

Less: Property sold
(756
)



(946
)


Less: Other assets
(6
)
 

 
(6
)
 

Total gains on sales of real estate
$
3,088

 
$


$
10,586


$



In addition to the cash proceeds received on the sale of real estate during the first quarter, we also recorded additional noncash consideration for the fair value of restaurant space we expect to receive within a building being developed by the buyer of the real estate. The $3.0 million of noncash consideration is recorded as a component of other noncurrent assets in our Condensed Consolidated Balance Sheets. The fair value of the noncash consideration is based upon Level 2 inputs.

As of June 26, 2019, we have recorded assets held for sale at their carrying amount of $15.4 million (comprised of property of $13.4 million, goodwill of $1.7 million, reacquired franchise rights of $0.2 million and other assets of $0.1 million) related to 49 company restaurants and one piece of real estate. There were $0.7 million in assets held for sale as of December 26, 2018 related to three company restaurants and one piece of real estate.

Acquisitions

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. The following table summarizes our acquisition activity.


14



 
Quarter Ended
 
Two Quarters Ended
 
June 26, 2019
 
June 27, 2018
 
June 26, 2019
 
June 27, 2018
 
(Dollars in thousands)
Restaurants acquired from franchisees

 
1

 

 
6

Purchase price allocation:
 
 
 
 
 
 
 
Reacquired franchise rights
$

 
$
119

 
$