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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 March 30, 2022
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

denn-20220330_g1.jpg
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 FilerýAccelerated FilerNon-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 April 28, 2022, 61,712,452 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)
 March 30, 2022December 29, 2021
 (In thousands)
Assets  
Current assets:  
Cash and cash equivalents$6,091 $30,624 
Investments3,687 2,551 
Receivables, net23,161 19,621 
Inventories9,829 5,060 
Assets held for sale1,322  
Prepaid and other current assets7,941 11,393 
Total current assets52,031 69,249 
Property, net of accumulated depreciation of $150,914 and $151,836, respectively
89,878 91,176 
Financing lease right-of-use assets, net of accumulated amortization of $9,772 and $11,210, respectively
7,399 7,709 
Operating lease right-of-use assets, net125,012 128,727 
Goodwill36,884 36,884 
Intangible assets, net49,892 50,226 
Deferred financing costs, net2,813 2,971 
Deferred income taxes, net5,139 11,502 
Other noncurrent assets32,346 37,083 
Total assets$401,394 $435,527 
Liabilities  
Current liabilities:  
Current finance lease liabilities$1,962 $1,952 
Current operating lease liabilities15,406 15,829 
Accounts payable12,998 15,595 
Other current liabilities48,524 64,146 
Total current liabilities78,890 97,522 
Long-term liabilities:  
Long-term debt171,500 170,000 
Noncurrent finance lease liabilities10,374 10,744 
Noncurrent operating lease liabilities122,470 126,296 
Liability for insurance claims, less current portion7,860 8,438 
Other noncurrent liabilities58,055 87,792 
Total long-term liabilities370,259 403,270 
Total liabilities449,149 500,792 
Shareholders' deficit  
Common stock $0.01 par value; 135,000 shares authorized; March 30, 2022: 64,457 shares issued and 61,713 outstanding; December 29, 2021: 64,200 shares issued and 62,210 shares outstanding
$645 $642 
Paid-in capital137,332 135,596 
Deficit(94,586)(116,441)
Accumulated other comprehensive loss, net(48,689)(54,470)
Treasury stock, at cost, 2,744 and 1,990 shares, respectively
(42,457)(30,592)
Total shareholders' deficit(47,755)(65,265)
Total liabilities and shareholders' deficit$401,394 $435,527 

See accompanying notes
3


Denny’s Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands, except per share amounts)
Revenue:  
Company restaurant sales$43,976 $33,569 
Franchise and license revenue59,131 47,007 
Total operating revenue103,107 80,576 
Costs of company restaurant sales, excluding depreciation and amortization:
  
Product costs11,244 8,272 
Payroll and benefits17,086 12,965 
Occupancy3,240 2,850 
Other operating expenses7,055 6,077 
Total costs of company restaurant sales38,625 30,164 
Costs of franchise and license revenue, excluding depreciation and amortization
30,669 23,758 
General and administrative expenses16,958 16,947 
Depreciation and amortization3,548 3,661 
Operating (gains), losses and other charges, net
 532 
Total operating costs and expenses, net
89,800 75,062 
Operating income13,307 5,514 
Interest expense, net2,960 4,277 
Other nonoperating income, net(19,615)(30,048)
Income before income taxes29,962 31,285 
Provision for income taxes8,107 8,104 
Net income$21,855 $23,181 
Net income per share - basic$0.35 $0.36 
Net income per share - diluted$0.34 $0.35 
Basic weighted average shares outstanding
63,343 65,251 
Diluted weighted average shares outstanding
63,580 65,749 
 
See accompanying notes
4


Denny’s Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Net income$21,855 $23,181 
Other comprehensive income, net of tax:
Minimum pension liability adjustment, net of tax of $8 and $10, respectively
24 30 
Changes in the fair value of cash flow derivatives, net of tax of $1,673 and $763, respectively
5,015 2,215 
Reclassification of cash flow derivatives to interest expense, net of tax of $248 and $255, respectively
742 740 
Amortization of unrealized losses related to dedesignated derivatives to interest expense, net of tax of $0 and $31, respectively
 90 
Other comprehensive income5,781 3,075 
Total comprehensive income$27,636 $26,256 

See accompanying notes
5


Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended March 30, 2022 and March 31, 2021
(Unaudited)
 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— — — — — 21,855 — 21,855 
Other comprehensive income— — — — — — 5,781 5,781 
Share-based compensation on equity classified awards, net of withholding tax— — — — 1,739 — — 1,739 
Purchase of treasury stock— — (754)(11,865)— — — (11,865)
Issuance of common stock for share-based compensation257 3 — — (3)— —  
Balance, March 30, 2022
64,457 $645 (2,744)$(42,457)$137,332 $(94,586)$(48,689)$(47,755)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net
Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 30, 202063,962 $640  $ $123,833 $(194,514)$(60,405)$(130,446)
Net income— — — — — 23,181 — 23,181 
Other comprehensive income— — — — — — 3,075 3,075 
Share-based compensation on equity classified awards, net of withholding tax— — — — 2,002 — — 2,002 
Issuance of common stock for share-based compensation153 1 — — (1)— —  
Exercise of common stock options30 — — — 116 — — 116 
Balance, March 31, 2021
64,145 $641  $ $125,950 $(171,333)$(57,330)$(102,072)


See accompanying notes



6


Denny’s Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Cash flows from operating activities:  
Net income$21,855 $23,181 
Adjustments to reconcile net income to cash flows provided by (used in) operating activities:  
Depreciation and amortization3,548 3,661 
Operating (gains), losses and other charges, net 532 
Gains and amortization on interest rate swap derivatives, net(20,253)(29,733)
Amortization of deferred financing costs158 344 
Losses on investments65 8 
Losses on early termination of debt and leases24 34 
Deferred income tax expense4,436 4,099 
Share-based compensation expense4,015 3,472 
Changes in assets and liabilities:  
Receivables(3,567)353 
Inventories(4,768)13 
Prepaids and other current assets3,451 5,294 
Other noncurrent assets4,085 (201)
   Operating lease assets and liabilities(244)(604)
Accounts payable(2,405)1,820 
Accrued payroll(7,475)(1,704)
Accrued taxes(1)(380)
Other accrued liabilities(7,488)1,195 
Other noncurrent liabilities(2,500)(1,149)
Net cash flows provided by (used in) operating activities(7,064)10,235 
Cash flows from investing activities:  
Capital expenditures(2,778)(1,583)
Proceeds from sales of restaurants, real estate and other assets108 1,348 
Investment purchases(1,200) 
Proceeds from sale of investments 200 
Collections on notes receivable67 215 
Net cash flows provided by (used in) investing activities(3,803)180 
Cash flows from financing activities:  
Revolver borrowings13,825 7,500 
Revolver payments(12,325)(2,500)
Long-term debt payments(503)(473)
Proceeds from exercise of stock options 116 
Tax withholding on share-based payments(2,165)(1,309)
Deferred financing costs (8)
Purchase of treasury stock(12,498) 
Net bank overdrafts (3,125)
Net cash flows provided by (used in) financing activities(13,666)201 
Increase (decrease) in cash and cash equivalents(24,533)10,616 
Cash and cash equivalents at beginning of period30,624 3,892 
Cash and cash equivalents at end of period$6,091 $14,508 
See accompanying notes
7


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

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At March 30, 2022, the Denny's brand consisted of 1,634 restaurants, 1,569 of which were franchised/licensed restaurants and 65 of which were company operated.

The global crisis resulting from the spread of coronavirus ("COVID-19") has had a substantial impact on our restaurant operations starting in the quarter ended March 25, 2020 with continuing impacts into the current quarter ended March 30, 2022. While we have seen improvements compared to earlier periods during the COVID-19 pandemic, we cannot currently estimate the duration or future financial impact of the COVID-19 pandemic on our business. Ongoing material adverse effects of the COVID-19 pandemic for an extended period could negatively affect our business, results of operations, liquidity and financial condition and could impact our impairment assessments of accounts receivable, intangible assets, long-lived assets and goodwill.

Our unaudited 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 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 29, 2021 which are contained in our audited Annual Report on Form 10-K for the fiscal year ended December 29, 2021. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 28, 2022. 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”. 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, 2022.

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.

8


Note 3.     Receivables
 
Receivables consisted of the following:
 
 March 30, 2022December 29, 2021
 (In thousands)
Receivables, net:  
Trade accounts receivable from franchisees$12,897 $13,430 
Financing receivables from franchisees2,811 1,027 
Vendor receivables2,803 4,041 
Credit card receivables625 747 
Other4,574 950 
Allowance for doubtful accounts(549)(574)
Total receivables, net$23,161 $19,621 
Other noncurrent assets:
  
Financing receivables from franchisees$252 $293 


Note 4.    Intangible Assets

Intangible assets consisted of the following:

 March 30, 2022December 29, 2021
 Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
 (In thousands)
Intangible assets with indefinite lives:
    
Trade names$44,087 $— $44,087 $— 
Liquor licenses120 — 120 — 
Intangible assets with definite lives:
    
Reacquired franchise rights11,801 6,116 12,218 6,199 
Intangible assets, net$56,008 $6,116 $56,425 $6,199 


Note 5.     Other Current Liabilities
 
Other current liabilities consisted of the following:

 March 30, 2022December 29, 2021
 (In thousands)
Accrued payroll$13,232 $20,676 
Current portion of liability for insurance claims
3,947 4,285 
Accrued taxes4,532 4,533 
Accrued advertising9,538 15,355 
Gift cards5,818 7,170 
Other11,457 12,127 
Other current liabilities$48,524 $64,146 

9


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 March 30, 2022:
Deferred compensation plan investments (1)
$12,925 $12,925 $ $ 
Interest rate swaps, net (2)
(23,264) (23,264) 
Investments (3)
3,687  3,687  
Total$(6,652)$12,925 $(19,577)$ 
Fair value measurements as of December 29, 2021:
Deferred compensation plan investments (1)
$13,726 $13,726 $ $ 
Interest rate swaps (2)
(52,121) (52,121) 
Investments (3)
2,551  2,551  
Total$(35,844)$13,726 $(49,570)$ 

(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 and forward yield curves. See Note 7 for details on the interest rate swaps.
(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.

The carrying amounts of cash and cash equivalents, 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 outstanding senior secured revolver is 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

Denny's 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 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. The maturity date for the credit facility is August 26, 2026.

The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than 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 March 30, 2022.

As of March 30, 2022, we had outstanding revolver loans of $171.5 million and outstanding letters of credit under the credit facility of $15.7 million. These balances resulted in unused commitments of $212.8 million as of March 30, 2022 under the credit facility.

As of March 30, 2022, borrowings under the credit facility bore interest at a rate of LIBOR plus 1.75% and the commitment fee, paid on the unused portion of the credit facility, was set to 0.25%.

10


Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 1.98% and 2.09% as of March 30, 2022 and December 29, 2021, 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 4.19% and 4.44% as of March 30, 2022 and December 29, 2021, respectively.

Interest Rate Hedges
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt. We initially designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable interest payments due on forecasted notional amounts. A summary of our interest rate swaps as of March 30, 2022 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 $104 2.44 %
October 1, 2015March 29, 2018March 31, 2026$50,000 $(59)2.46 %
Dedesignated swaps
February 15, 2018March 31, 2020December 31, 2033$120,000 (1)$(23,309)3.19 %
Total$290,000 $(23,264)

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase periodically until they reach the maximum notional amount of $425.0 million on September 28, 2029.

Swaps Designated as Cash Flow Hedges

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. The interest rate swaps entered into in 2015 are designated as cash flow hedges with unrealized gain and losses recorded as a component of accumulated other comprehensive loss, net.

As of March 30, 2022, the fair value of the swaps designated as cash flow hedges was a net asset of less than $0.1 million. One was recorded as an asset of $0.1 million as a component of other noncurrent assets and the other as a liability of $0.1 million as a component of other noncurrent liabilities. 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 approximately $3.4 million from accumulated other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to swaps designated as cash flow hedges during the next twelve months.

Dedesignated Interest Rate Hedges

During the year ended December 30, 2020, we determined that a portion of the underlying cash flows related to our hedging relationship entered into in 2018 (“2018 Swaps”) were no longer probable of occurring over the term of the interest rate swaps. Accordingly, we dedesignated the cash flow relationship and discontinued hedge accounting treatment for the 2018 Swaps. As a result, we reclassified a portion of losses from accumulated other comprehensive loss, net to other nonoperating income, net in our Consolidated Statements of Operations and began amortizing the remaining amounts of unrealized losses related to the 2018 Swaps from accumulated other comprehensive loss, net into our Consolidated Statements of Operations as a component of interest expense, net over the remaining term of the 2018 Swaps. For the quarter ended March 30, 2022, no unrealized losses were reclassified to interest expense, net related to the 2018 Swaps. For the quarter ended March 31, 2021, we reclassified unrealized losses of approximately $0.1 million to interest expense, net related to the 2018 Swaps. At March 30, 2022, approximately $64.2 million (before taxes) of unrealized losses remained in accumulated other comprehensive loss, net. We expect to amortize less than $0.1 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 twelve months.

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As a result of the dedesignated cash flow relationship related to the 2018 Swaps, changes in the fair value of the 2018 Swaps are recorded as a component of other nonoperating income, net in our Consolidated Statements of Operations. For the quarter ended March 30, 2022, we recorded income of approximately $20.3 million as a component of other nonoperating income, net related to the 2018 Swaps resulting from changes in fair value. For the quarter ended March 31, 2021, we recorded income of approximately $29.9 million as a component of other nonoperating income, net related to the 2018 Swaps resulting from changes in fair value. As of March 30, 2022, the fair value of the dedesignated interest rate swaps was a liability of $23.3 million, $0.3 million of which was recorded as a component of other current liabilities and $23.0 million of which was recorded as a component of other noncurrent liabilities in our Consolidated Balance Sheets.

Note 8.     Revenues

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

 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Company restaurant sales$43,976 $33,569 
Franchise and license revenue:
Royalties26,525 20,844 
Advertising revenue18,206 14,111 
Initial and other fees4,507 1,838 
Occupancy revenue 9,893 10,214 
Franchise and license revenue 
59,131 47,007 
Total operating revenue$103,107 $80,576 

Franchise occupancy revenue consisted of the following:

 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Operating lease revenue$7,418 $7,913 
Variable lease revenue
2,475 2,301 
Total occupancy revenue
$9,893 $10,214 

Balances related to contracts with customers consist of receivables, deferred franchise revenue and deferred gift card revenue. See Note 3 for details on our receivables.
The components of the change in deferred franchise revenue are as follows:

 (In thousands)
Balance, December 29, 2021$19,896 
Fees received from franchisees1,199 
Franchisee deferred costs (1)
(626)
Revenue recognized, net (2)
(739)
Balance, March 30, 202219,730 
Less current portion included in other current liabilities1,928 
Deferred franchise revenue included in other noncurrent liabilities$17,802 

(1)    Deferred costs are contract assets consisting of incentives given to franchisees related to the rollout of kitchen equipment to all franchise locations.
(2)    Of this amount $0.6 million was included in the deferred franchise revenue balance as of December 29, 2021.



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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 we will begin amortizing into revenue when the related restaurants are opened net of certain deferred costs. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sales-based royalties and advertising.

The Company has entered into equipment purchase contracts of approximately $18.3 million related to the rollout of kitchen equipment for franchise restaurants, which will be paid by the franchisees as the equipment is installed, less approximately $5.7 million in commitments from the Company. Amounts committed from the Company are contract assets that have been netted against deferred revenue and will be recognized as a component of franchise and license revenue over the remaining term of the related franchise agreement. At March 30, 2022, our remaining obligation under these contracts was approximately $9.2 million, $1.6 million of which is included in accounts payable. At March 30, 2022, we had approximately $8.4 million in inventory and $0.7 million in contract assets 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 March 30, 2022 and December 29, 2021 was $5.8 million and $7.2 million, respectively. During the quarter ended March 30, 2022, we recognized revenue of $0.2 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 Ended
 March 30, 2022March 31, 2021
 (In thousands)
Gains on sales of assets and other, net$(146)$(942)
Restructuring charges and exit costs
146 1,474 
Operating (gains), losses and other charges, net
$ $532 
 

As of March 30, 2022, we had recorded assets held for sale at their carrying amount of $1.3 million (consisting of property of $1.0 million and other assets of $0.3 million) related to three parcels of real estate. There were no assets held for sale recorded as of December 29, 2021.

Restructuring charges and exit costs consisted of the following:

 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Exit costs$12 $82 
Severance and other restructuring charges
134 1,392 
Total restructuring charges and exit costs
$146 $1,474 

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 March 30, 2022 and December 29, 2021, we had accrued severance and other restructuring charges of $0.1 million and $0.1 million, respectively. The balance as of March 30, 2022 is expected to be paid during the next 12 months.

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Note 10.     Share-Based Compensation

Total share-based compensation included as a component of general and administrative expenses was as follows:
 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Employee share awards$3,794 $3,253 
Restricted stock units for board members
221 219 
Total share-based compensation
$4,015 $3,472 
 
Employee Share Awards

During the quarter ended March 30, 2022, we granted certain employees approximately 233,000 performance share units ("PSUs") with a grant date fair value of $24.51 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 approximately 233,000 PSUs with a grant date fair value of $15.59 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 30, 2021 and ending December 25, 2024. The PSUs will completely 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 approximately 312,000 of these PSU awards over the entire performance period on a straight-line basis, with compensation cost for the remaining 154,000 PSU awards recognized on a graded-vesting basis due to the accelerated vesting terms for certain retirement eligible individuals.

We also granted certain employees approximately 310,000 restricted stock units ("RSUs") with a grant date fair value of $15.59 per share. The RSUs vest evenly over the three year fiscal period beginning December 30, 2021 and ending December 25, 2024. We recognize compensation cost associated with these RSU awards on a straight-line basis over the entire performance period of the award.

During the quarter ended March 30, 2022, we issued 257,000 shares of common stock related to vested PSUs and RSUs. In addition, approximately 24,000 shares of common stock were deferred and approximately 136,000 shares of common stock were withheld in lieu of taxes related to vested PSUs and RSUs.
 
As of March 30, 2022, we had approximately $22.9 million of unrecognized compensation cost related to unvested PSU awards and RSU awards outstanding, which have a weighted average remaining contractual term of 2.3 years.

Restricted Stock Units for Board Members

As of March 30, 2022, we had approximately $0.1 million of unrecognized compensation cost related to unvested RSU awards outstanding, which have a weighted average remaining contractual term of 0.2 years.

Note 11.     Income Taxes

The effective income tax rate was 27.1% for the quarter ended March 30, 2022, compared to 25.9% for the prior year period.

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Note 12.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands, except per share amounts)
Net income$21,855 $23,181 
Weighted average shares outstanding - basic
63,343 65,251 
Effect of dilutive share-based compensation awards237 498 
Weighted average shares outstanding - diluted
63,580 65,749 
Net income per share - basic$0.35 $0.36 
Net income per share - diluted$0.34 $0.35 
Anti-dilutive share-based compensation awards829 273 

Note 13.     Shareholders' Deficit

Share Repurchases

Our credit facility permits the repurchase of Denny’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.

During the quarter ended March 30, 2022, we repurchased a total of 0.8 million shares of our common stock for approximately $11.9 million. This brings the total amount repurchased under the current authorization to approximately $44.5 million, leaving approximately $205.5 million that can be used to repurchase our common stock under this authorization as of March 30, 2022. Repurchased shares are included as treasury stock in our Consolidated Balance Sheets and our Consolidated Statement of Shareholders' Deficit.

As of March 30, 2022, 2.7 million shares were held in treasury stock.

15


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 29, 2021$(900)$(53,570)$(54,470)
Amortization of net loss (1)
32 — 32 
Changes in the fair value of cash flow derivatives— 6,688 6,688 
Reclassification of cash flow derivatives to interest expense, net (2)
— 990 990 
Income tax expense related to items of other comprehensive income(8)(1,921)(1,929)
Balance as of March 30, 2022$(876)$(47,813)$(48,689)

(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 quarter ended March 30, 2022.
(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 swaps. 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
 Quarter Ended
 March 30, 2022March 31, 2021
 (In thousands)
Income taxes paid, net$449 $421 
Interest paid$2,849 $4,743 
Noncash investing and financing activities:  
Issuance of common stock, pursuant to share-based compensation plans$4,081 $2,435 
Execution of finance leases$133 $ 
 

Note 16. Subsequent Event

On May 3, 2022, the Company entered into an Asset Purchase Agreement, by and between the Company, as purchaser, and K2 Restaurants, Inc. together with the other sellers and principals party thereto (the "Purchase Agreement") for the acquisition of certain assets and assumption of certain liabilities of the franchise business, Keke's Breakfast Cafe ("Keke's"), and eight Keke’s restaurants owned and operated by the sellers (the "Acquisition"). The Company anticipates that the Acquisition will close during the Company’s second fiscal quarter of 2022.

The aggregate consideration payable to Keke's equityholders will be $82,500,000, payable in cash, subject to certain adjustments. The Company expects to fund the purchase price with a combination of cash on hand and funds available under its existing credit agreement.
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 and Section 21E of the Securities Exchange Act of 1934, as amended. 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: the evolving COVID-19 pandemic and related containment measures, including the potential for further operational disruption from government mandates affecting restaurants; economic, public health and political conditions that impact consumer confidence and spending, including COVID-19; commodity and labor inflation; the ability to effectively staff restaurants; 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 successfully complete the acquisition and subsequent integration of Keke's Breakfast Cafe; 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 year ended December 29, 2021, this report on Form 10-Q and in the Company's subsequent quarterly reports on Form 10-Q.

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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 Ended
 March 30, 2022March 31, 2021
 (Dollars in thousands)
Revenue:    
Company restaurant sales$43,976 42.7 %$33,569 41.7 %
Franchise and license revenue59,131 57.3 %47,007 58.3 %
Total operating revenue103,107 100.0 %80,576 100.0 %
Costs of company restaurant sales, excluding depreciation and amortization (a):
  
Product costs11,244 25.6 %8,272 24.6 %
Payroll and benefits17,086 38.9 %12,965 38.6 %
Occupancy3,240 7.4 %2,850 8.5 %
Other operating expenses7,055 16.0 %6,077 18.1 %
Total costs of company restaurant sales
38,625 87.8 %30,164 89.9 %
Costs of franchise and license revenue, excluding depreciation and amortization (a)
30,669 51.9 %23,758 50.5 %
General and administrative expenses16,958 16.4 %16,947 21.0 %
Depreciation and amortization3,548 3.4 %3,661 4.5 %
Operating (gains), losses and other charges, net
— — %532 0.7 %
Total operating costs and expenses, net
89,800 87.1 %75,062 93.2 %
Operating income13,307 12.9 %5,514 6.8 %
Interest expense, net2,960 2.9 %4,277 5.3 %
Other nonoperating income, net(19,615)(19.0)%(30,048)(37.3)%
Income before income taxes29,962 29.1 %31,285 38.8 %
Provision for income taxes8,107 7.9 %8,104 10.1 %
Net income$21,855 21.2 %$23,181 28.8 %
Other Data:    
Company average unit sales$682  $523  
Franchise average unit sales$404  $326  
Company equivalent units (b)
64  64  
Franchise equivalent units (b)1,572  1,583  
Company same-store sales increase (decrease) vs. prior year (c)(d)30.6 % (9.4)% 
Domestic franchise same-store sales increase (decrease) vs. prior year (c)(d)22.8 % (9.7)% 
            
(a)Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.
(b)Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.
(c)Same-store sales include sales from company restaurants or non-consolidated franchised and licensed restaurants that were open during the comparable periods noted.
(d)Prior year amounts have not been restated for 2022 comparable units.
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Unit Activity
 
 Quarter Ended
 March 30, 2022March 31, 2021
Company restaurants, beginning of period
65 65 
Units opened— — 
Units closed— — 
End of period65 65 
Franchised and licensed restaurants, beginning of period
1,575 1,585 
Units opened 
Units closed(11)(4)
End of period1,569 1,584 
Total restaurants, end of period1,634 1,649 

Company Restaurant Operations
 
Company restaurant sales increased $10.4 million, or 31.0%, for the quarter ended March 30, 2022 as compared to the prior year period. The increase in sales was primarily due to easing of prior year period dine-in restrictions and limited operating hours related to the COVID-19 pandemic in addition to current quarter increases in guest check average. Company same-store sales increased 30.6% for the current year quarter as compared to the prior year period.

Total costs of company restaurant sales as a percentage of company restaurant sales were 87.8% for the quarter ended March 30, 2022 compared to 89.9%, for the prior year period.

Product costs were 25.6% of company restaurant sales for the quarter compared to 24.6% for the prior year period, primarily due to increased commodity costs.

Payroll and benefits were 38.9% of company restaurant sales for the quarter compared to 38.6% in the prior year period. For the current quarter, staff payroll increased 2.0 percentage points as a percentage of sales primarily due to labor inflation, partially offset by a 1.8 percentage point decrease in management payroll due to the leveraging effect of higher sales. Additionally, the current quarter included a 0.8 percentage point increase in workers' compensation costs, partially offset by a 0.7 percentage point decrease in group benefit costs.

Occupancy costs were 7.4% of company restaurant sales for the quarter compared to 8.5% in the prior year period. The decrease as a percentage of sales was primarily due to the leveraging effect of higher sales, partially offset by higher percentage rents due to the increase in sales.

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

 Quarter Ended
 March 30, 2022March 31, 2021
 (Dollars in thousands)
Utilities$1,577 3.6 %$1,225 3.6 %
Repairs and maintenance825 1.9 %533 1.6 %
Marketing1,207 2.7 %967 2.9 %
Other direct costs3,446 7.8 %3,352 10.0 %
Other operating expenses$7,055 16.0 %$6,077 18.1 %

Other direct costs were lower as a percentage of sales due to the leveraging effect of higher sales and a 1.7 percentage point reduction in legal settlement costs.

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Franchise Operations
 
Franchise and license revenue and costs of franchise and license revenue consisted of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
 Quarter Ended
 March 30, 2022March 31, 2021
 (Dollars in thousands)
Royalties$26,525 44.9 %$20,844 44.4 %
Advertising revenue18,206 30.8 %14,111 30.0 %
Initial and other fees4,507 7.6 %1,838 3.9 %
Occupancy revenue 9,893 16.7 %10,214 21.7 %
Franchise and license revenue 
$59,131 100.0 %$47,007 100.0 %
Advertising costs$18,206 30.8 %$14,111 30.0