Company Quick10K Filing
Quick10K
Dennys
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$23.52 60 $1,418
10-Q 2019-09-25 Quarter: 2019-09-25
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 2019-10-29 Earnings, Regulation FD, Exhibits
8-K 2019-09-05 Other Events
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 Regulation FD, Exhibits
8-K 2018-11-07 Amend Bylaw, 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
MCD McDonalds 168,395
QSR Restaurant Brands 19,689
ARMK Aramark 10,153
JACK Jack In The Box 2,212
CNNE Cannae Holdings 1,404
RRGB Red Robin 437
NYNY Empire Resorts 333
TAST Carrols Restaurant Group 307
DFRG Del Frisco's 266
ARKR Ark Restaurants 71
DENN 2019-09-25
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-31.1 q32019ex311.htm
EX-31.2 q32019ex312.htm
EX-32.1 q32019ex321.htm

Dennys Earnings 2019-09-25

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 September 25, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________

dennyslogo2017a12.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  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 Filer
ý
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  ý

As of October 23, 2019, 59,058,729 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 25, 2019
 
December 26, 2018
 
(In thousands, except per share amounts)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,020

 
$
5,026

Investments
3,188

 
1,709

Receivables, net
19,903

 
26,283

Inventories
1,468

 
2,993

Assets held for sale
1,419

 
723

Prepaid and other current assets
11,034

 
10,866

Total current assets
39,032

 
47,600

Property, net of accumulated depreciation of $153,175 and $226,620, respectively
98,540

 
117,251

Financing lease right-of-use assets, net of accumulated amortization of $9,973 and $15,526, respectively
12,410

 
22,753

Operating lease right-of-use assets, net
143,371

 

Goodwill
36,884

 
39,781

Intangible assets, net
54,591

 
59,067

Deferred financing costs, net
1,879

 
2,335

Deferred income taxes, net
21,423

 
17,333

Other noncurrent assets
33,301

 
29,229

Total assets
$
441,431

 
$
335,349

Liabilities
 

 
 

Current liabilities:
 

 
 

Current finance lease liabilities
$
1,812

 
$
3,410

Current operating lease liabilities
16,718

 

Accounts payable
17,705

 
29,527

Other current liabilities
51,618

 
61,790

Total current liabilities
87,853

 
94,727

Long-term liabilities:
 

 
 

Long-term debt
213,000

 
286,500

Noncurrent finance lease liabilities
15,407

 
27,181

Noncurrent operating lease liabilities
137,165

 

Liability for insurance claims, less current portion
12,556

 
12,199

Other noncurrent liabilities
94,196

 
48,087

Total long-term liabilities
472,324

 
373,967

Total liabilities
560,177

 
468,694

Shareholders' deficit
 

 
 

Common stock $0.01 par value; 135,000 shares authorized; September 25, 2019: 109,413 shares issued and 59,340 shares outstanding; December 26, 2018: 108,585 shares issued and 61,533 shares outstanding
$
1,094

 
$
1,086

Paid-in capital
604,406

 
592,944

Deficit
(207,957
)
 
(306,414
)
Accumulated other comprehensive loss, net of tax
(41,907
)
 
(4,146
)
Treasury stock, at cost, 50,073 and 47,052 shares, respectively
(474,382
)
 
(416,815
)
Total shareholders' deficit
(118,746
)
 
(133,345
)
Total liabilities and shareholders' deficit
$
441,431

 
$
335,349


See accompanying notes

3



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

 
Quarter Ended
 
Three Quarters Ended
 
September 25, 2019
 
September 26, 2018
 
September 25, 2019
 
September 26, 2018
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
63,582

 
$
103,609

 
$
257,574

 
$
307,543

Franchise and license revenue
60,676

 
54,414

 
169,979

 
163,087

Total operating revenue
124,258

 
158,023

 
427,553

 
470,630

Costs of company restaurant sales, excluding depreciation and amortization:
 
 
 
 
 
 
 
Product costs
15,603

 
25,303

 
62,871

 
75,292

Payroll and benefits
23,777

 
41,041

 
100,475

 
123,332

Occupancy
4,301

 
6,083

 
15,583

 
17,165

Other operating expenses
10,625

 
15,419

 
39,320

 
45,490

Total costs of company restaurant sales
54,306

 
87,846

 
218,249

 
261,279

Costs of franchise and license revenue, excluding depreciation and amortization
31,136

 
28,174

 
87,065

 
85,779

General and administrative expenses
16,395

 
15,981

 
53,659

 
48,138

Depreciation and amortization
4,338

 
6,760

 
15,619

 
19,965

Operating (gains), losses and other charges, net
(50,091
)
 
793

 
(85,459
)
 
1,615

Total operating costs and expenses, net
56,084

 
139,554

 
289,133

 
416,776

Operating income
68,174

 
18,469

 
138,420

 
53,854

Interest expense, net
4,188

 
5,314

 
14,977

 
15,324

Other nonoperating income, net
(415
)
 
(460
)
 
(2,111
)
 
(877
)
Income before income taxes
64,401

 
13,615

 
125,554

 
39,407

Provision for income taxes
15,279

 
2,810

 
26,703

 
7,217

Net income
$
49,122

 
$
10,805

 
$
98,851

 
$
32,190

 
 
 
 
 
 
 
 
Basic net income per share
$
0.83

 
$
0.17

 
$
1.64

 
$
0.50

Diluted net income per share
$
0.80

 
$
0.16

 
$
1.58

 
$
0.49

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
59,430

 
63,246

 
60,457

 
63,774

Diluted weighted average shares outstanding
61,189

 
65,522

 
62,370

 
66,122

 
See accompanying notes

4


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

 
Quarter Ended
 
Three Quarters Ended
 
September 25, 2019
 
September 26, 2018
 
September 25, 2019
 
September 26, 2018
 
(In thousands)
Net income
$
49,122

 
$
10,805

 
$
98,851

 
$
32,190

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax of $6, $7, $17 and $20, respectively
16

 
21

 
48

 
64

Changes in the effective portion of the fair value of derivatives, net of tax of $(5,251), $1,543, $(13,574) and $1,611, respectively
(15,067
)
 
4,422

 
(37,838
)
 
4,614

Reclassification of derivatives to interest expense, net of tax of $21, $40, $11 and $62, respectively
57

 
115

 
29

 
179

Other comprehensive (loss) income
(14,994
)
 
4,558

 
(37,761
)
 
4,857

Total comprehensive income
$
34,128

 
$
15,363

 
$
61,090

 
$
37,047


See accompanying notes

5



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended September 25, 2019 and September 26, 2018
(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, June 26, 2019
109,291

 
$
1,093

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

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

 

 

 

 

 
49,122

 

 
49,122

Other comprehensive loss

 

 

 

 

 

 
(14,994
)
 
(14,994
)
Share-based compensation on equity classified awards, net

 

 

 

 
2,089

 

 

 
2,089

Purchase of treasury stock

 

 
(589
)
 
(12,807
)
 

 

 

 
(12,807
)
Issuance of common stock for share-based compensation
3

 

 

 

 

 

 

 

Exercise of common stock options
119

 
1

 

 

 
415

 

 

 
416

Balance, September 25, 2019
109,413

 
$
1,094

 
(50,073
)
 
$
(474,382
)
 
$
604,406

 
$
(207,957
)
 
$
(41,907
)
 
$
(118,746
)

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Total
Shareholders’
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, June 27, 2018
108,470

 
$
1,084

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

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

 

 

 

 

 
10,805

 

 
10,805

Other comprehensive income

 

 

 

 
 
 

 
4,558

 
4,558

Share-based compensation on equity classified awards, net

 

 

 

 
1,052

 

 

 
1,052

Purchase of treasury stock

 

 
(574
)
 
(8,563
)
 

 

 

 
(8,563
)
Issuance of common stock for share-based compensation
3

 
1

 

 

 
(1
)
 

 

 

Exercise of common stock options
20

 

 

 

 
45

 

 

 
45

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 Shareholders’ Deficit
For the Three Quarters Ended September 25, 2019 and September 26, 2018
(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 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

 

 

 

 

 
98,851

 

 
98,851

Other comprehensive loss

 

 

 

 

 

 
(37,761
)
 
(37,761
)
Share-based compensation on equity classified awards, net

 

 

 

 
3,741

 

 

 
3,741

Purchase of treasury stock

 

 
(2,632
)
 
(50,804
)
 

 

 

 
(50,804
)
Equity forward contract settlement

 

 
(389
)
 
(6,763
)
 
6,763

 

 

 

Issuance of common stock for share-based compensation
468

 
5

 

 

 
(5
)
 

 

 

Exercise of common stock options
360

 
3

 

 

 
963

 

 

 
966

Balance, September 25, 2019
109,413

 
$
1,094

 
(50,073
)
 
$
(474,382
)
 
$
604,406

 
$
(207,957
)
 
$
(41,907
)
 
$
(118,746
)

 
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

7



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Quarters Ended
 
September 25, 2019
 
September 26, 2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
98,851

 
$
32,190

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
15,619

 
19,965

Operating (gains), losses and other charges, net
(85,459
)
 
1,615

Amortization of deferred financing costs
456

 
455

Gains on investments
(179
)
 

Gains on early extinguishments of debt and leases
(157
)
 
(159
)
Deferred income tax expense
9,594

 
5,044

Share-based compensation
7,142

 
3,661

Changes in assets and liabilities:
 
 
 
Receivables
8,095

 
3,582

Inventories
1,525

 
83

Other current assets
(168
)
 
1,292

Other assets
(3,081
)
 
(565
)
   Operating lease assets/liabilities
(577
)
 

Accounts payable
(9,411
)
 
(11,948
)
Accrued salaries and vacations
(6,224
)
 
(858
)
Accrued taxes
(524
)
 
1,974

Other accrued liabilities
(5,544
)
 
(7,733
)
Other noncurrent liabilities
2,068

 
(2,339
)
Net cash flows provided by operating activities
32,026

 
46,259

Cash flows from investing activities:
 
 
 
Capital expenditures
(12,646
)
 
(17,294
)
Acquisition of restaurants and real estate
(9,456
)
 
(10,416
)
Deposits on acquisitions of real estate
(1,538
)
 

Proceeds from sales of restaurants, real estate and other assets
118,370

 
969

Investment purchases
(1,300
)
 
(1,709
)
Collections on notes receivable
3,027

 
2,478

Issuance of notes receivable
(822
)
 
(2,525
)
Net cash flows provided by (used in) investing activities
95,635

 
(28,497
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
102,500

 
91,000

Revolver payments
(176,000
)
 
(72,000
)
Long-term debt payments
(2,044
)
 
(2,429
)
Proceeds from exercise of stock options
966

 
1,058

Tax withholding on share-based payments
(3,206
)
 
(1,714
)
Purchase of treasury stock
(50,649
)
 
(37,108
)
Net bank overdrafts
(2,234
)
 
319

Net cash flows used in financing activities
(130,667
)
 
(20,874
)
Decrease in cash and cash equivalents
(3,006
)
 
(3,112
)
Cash and cash equivalents at beginning of period
5,026

 
4,983

Cash and cash equivalents at end of period
$
2,020

 
$
1,871

 
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 September 25, 2019, the Denny's brand consisted of 1,706 restaurants, 1,629 of which were franchised/licensed restaurants and 77 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 ("ROU") model 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 Accounting Standards Codification 840, "Leases (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 required disclosures.


9



Accounting Standards to be Adopted

In June 2016, the Financial Accounting Standards Board 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. Operating lease payments are classified as cash flows for operating activities with ROU asset amortization and the change in the lease liability combined as "Operating lease assets/liabilities" in the reconciliation of net income to net cash flows provided by operating activities in the Consolidated Statement of Cash Flows. 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. Finance lease payments are classified as cash flows used in financing activities in the Consolidated Statement of Cash Flows. Operating and finance lease 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 rent rate. 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
 
Three Quarters Ended
 
Classification
 
September 25, 2019
 
September 25, 2019
 
 
 
(In thousands)
Lease costs
 
 
 
 
 
Finance lease costs:
 
 
 
 
 
Amortization of right-of-use assets
Depreciation and amortization
 
$
592

 
$
2,473

Interest on lease liabilities
Interest expense, net
 
906

 
3,740

Operating lease costs:
 
 
 
 
 
Operating lease costs - company
Occupancy
 
1,811

 
6,824

Operating lease costs - franchise
Costs of franchise and license revenue
 
4,850

 
11,926

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

 
80

Variable lease costs:
 
 
 
 
 
Variable lease costs - company
Occupancy
 
1,324

 
4,992

Variable lease costs - franchise
Costs of franchise and license revenue
 
1,924

 
4,862

Variable lease costs - general and administrative
General and administrative expenses
 
15

 
25

Variable lease costs - closed stores
Restructuring charges and exit costs
 

 
55

Sublease income
Franchise and license revenue
 
(8,156
)
 
(20,164
)
Total lease costs
 
 
$
3,293

 
$
14,813



Lease terms and discount rates were as follows:
 
September 25, 2019
Weighted-average remaining lease term (in years)
 
Finance leases
9.6

Operating leases
10.8

Weighted-average discount rate
 
Finance leases
23.5
%
Operating leases
6.1
%


The components of lease income were as follows:
 
 
 
Quarter Ended
 
Three Quarters Ended
 
Classification
 
September 25, 2019
 
September 25, 2019
 
 
 
(In thousands)
Lease income
 
 
 
 
 
Operating lease income - franchise
Franchise and license revenue
 
$
7,963

 
$
19,234

Operating lease income - closed stores
Restructuring charges and exit costs
 
56

 
188

Variable lease income - franchise
Franchise and license revenue
 
2,770

 
7,170

Variable lease income - closed stores
Restructuring charges and exit costs
 
13

 
37

Total lease income
 
 
$
10,802

 
$
26,629




11




Cash and supplemental noncash amounts were as follows:
 
Quarter Ended
 
Three Quarters Ended
 
September 25, 2019
 
September 25, 2019
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from finance leases
$
906

 
$
3,740

Operating cash flows from operating leases
6,816

 
19,569

Financing cash flows from finance leases
497

 
2,044

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

 
305

Right-of-use assets obtained in exchange for new operating lease liabilities
31,050

 
58,581



Maturities of lease liabilities and receipts in accordance with Topic 842 as of September 25, 2019 were as follows:
 
Lease Liabilities
 
Lease Receipts
 
Finance
 
Operating
 
Operating
 
(In thousands)
Remainder of 2019
$
1,256

 
$
6,543


$
8,225

2020
4,839

 
24,749


31,029

2021
4,571

 
22,629


28,145

2022
4,287

 
20,469


25,756

2023
3,769

 
17,875


22,682

Thereafter
25,672

 
120,696


155,741

Total undiscounted cash flows
44,394

 
212,961


$
271,578

Less: interest
27,175

 
59,078


 
Present value of lease liabilities
17,219

 
153,883


 
Less: current lease liabilities
1,812

 
16,718


 
Long-term lease liabilities
$
15,407

 
$
137,165


 



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

 
 
 
 



12



Note 4.     Refranchisings and Acquisitions
 
Refranchisings

The following table summarizes the activity related to our 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

Three Quarters Ended
 
September 25, 2019

September 26, 2018

September 25, 2019

September 26, 2018
 
(Dollars in thousands)
Restaurants sold to franchisees
56




96



Gains on sales of company restaurants:











Cash proceeds
$
68,774


$


$
107,611


$

Receivables
2,976

 

 
3,446

 

Less: Property sold
(17,759
)



(27,984
)


Less: Goodwill
(1,705
)



(2,709
)


Less: Intangibles
(579
)


 
(2,225
)
 

Less: Deferred gain
(1,350
)
 

 
(1,350
)
 

Total gains of sales of company restaurants
$
50,357

 
$


$
76,789


$













Real estate parcels sold
2




6



Gains on sales of real estate:











Cash proceeds
$
2,142

 
$

 
$
10,680