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DENNY'S Corp - Quarter Report: 2013 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 27, 2013


Commission File Number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-3487402
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization
 
Identification No.)

203 East Main Street
Spartanburg, South Carolina 29319-0001
(Address of principal executive offices)
(Zip Code)

(864) 597-8000
(Registrant’s telephone number, including area code)
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes  þ    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes  þ    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  þ

 As of April 25, 2013, 91,773,875 shares of the registrant’s common stock, par value $.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)
 
March 27, 2013
 
December 26, 2012
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,263

 
$
13,565

Receivables
16,762

 
19,947

Inventories
2,925

 
2,890

Current deferred tax asset
20,238

 
19,807

Prepaid and other current assets
6,184

 
8,401

Total current assets
56,372

 
64,610

Property, net of accumulated depreciation of $252,687 and $250,173 respectively
105,426

 
107,004

Goodwill
31,430

 
31,430

Intangible assets, net
48,369

 
48,920

Deferred financing costs, net
1,917

 
2,041

Noncurrent deferred tax asset
42,305

 
45,776

Other noncurrent assets
25,474

 
25,104

Total assets
$
311,293

 
$
324,885

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
9,250

 
$
8,500

Current maturities of capital lease obligations
4,135

 
4,181

Accounts payable
19,336

 
24,461

Other current liabilities
46,529

 
54,682

Total current liabilities
79,250

 
91,824

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
156,750

 
161,500

Capital lease obligations, less current maturities
16,012

 
15,953

Liability for insurance claims, less current portion
16,845

 
18,045

Other noncurrent liabilities and deferred credits
40,617

 
42,023

Total long-term liabilities
230,224

 
237,521

Total liabilities
309,474

 
329,345

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity
 

 
 

Common stock $0.01 par value; authorized - 135,000; March 27, 2013: 104,341 shares issued and 92,465 shares outstanding; December 26, 2012: 103,764 shares issued and 92,229 shares outstanding
$
1,044

 
$
1,038

Paid-in capital
563,483

 
562,657

Deficit
(488,437
)
 
(495,518
)
Accumulated other comprehensive loss, net of tax
(24,745
)
 
(24,999
)
Shareholders’ equity before treasury stock
51,345

 
43,178

Treasury stock, at cost, 11,876 and 11,535 shares, respectively
(49,526
)
 
(47,638
)
Total shareholders' equity (deficit)
1,819

 
(4,460
)
Total liabilities and shareholders' equity
$
311,293

 
$
324,885

See accompanying notes

3



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

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands, except per share amounts)
Revenue:
 
 
 
Company restaurant sales
$
81,030

 
$
94,163

Franchise and license revenue
33,460

 
32,575

Total operating revenue
114,490

 
126,738

Costs of company restaurant sales:
 
 
 
Product costs
21,146

 
23,533

Payroll and benefits
31,546

 
37,753

Occupancy
5,228

 
5,774

Other operating expenses
11,200

 
12,895

Total costs of company restaurant sales
69,120

 
79,955

Costs of franchise and license revenue
11,402

 
11,312

General and administrative expenses
15,159

 
15,663

Depreciation and amortization
5,224

 
6,060

Operating (gains), losses and other charges, net
134

 
(165
)
Total operating costs and expenses, net
101,039

 
112,825

Operating income
13,451

 
13,913

Interest expense, net
2,800

 
4,456

Other nonoperating expense (income), net
1

 
(295
)
Net income before income taxes
10,650

 
9,752

Provision for income taxes
3,569

 
3,887

Net income
$
7,081

 
$
5,865

 
 
 
 
Basic net income per share
$
0.08

 
$
0.06

Diluted net income per share
$
0.07

 
$
0.06

 
 
 
 
Basic weighted average shares outstanding
92,350

 
96,075

Diluted weighted average shares outstanding
94,461

 
97,878

 
 
 
 
Comprehensive income
$
7,335

 
$
6,133

 
See accompanying notes

4



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Paid-in
 
 
 
Accumulated
Other
Comprehensive
 
Total
Shareholders’ Equity /
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
(Deficit)
 
Loss, Net
 
(Deficit)
 
(In thousands)
Balance, December 26, 2012
103,764

 
$
1,038

 
(11,535
)
 
$
(47,638
)
 
$
562,657

 
$
(495,518
)
 
$
(24,999
)
 
$
(4,460
)
Net income

 

 

 

 

 
7,081

 

 
7,081

Minimum pension liability adjustment, net of tax expense of $165

 

 

 

 

 

 
254

 
254

Share-based compensation on equity classified awards

 

 

 

 
241

 

 

 
241

Purchase of treasury stock

 

 
(341
)
 
(1,888
)
 

 

 

 
(1,888
)
Issuance of common stock for share-based compensation
300

 
3

 

 

 
(3
)
 

 

 

Exercise of common stock options
277

 
3

 

 

 
685

 

 

 
688

Tax benefit (expense) from stock options exercised

 

 

 

 
(97
)
 

 

 
(97
)
Balance, March 27, 2013
104,341

 
$
1,044

 
(11,876
)
 
$
(49,526
)
 
$
563,483

 
$
(488,437
)
 
$
(24,745
)
 
$
1,819

 
See accompanying notes

5



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
7,081

 
$
5,865

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
5,224

 
6,060

Operating (gains), losses and other charges, net
134

 
(165
)
Amortization of deferred financing costs
133

 
339

Amortization of debt discount

 
121

Loss on early extinguishment of debt
349

 
217

Loss on change in the fair value of interest rate cap
2

 

Deferred income tax expense
2,875

 
3,055

Share-based compensation
1,175

 
790

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
2,398

 
1,998

Inventories
(35
)
 
99

Other current assets
2,218

 
3,037

Other assets
(1,036
)
 
(1,064
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(2,658
)
 
(5,389
)
Accrued salaries and vacations
(5,574
)
 
(638
)
Accrued taxes
(117
)
 
(55
)
Other accrued liabilities
(2,679
)
 
(4,414
)
Other noncurrent liabilities and deferred credits
(2,135
)
 
(1,370
)
Net cash flows provided by operating activities
7,355

 
8,486

Cash flows from investing activities:
 
 
 
Purchase of property
(3,006
)
 
(1,836
)
Proceeds from disposition of property
22

 
3,594

Collections on notes receivable
1,234

 
1,367

Issuance of notes receivable
(404
)
 
(649
)
Net cash flows (used in) provided by investing activities
(2,154
)
 
2,476

Cash flows from financing activities:
 
 
 
Long-term debt payments
(5,072
)
 
(9,137
)
Proceeds from exercise of stock options
688

 
334

Tax withholding on share-based payments
(464
)
 
(145
)
Tax (expense) benefit of stock options exercised
(97
)
 
138

Purchase of treasury stock
(2,272
)
 

Net bank overdrafts
(1,286
)
 
(2,352
)
Net cash flows used in financing activities
(8,503
)
 
(11,162
)
Decrease in cash and cash equivalents
(3,302
)
 
(200
)
Cash and cash equivalents at beginning of period
13,565

 
13,740

Cash and cash equivalents at end of period
$
10,263

 
$
13,540

 
See accompanying notes

6



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, is one of America’s largest full-service restaurant chains based on number of restaurants. The following table shows the unit activity for the quarters ended March 27, 2013 and March 28, 2012, respectively:

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
Company restaurants, beginning of period
164

 
206

Units opened

 

Units sold to franchisees

 
(6
)
Units closed

 
(3
)
End of period
164

 
197

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,524

 
1,479

Units opened
7

 
6

Units purchased from Company

 
6

Units closed
(6
)
 
(8
)
End of period
1,525

 
1,483

Total restaurants, end of period
1,689

 
1,680


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 have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 26, 2012 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 26, 2012. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 25, 2013.

Note 2.     Summary of Significant Accounting Policies
 
Newly Adopted Accounting Standards
 
Intangibles
 
ASU No. 2012-02, "Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”

Effective December 27, 2012, we adopted ASU 2012-02, which modifies the impairment test for indefinite-lived intangible assets. Under the new guidance, an entity is permitted to make a qualitative assessment of whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined through the qualitative assessment that the indefinite-lived intangible asset's fair value is more likely than not greater than its carrying value, the quantitative impairment calculations would not be required. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. The adoption did not have any impact on our Condensed Consolidated Financial Statements.


7



Comprehensive Income 

ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income"

Effective December 27, 2012, we adopted ASU 2013-02, which requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, companies are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 is to be applied prospectively. The adoption concerns presentation and disclosure only and did not have an impact on our financial position or results of operations.
Accounting Standards to be Adopted

We reviewed significant newly issued accounting pronouncements and concluded that they are either not applicable to our business or that no material effect is expected on the financial statements as a result of future adoption.

Note 3.     Receivables
 
Receivables were comprised of the following:
 
 
March 27, 2013
 
December 26, 2012
 
(In thousands)
Current assets:
 
 
 
Receivables:
 
 
 
Trade accounts receivable from franchisees
$
10,158

 
$
10,212

Notes receivable from franchisees
3,523

 
4,310

Vendor receivables
942

 
2,529

Credit card receivables
989

 
1,384

Other
1,163

 
1,524

Allowance for doubtful accounts
(13
)
 
(12
)
Total current receivables, net
$
16,762

 
$
19,947

 
 
 
 
Noncurrent assets (included as a component of other noncurrent assets):
 
 
 
Notes receivable from franchisees
$
960

 
$
1,002


For the quarters ended March 27, 2013 and March 28, 2012, we recognized interest income on notes receivable from franchisees of less than $0.1 million. These amounts are included as a component of interest expense, net on our Condensed Consolidated Statements of Comprehensive Income.
 

8



Note 4.    Goodwill and Other Intangible Assets

Goodwill and intangible assets were comprised of the following:
 
 
March 27, 2013
 
December 26, 2012
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Goodwill
$
31,430

 
$

 
$
31,430

 
$

 
 
 
 
 
 
 
 
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,050

 
$

 
$
44,050

 
$

Liquor licenses
126

 

 
156

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Franchise and license agreements
32,879

 
28,736

 
37,524

 
32,863

Foreign license agreements
241

 
191

 
241

 
188

Intangible assets
$
77,296

 
$
28,927

 
$
81,971

 
$
33,051

 
Note 5.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
(Gains) losses on sales of assets and other, net
$
18

 
$
(1,955
)
Restructuring charges and exit costs
116

 
1,267

Impairment charges

 
523

Operating (gains), losses and other charges, net
$
134

 
$
(165
)
 
Restructuring Charges and Exit Costs
 
Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Exit costs
$
56

 
$
579

Severance and other restructuring charges
60

 
688

Total restructuring and exit costs
$
116

 
$
1,267



9



The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance, December 26, 2012
$
4,061

Exit costs (1)
56

Payments, net of sublease receipts
(447
)
Interest accretion
70

Balance, March 27, 2013
3,740

Less current portion included in other current liabilities
1,269

Long-term portion included in other noncurrent liabilities
$
2,471

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

Estimated net cash payments related to exit cost liabilities are as follows:
 
 
(In thousands)
Remainder of 2013
$
1,171

2014
1,077

2015
379

2016
321

2017
323

Thereafter
1,328

Total
4,599

Less imputed interest
859

Present value of exit cost liabilities
$
3,740

 
As of March 27, 2013 and December 26, 2012, we had accrued severance and other restructuring charges of $0.3 million and $0.5 million, respectively. The balance as of March 27, 2013 is expected to be paid during the next 12 months.
 
Note 6.     Fair Value of Financial Instruments

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
 
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
 
Fair Value Measurements as of March 27, 2013
 
Total
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Valuation Technique
 
(In thousands)
 
 
Deferred compensation plan investments 
$
7,331

 
$
7,331

 
$

 
$

 
market approach
Interest rate caps
$
6

 
$

 
$
6

 
$

 
income approach
Total
$
7,337

 
$
7,331

 
$
6

 
$

 
 
 

10



 
Fair Value Measurements as of December 26, 2012
 
Total
 
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Valuation Technique
 
(In thousands)
 
 
Deferred compensation plan investments 
$
6,371

 
$
6,371

 
$

 
$

 
market approach
Interest rate caps
$
8

 
$

 
$
8

 
$

 
income approach
Total
$
6,379

 
$
6,371

 
$
8

 
$

 
 
 
In addition to the financial assets and liabilities that are measured at fair value on a recurring basis, we measure certain assets
and liabilities at fair value on a nonrecurring basis. As of March 27, 2013, there were no such nonrecurring measurements. As of December 26, 2012, impaired assets related to underperforming units were written down to a fair value of $0.2 million based on the income approach.

Disclosures of Fair Value of Other Assets and Liabilities
 
The liabilities under our credit facility are carried at historical cost in our Condensed Consolidated Balance Sheets. As of March 27, 2013 and December 26, 2012, the estimated fair value (Level 2) of our senior secured term loan approximated its carrying value. The fair value of our long-term debt is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at market rates.

Note 7.     Long-Term Debt

As of March 27, 2013, Denny’s Corporation and certain of its subsidiaries had a credit facility comprised of a senior secured term loan in an original principal amount of $190 million and a senior secured revolver of $60 million (with a $30 million letter of credit sublimit). As of March 27, 2013, we had outstanding term loan borrowings under the credit facility of $166.0 million and outstanding letters of credit under the senior secured revolver of $25.2 million. There were no revolving loans outstanding at March 27, 2013. These balances resulted in availability of $34.8 million under the revolving facility. The weighted-average interest rate under the term loan was 2.96% and 2.97% as of March 27, 2013 and December 26, 2012, respectively.

A commitment fee of 0.375% was paid on the unused portion of the revolving credit facility. Interest on the credit facility was
payable at per annum rates equal to LIBOR plus 275 basis points. The maturity date for the credit facility was April 12, 2017. The term loan under the credit facility amortized $19.0 million annually, payable in quarterly installments, with all remaining amounts due on the maturity date. We were required to make certain mandatory prepayments under certain circumstances and had the option to make certain prepayments under the credit facility. The optional prepayments were applied against future amortization. The credit facility included events of default (and related remedies, including acceleration and increased interest rates following an event of default) that were usual for facilities and transactions of this type.

The credit facility was guaranteed by the Company and its material subsidiaries and was secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It included negative covenants that are usual for facilities and transactions of this type. The credit facility also included certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charged coverage ratio and maximum capital expenditures.

During the quarter ended March 27, 2013, we made $4.0 million of principal payments on the term loan under the credit facility.

On April 13, 2012, we entered into interest rate hedges that cap the LIBOR rate on borrowings under the credit facility for a two year period. The 200 basis point LIBOR cap applies to $150 million of borrowings during the first year and $125 million of borrowings during the second year.

Subsequent to the end of the quarter, we refinanced our credit facility and entered into additional interest rate hedges. See Note 15.


11



We believe that our estimated cash flows from operations for 2013, combined with our capacity for additional borrowings under our credit facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months.

Note 8.     Defined Benefit Plans
 
The components of net periodic benefit cost were as follows:

 
Pension Plan
 
Other Defined Benefit Plans
 
Quarter Ended
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Service cost
$
100

 
$
84

 
$

 
$

Interest cost
754

 
789

 
28

 
29

Expected return on plan assets
(1,124
)
 
(1,012
)
 

 

Amortization of net loss
419

 
428

 
18

 
13

Net periodic benefit cost
$
149

 
$
289

 
$
46

 
$
42

 
We made contributions of $1.4 million and $0.3 million to our qualified pension plan during the quarters ended March 27, 2013 and March 28, 2012, respectively. We made contributions of less than $0.1 million to our other defined benefit plans during both quarters ended March 27, 2013 and March 28, 2012. We expect to contribute an additional $1.4 million to our qualified pension plan and an additional $0.1 million to our other defined benefit plans over the remainder of fiscal 2013.

During the quarter ended March 27, 2013, we amortized $0.3 million of actuarial losses, net of tax, out of accumulated other comprehensive loss into net periodic benefit cost, which is reported as a component of general and administrative expenses in the Condensed Consolidated Statement of Comprehensive Income. Additional minimum pension liability of $24.7 million and $25.0 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Equity as of March 27, 2013 and December 26, 2012.
 
Note 9.     Share-Based Compensation

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

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Stock options
$
164

 
$
328

Restricted stock units
831

 
443

Board deferred stock units
180

 
19

Total share-based compensation
$
1,175

 
$
790

 
Stock Options

We did not grant any stock options during the quarter ended March 27, 2013. As of March 27, 2013, we had approximately $0.4 million of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of 0.8 years.
 

12



Restricted Stock Units
 
In January 2013, we granted approximately 0.3 million performance shares and related performance-based target cash awards of $2.1 million to certain employees. As these awards contain a market condition, a Monte Carlo valuation was used to determine the performance shares' grant date fair value of $8.05 per share and the payout probability of the target cash awards. In addition, the awards granted to our named executive officers also contain a performance condition based on certain operating measures for the fiscal year ended December 25, 2013. The performance period is the three year fiscal period beginning December 27, 2012 and ending December 30, 2015. The performance shares and cash awards will vest and be earned (from 0% to 200% of the target award for each such increment) at the end of the performance period based on the Total Shareholder Return of our stock compared to the Total Shareholder Returns of a group of peer companies.
 
During the quarter ended March 27, 2013, we made payments of $0.9 million in cash and issued 0.3 million shares of common stock related to restricted stock unit awards.
 
As of March 27, 2013, we had approximately $6.6 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 1.9 years.
 
Board Deferred Stock Units

During the quarter ended March 27, 2013, we granted less than 0.1 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $5.06 per unit to non-employee members of our Board of Directors. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of the Board of Directors) or upon termination as a member of the Board of Directors. During the quarter ended March 27, 2013, less than 0.1 million deferred stock units were converted into shares of common stock. As of March 27, 2013, we had approximately $0.1 million of unrecognized compensation cost related to all unvested deferred stock unit awards outstanding, which is expected to be recognized over a weighted average of 0.1 years.
 
Note 10.     Income Taxes

The provision for income taxes was $3.6 million and $3.9 million for the quarters ended March 27, 2013 and March 28, 2012, respectively. For the 2013 period, the difference in the overall effective rate from the U.S. Statutory rate was due to a discrete tax item. The passage of the American Tax Payer Relief Act of 2012, enacted in January 2013, resulted in a deferred tax benefit of $0.5 million related to work opportunity credits generated in 2012, which were allowed retroactively. The provision for income taxes for the first quarter of 2012 was determined using our effective rate estimated for the entire fiscal year.


13



Note 11.     Net Income Per Share
 
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands, except for per share amounts)
Numerator:
 
 
 
Net income
$
7,081

 
$
5,865

 
 
 
 
Denominator:
 
 
 
Weighted average shares - basic
92,350

 
96,075

Effect of dilutive securities:
 
 
 
Options
1,023

 
904

Restricted stock units and awards
1,088

 
899

Weighted average shares - diluted
94,461

 
97,878

 
 
 
 
Basic net income per share
$
0.08

 
$
0.06

Diluted net income per share
$
0.07

 
$
0.06

 
 
 
 
Stock options excluded (1)

 
1,730

Restricted stock units and awards excluded (1)
331

 
715

(1)
Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.
        
Note 12.     Supplemental Cash Flow Information

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Income taxes paid, net
$
343

 
$
213

Interest paid
$
2,526

 
$
4,887

 
 
 
 
Noncash investing and financing activities:
 
 
 
Issuance of common stock, pursuant to share-based compensation plans
$
1,586

 
$
296

Execution of capital leases
$
1,313

 
$
1,010

Treasury stock payable
$
177

 
$

 
Note 13.     Share Repurchase
 
Our Old Credit Facility (as defined below in Note 15) permitted and our New Credit Facility (as defined below in Note 15) permits the payment of cash dividends and the purchase of Denny’s stock subject to certain limitations. In May 2012, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to an additional 6.0 million shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of March 27, 2013, we had repurchased 2.9 million shares of Common Stock for approximately $14.1 million and there were 3.1 million shares remaining to be repurchased under this share repurchase program.

Subsequent to the end of the quarter, we announced that our Board of Directors approved a new share repurchase program. See Note 15.


14



Note 14.     Commitments and Contingencies
  
There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company's consolidated results of operations or financial position. We record legal settlement costs as other operating expenses in our Condensed Consolidated Statements of Comprehensive Income as those costs are incurred.
 
Note 15.     Subsequent Events

Refinancing of Credit Facility
On April 24, 2013, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new senior secured credit agreement in an aggregate principal amount of $250 million (the “New Credit Facility”). The New Credit Facility is comprised of a $60 million senior secured term loan and a $190 million senior secured revolver (with a $30 million letter of credit sublimit). As of the closing, there were $105 million of borrowings outstanding under the new revolver. Borrowings under the New Credit Facility bear a tiered interest rate based on the Company's consolidated leverage ratio and is initially set at LIBOR plus 200 basis points. The New Credit Facility includes an accordion feature that would allow us to increase the size of the facility to $300 million. The maturity date for the New Credit Facility is April 24, 2018.
The New Credit Facility is being used to refinance the Old Credit Facility (described in Note 7) and will also be available for working capital, capital expenditures and other general corporate purposes. The New Credit Facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The New Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and maximum capital expenditures.
The term loan under the New Credit Facility requires amortization of the original term loan balance of 5% per year in the first two years, 7.5% in the subsequent two years and 10% in the fifth year with the balance due at maturity. We will be required to make certain mandatory prepayments under certain circumstances and will have the option to make certain prepayments under the New Credit Facility. The New Credit Facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are usual for facilities and transactions of this type. We estimate that the refinancing will result in a one-time charge to other nonoperating expense of approximately $1.2 million in the second quarter of 2013, as a result of charges for the unamortized portion of deferred financing costs related to the Old Credit Facility, and a portion of the fees related to the New Credit Facility.
Share Repurchase Authorization
On April 25, 2013, we announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to an additional 10.0 million shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of April 24, 2013, there were approximately 2.4 million shares remaining available to be repurchased under our previous share repurchase program (as described above in Note 13).

Interest Rate Hedges
Our existing interest rate hedges remain in effect under the New Credit Facility until April 13, 2014 (see Note 7). In addition, on April 30, 2013, we entered into interest rate hedges that cap the LIBOR rate on borrowings under the New Credit Facility. The 200 basis point LIBOR cap applies to $150 million of borrowings from April 14, 2014 through March 31, 2015.

Also, on April 30, 2013, we entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 through March 29, 2018. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on a related $150 million notional debt obligation from March 31, 2015 through March 31, 2017 and a related $140 million notional debt obligation from April 1, 2017 through March 29, 2018. Under the terms of the swaps, we will pay an average fixed rate of 3.12% on the notional amounts and receive payments from a counterparty based on the 30-day LIBOR rate.



15



Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion is intended to highlight significant changes in our financial position as of March 27, 2013 and results of operations for the quarter ended March 27, 2013 compared to the quarter ended March 28, 2012. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflect our best judgment based on factors currently known and are intended to speak only as of the date such statements are made, involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; 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 (including acts of war and terrorism); and other factors included in the discussion below, or in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors, contained in our Annual Report on Form 10-K for the year ended December 26, 2012.

16




Statements of Income
 
The following table contains information derived from our Condensed Consolidated Statements of Comprehensive Income expressed as a percentage of total operating revenues, except as noted below. Percentages may not add due to rounding.
 
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
81,030

 
70.8
%
 
$
94,163

 
74.3
 %
Franchise and license revenue
33,460

 
29.2
%
 
32,575

 
25.7
 %
Total operating revenue
114,490

 
100.0
%
 
126,738

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
Product costs
21,146

 
26.1
%
 
23,533

 
25.0
 %
Payroll and benefits
31,546

 
38.9
%
 
37,753

 
40.1
 %
Occupancy
5,228

 
6.5
%
 
5,774

 
6.1
 %
Other operating expenses
11,200

 
13.8
%
 
12,895

 
13.7
 %
Total costs of company restaurant sales
69,120

 
85.3
%
 
79,955

 
84.9
 %
Costs of franchise and license revenue (a)
11,402

 
34.1
%
 
11,312

 
34.7
 %
General and administrative expenses
15,159

 
13.2
%
 
15,663

 
12.4
 %
Depreciation and amortization
5,224

 
4.6
%
 
6,060

 
4.8
 %
Operating (gains), losses and other charges, net
134

 
0.1
%
 
(165
)
 
(0.1
)%
Total operating costs and expenses
101,039

 
88.3
%
 
112,825

 
89.0
 %
Operating income
13,451

 
11.7
%
 
13,913

 
11.0
 %
Interest expense, net
2,800

 
2.4
%
 
4,456

 
3.5
 %
Other nonoperating expense (income), net
1

 
0.0
%
 
(295
)
 
(0.2
)%
Net income before income taxes
10,650

 
9.3
%
 
9,752

 
7.7
 %
Provision for income taxes
3,569

 
3.1
%
 
3,887

 
3.1
 %
Net income
$
7,081

 
6.2
%
 
$
5,865

 
4.6
 %
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

Company average unit sales
$
494

 
 

 
$
470

 
 

Franchise average unit sales
$
349

 
 

 
$
349

 
 

Company equivalent units (b)
164

 
 

 
200

 
 

Franchise equivalent units (b)
1,526

 
 

 
1,481

 
 

Company same-store sales increase (decrease) (c)(d)
(1.5
)
%
 

 
0.8

%
 

Domestic franchise same-store sales increase (decrease) (c)(e)
(0.5
)
%
 

 
2.8

%
 

            
(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 restaurants that were open the same period in the prior year.
(d)
Prior year amounts have not been restated for 2013 comparable units.
(e)
Prior year amounts have been restated to represent domestic franchise units only.


17



Quarter Ended March 27, 2013 Compared with Quarter Ended March 28, 2012
  
Unit Activity

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
Company restaurants, beginning of period
164

 
206

Units opened

 

Units sold to franchisees

 
(6
)
Units closed

 
(3
)
End of period
164

 
197

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,524

 
1,479

Units opened 
7

 
6

Units purchased from Company

 
6

Units closed
(6
)
 
(8
)
End of period
1,525

 
1,483

Total restaurants, end of period
1,689

 
1,680


Company Restaurant Operations

During the quarter ended March 27, 2013, we realized a 1.5% decrease in same-store sales. Company restaurant sales decreased $13.1 million, or 13.9%, primarily resulting from a 36 equivalent-unit decrease in company restaurants. The decrease in equivalent-units resulted primarily from the sale of company restaurants to franchisees during the prior year.

Total costs of company restaurant sales as a percentage of company restaurant sales increased to 85.3% from 84.9%. Product costs increased to 26.1% from 25.0% primarily due to the unfavorable impact of product mix as well as increased commodity costs. Payroll and benefits decreased to 38.9% from 40.1% primarily as a result of a decrease in incentive compensation and lower medical costs. Occupancy costs increased to 6.5% from 6.1% resulting from the positive development of certain general liability claims in the prior year period. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(Dollars in thousands)
Utilities
$
3,127

 
3.9
%
 
$
3,714

 
3.9
%
Repairs and maintenance
1,349

 
1.7
%
 
1,688

 
1.8
%
Marketing
3,016

 
3.7
%
 
3,535

 
3.8
%
Legal
276

 
0.3
%
 
98

 
0.1
%
Other direct costs
3,432

 
4.2
%
 
3,860

 
4.1
%
Other operating expenses
$
11,200

 
13.8
%
 
$
12,895

 
13.7
%


 

18



Franchise Operations

Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(Dollars in thousands)
Royalties
$
21,027

 
62.9
%
 
$
20,527

 
63.0
%
Initial fees
280

 
0.8
%
 
436

 
1.3
%
Occupancy revenue
12,153

 
36.3
%
 
11,612

 
35.7
%
Franchise and license revenue
$
33,460

 
100.0
%
 
$
32,575

 
100.0
%
 
 
 
 
 
 
 
 
Occupancy costs
8,853

 
26.5
%
 
8,723

 
26.8
%
Other direct costs
2,549

 
7.6
%
 
2,589

 
7.9
%
Costs of franchise and license revenue
$
11,402

 
34.1
%
 
$
11,312

 
34.7
%
 
Royalties increased by $0.5 million, or 2.4%, primarily resulting from a 45 equivalent unit increase in franchised and licensed units, partially offset by a 0.5% decrease in domestic same-store sales, as compared to the prior year. The increase in equivalent units resulted primarily from the sale of company restaurants to franchisees during the prior year. Initial fees decreased by $0.2 million, or 35.8%, as no restaurants were sold to franchisees during the current year period. The increase in occupancy revenue of $0.5 million, or 4.7%, is primarily the result of the sale of restaurants to franchisees during 2012.

Costs of franchise and license revenue increased by $0.1 million, or 0.8%. The increase in occupancy costs of $0.1 million, or 1.5%, is primarily the result of the sale of restaurants to franchisees during the prior year, partially offset by lease expirations. Other direct costs remained flat. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 34.1% for the quarter ended March 27, 2013 from 34.7% for the quarter ended March 28, 2012.
 
Other Operating Costs and Expenses
 
Other operating costs and expenses such as general and administrative expenses and depreciation and amortization expense relate to both company and franchise operations.
 
General and administrative expenses are comprised of the following:

 
Quarter Ended
  
March 27, 2013
 
March 28, 2012
 
(In thousands)
Share-based compensation
$
1,175

 
$
790

Other general and administrative expenses
13,984

 
14,873

Total general and administrative expenses
$
15,159

 
$
15,663

 
The $0.5 million decrease in general and administrative expenses is the result of $0.9 million in reductions related to payroll and benefits costs, travel and professional fees, partially offset by a $0.4 million increase in share-based compensation resulting from the increased payout probability of certain awards.


19



Depreciation and amortization is comprised of the following:

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Depreciation of property and equipment
$
3,693

 
$
4,437

Amortization of capital lease assets
798

 
818

Amortization of intangible assets
733

 
805

Total depreciation and amortization expense
$
5,224

 
$
6,060

 
The overall decrease in depreciation and amortization expense is due primarily to the sale of company restaurants to franchisees during fiscal 2012.
 
Operating (gains), losses and other charges, net are comprised of the following:

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Losses (gains) on sales of assets and other, net
$
18

 
$
(1,955
)
Restructuring charges and exit costs
116

 
1,267

Impairment charges

 
523

Operating (gains), losses and other charges, net
$
134

 
$
(165
)
 
During the quarter ended March 28, 2012, we recognized gains of $2.0 million, primarily resulting from the sale of restaurant operations to franchisees and the sale of real estate.

Restructuring charges and exit costs were comprised of the following:
         
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Exit costs 
$
56

 
$
579

Severance and other restructuring charges
60

 
688

Total restructuring and exit costs
$
116

 
$
1,267

 
Impairment charges of $0.5 million for the quarter ended March 28, 2012 resulted primarily from the impairment of an underperforming unit and a unit identified as assets held for sale.
 
Operating income was $13.5 million for the quarter ended March 27, 2013 and $13.9 million for the quarter ended March 28, 2012.
 

20



Interest expense, net is comprised of the following:

 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Interest on credit facilities
$
1,269

 
$
2,628

Interest on capital lease liabilities
900

 
969

Letters of credit and other fees
337

 
461

Other interest income
(21
)
 
(308
)
Total cash interest
2,485

 
3,750

Amortization of deferred financing costs
133

 
340

Amortization of debt discount

 
121

Interest accretion on other liabilities
182

 
245

Total interest expense, net
$
2,800

 
$
4,456

 
The decrease in interest expense resulted from a decrease in interest rates related to the 2012 refinancing of our credit facility, as well as debt reductions during 2012.

The provision for income taxes was $3.6 million for the quarter ended March 27, 2013 compared to $3.9 million the quarter ended March 28, 2012. For the 2013 period, the difference in the overall effective rate from the U.S. Statutory rate was due to a discrete tax item. The passage of the American Tax Payer Relief Act of 2012, enacted in January 2013, resulted in a deferred tax benefit of $0.5 million related to work opportunity credits generated in 2012 which were allowed retroactively. The provision for income taxes for the first quarter of 2012 was determined using our effective rate estimated for the entire fiscal year.
 
Net income was $7.1 million for the quarter ended March 27, 2013 compared with $5.9 million for the quarter ended March 28, 2012 due to the factors noted above.
 

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility (as described below). Principal uses of cash are operating expenses, capital expenditures, debt repayments and the repurchase of shares of our Common Stock.
 
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:
 
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Net cash provided by operating activities
$
7,355

 
$
8,486

Net cash provided by (used in) investing activities
(2,154
)
 
2,476

Net cash used in financing activities
(8,503
)
 
(11,162
)
Decrease in cash and cash equivalents
$
(3,302
)
 
$
(200
)
  
We believe that our estimated cash flows from operations for 2013, combined with our capacity for additional borrowings under our credit facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months.
 

21



Net cash flows used in investing activities were $2.2 million for the quarter ended March 27, 2013. These cash flows include capital expenditures of $3.0 million and issuances of notes receivable of $0.4 million, partially offset by $1.2 million in collections of notes receivable. Our principal capital requirements have been largely associated with the following:
  
 
Quarter Ended
 
March 27, 2013
 
March 28, 2012
 
(In thousands)
Facilities
$
1,199

 
$
962

New construction 
400

 
407

Remodeling
1,030

 
11

Information technology
96

 
18

Other
281

 
438

Capital expenditures
$
3,006

 
$
1,836

 
Capital expenditures for fiscal 2013 are expected to be approximately $19-$21 million, comprised primarily of costs related to remodels and facilities.
 
Cash flows used in financing activities were $8.5 million for the quarter ended March 27, 2013, which included long-term debt payments of $5.1 million and stock repurchases of $2.3 million.

Our working capital deficit was $22.9 million at March 27, 2013 compared with $27.2 million at December 26, 2012. The decrease in working capital deficit is primarily related to the timing of payments impacting prepaid and payable balances. We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually become due after the receipt of cash from the related sales.

Credit Facility

As of March 27, 2013, we had outstanding term loan borrowings under the credit facility of $166.0 million and outstanding letters of credit under the senior secured revolver of $25.2 million. There were no revolving loans outstanding at March 27, 2013. These balances resulted in availability of $34.8 million under the revolving facility. The weighted-average interest rate under the term loan was 2.96% as of March 27, 2013.

A commitment fee of 0.375% was paid on the unused portion of the revolving credit facility. Interest on the credit facility was
payable at per annum rates equal to LIBOR plus 275 basis points. The maturity date for the credit facility was April 12, 2017. The term loan under the credit facility amortized $19.0 million annually, payable in quarterly installments, with all remaining amounts due on the maturity date. We were required to make certain mandatory prepayments under certain circumstances and had the option to make certain prepayments under the credit facility. The optional prepayments were applied against future amortization. The credit facility included events of default (and related remedies, including acceleration and increased interest rates following an event of default) that were usual for facilities and transactions of this type.

The credit facility was guaranteed by the Company and its material subsidiaries and was secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It included negative covenants that are usual for facilities and transactions of this type. The credit facility also included certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charged coverage ratio and maximum capital expenditures.

On April 13, 2012, we entered into interest rate hedges that cap the LIBOR rate on borrowings under the credit facility for a two year period. The 200 basis point LIBOR cap applies to $150 million of borrowings during the first year and $125 million of borrowings during the second year.




22



Refinancing of Credit Facility
 
On April 24, 2013, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new senior secured credit agreement in an aggregate principal amount of $250 million (the “New Credit Facility”). The New Credit Facility is comprised of a $60 million senior secured term loan and a $190 million senior secured revolver (with a $30 million letter of credit sublimit). As of the closing, there were $108 million of borrowings outstanding under the new revolver. Borrowings under the New Credit Facility bear a tiered interest rate based on the Company's consolidated leverage ratio and is initially set at LIBOR plus 200 basis points. The New Credit Facility includes an accordion feature that would allow us to increase the size of the facility to $300 million. The maturity date for the New Credit Facility is April 24, 2018.
The New Credit Facility is being used to refinance the Old Credit Facility and will also be available for working capital, capital expenditures and other general corporate purposes. The New Credit Facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The New Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and maximum capital expenditures.
The term loan under the New Credit Facility requires amortization of 5% per year in the first two years, 7.5% in the subsequent two years and 10% in the fifth year with the balance due at maturity. We will be required to make certain mandatory prepayments under certain circumstances and will have the option to make certain prepayments under the New Credit Facility. The New Credit Facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are usual for facilities and transactions of this type. We estimate that the refinancing will result in a one-time charge to other nonoperating expense of approximately $1.2 million in the second quarter of 2013, as a result of charges for the unamortized portion of deferred financing costs related to the Old Credit Facility, and a portion of the fees related to the New Credit Facility.
Interest Rate Hedges
Our existing interest rate hedges remain in effect under the New Credit Facility until April 13, 2014. In addition, on April 30, 2013, we entered into interest rate hedges that cap the LIBOR rate on borrowings under the New Credit Facility. The 200 basis point LIBOR cap applies to $150 million of borrowings from April 14, 2014 through March 31, 2015.

Also, on April 30, 2013, we entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 through March 29, 2018. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on a related $150 million notional debt obligation from March 31, 2015 through March 31, 2017 and a related $140 million notional debt obligation from April 1, 2017 through March 29, 2018. Under the terms of the swaps, we will pay an average fixed rate of 3.12% on the notional amounts and receive payments from a counterparty based on the 30-day LIBOR rate.

Implementation of New Accounting Standards

See Note 2 to our Condensed Consolidated Financial Statements.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk
 
We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, as of March 27, 2013, borrowings under our term loan and revolver bore interest at variable rates based on LIBOR plus a spread of 275 basis points per annum. Through April 13, 2013, up to $150 million of the term loan borrowings had a 200 basis point LIBOR point cap. As of April 13, 2013, up to $125 million of the term loan borrowing has a 200 basis point LIBOR point cap.
 

23



Based on the levels of borrowings under the Old Credit Facility at March 27, 2013, if interest rates changed by 100 basis points, our annual cash flow and income before taxes would change by approximately $1.7 million. This computation is determined by considering the impact of hypothetical interest rates on the Old Credit Facility at March 27, 2013, taking into consideration the interest rate cap. Based on the levels of borrowings under the New Credit Facility at April 24, 2013, if interest rates changed by 100 basis points, our annual cash flow and income before taxes would change by approximately $1.7 million. This computation is determined by considering the impact of hypothetical interest rates on the New Credit Facility at April 24, 2013, taking into consideration the interest rate cap. However, the nature and amount of our borrowings may vary as a result of future business requirements, market conditions and other factors.
 
We also have exposure to interest rate risk related to our pension plan, other defined benefit plans and self-insurance liabilities. A 25 basis point increase or decrease in discount rate would increase or decrease our projected benefit obligation related to our pension plan by approximately $2.6 million and would impact the pension plan's net periodic benefit cost by approximately $0.3 million. The impact of a 25 basis point increase or decrease in discount rate would decrease or increase our projected benefit obligation related to our other defined benefit plans by less than $0.1 million while the plans' net periodic benefit cost would remain flat. A 25 basis point increase or decrease in discount rate related to our self-insurance liabilities would result in a decrease or increase of $0.2 million, respectively.
 
Commodity Price Risk
 
We purchase certain food products, such as beef, poultry, pork, eggs and coffee, and utilities such as gas and electricity, which are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control and which are generally unpredictable. Changes in commodity prices affect us and our competitors generally and often simultaneously. In general, we purchase food products and utilities based upon market prices established with vendors. Although many of the items purchased are subject to changes in commodity prices, the majority of our purchasing arrangements are structured to contain features that minimize price volatility by establishing fixed pricing and/or price ceilings and floors. We use these types of purchase arrangements to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting our menu pricing or changing our product delivery strategy. However, competitive circumstances could limit such actions and, in those circumstances, increases in commodity prices could lower our margins. Because of the often short-term nature of commodity pricing aberrations and our ability to change menu pricing or product delivery strategies in response to commodity price increases, we believe that the impact of commodity price risk is not significant.
 
We have established a policy to identify, control and manage market risks which may arise from changes in interest rates, commodity prices and other relevant rates and prices. We do not use derivative instruments for trading purposes. 
 
Item 4.     Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our management conducted an evaluation (under the supervision and with the participation of our President and Chief Executive Officer, John C. Miller, and our Executive Vice President, Chief Administrative Officer and Chief Financial Officer, F. Mark Wolfinger) as of the end of the period covered by this Quarterly report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Messrs. Miller and Wolfinger each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Messrs. Miller and Wolfinger, as appropriate to allow timely decisions regarding required disclosure. 
 
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 


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PART II - OTHER INFORMATION

Item 1.     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 the Company's consolidated results of operations or financial position.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities by the Issuer
 
The table below provides information concerning repurchases of shares of our Common Stock during the quarter ended March 27, 2013
 
Period
 
Total Number of Shares Purchased
 
 Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)
 
Maximum Number of Shares that May Yet be Purchased Under the Programs (2)
 
(In thousands, except per share amounts)
 
 
December 27, 2012 - January 23, 2013
75

 
$
4.85

 
75

 
3,390

January 24, 2013 - February 20, 2013

 

 

 
3,390

February 21, 2013 - March 27, 2013
266

 
5.70

 
266

 
3,124

Total
341

 
$
5.52

 
341

 
 
 
(1)
Average price paid per share excludes commissions.
(2)
May 18, 2012 we announced that our Board of Directors had approved the repurchase of up to 6 million shares of Common Stock. Such repurchases may take place from time to time on the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended March 27, 2013, we purchased 341,100 shares of Common Stock for an aggregate consideration of approximately $1.9 million, pursuant to the share repurchase program.

On April 25, 2013, we announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to an additional 10.0 million shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of April 24, 2013, there were approximately 2.4 million shares remaining available to be repurchased under our previous share repurchase program.


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Item 6.     Exhibits
 
The following are included as exhibits to this report: 
Exhibit No.
 
Description 
 
 
 
10.1
 
Form of the 2013 Long-Term Performance Incentive Program Performance Shares and Target Cash Opportunity Award Certificate
 
 
 
10.2
 
Written Description of the Denny's 2013 Long-Term Performance Incentive Program
 
 
 
10.3
 
Amended and Restated Credit Agreement dated as of April 24, 2013 among Denny's, Inc., as the Borrower, Denny's Corporation, as Parent, and Certain Subsidiaries of Parent, as Guarantors, Wells Fargo Bank, National Association, as Administrative Agent and L/C Issuer, Regions Bank and General Electric Capital Corporation, as Co-Syndication Agents, Cadence Bank N.A., Fifth Third Bank and RBS Citizens, N.A., as Co-Documentation Agents, and The Other Lenders Party Hereto, Wells Fargo Securities, LLC, Regions Capital Markets and GE Capital Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners.
 
 
 
10.4
 
Amended and Restated Guarantee and Collateral Agreement dated as of April 24, 2013 among Denny's, Inc., Denny's Realty, LLC, Denny's Corporation, DFO, LLC, the other Subsidiaries of Parent from time to time party hereto, and  Wells Fargo Bank, N.A., as Administrative Agent.
 
 
 
31.1
 
Certification of John C. Miller, President and Chief Executive Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of John C. Miller, President and Chief Executive Officer of Denny’s Corporation and F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed."

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
DENNY'S CORPORATION
 
 
 
 
 
 
Date:
May 1, 2013
By:    
/s/ F. Mark Wolfinger
 
 
 
 
F. Mark Wolfinger
 
 
 
 
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
 
 
 
 
 
 
Date:
May 1, 2013
By:    
/s/ Jay C. Gilmore
 
 
 
 
Jay C. Gilmore
 
 
 
 
Vice President,
Chief Accounting Officer and
Corporate Controller
 

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