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DENNY'S Corp - Quarter Report: 2015 April (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 April 1, 2015


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
¨
Smaller reporting company
¨
 
 
 
 
 
(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 30, 2015, 84,363,692 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)
 
April 1, 2015
 
December 31, 2014
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,718

 
$
3,074

Receivables
14,140

 
18,059

Inventories
2,680

 
2,952

Current deferred tax asset
24,108

 
24,310

Prepaid and other current assets
6,855

 
7,676

Total current assets
49,501

 
56,071

Property, net of accumulated depreciation of $254,753 and $255,089, respectively
108,412

 
109,777

Goodwill
31,451

 
31,451

Intangible assets, net
45,992

 
46,278

Deferred financing costs, net
2,451

 
1,614

Noncurrent deferred tax asset
17,620

 
19,252

Other noncurrent assets
25,637

 
25,415

Total assets
$
281,064

 
$
289,858

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$

 
$
4,125

Current maturities of capital lease obligations
3,271

 
3,609

Accounts payable
16,307

 
13,250

Other current liabilities
49,564

 
59,432

Total current liabilities
69,142

 
80,416

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
135,500

 
135,875

Capital lease obligations, less current maturities
14,689

 
15,204

Liability for insurance claims, less current portion
17,793

 
18,005

Other noncurrent liabilities and deferred credits
40,037

 
38,775

Total long-term liabilities
208,019

 
207,859

Total liabilities
277,161

 
288,275

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity
 

 
 

Common stock $0.01 par value; shares authorized - 135,000; April 1, 2015: 106,274 shares issued and 84,714 shares outstanding; December 31, 2014: 105,818 shares issued and 84,707 shares outstanding
$
1,063

 
$
1,058

Paid-in capital
572,109

 
571,674

Deficit
(429,688
)
 
(438,221
)
Accumulated other comprehensive loss, net of tax
(26,152
)
 
(24,602
)
Shareholders’ equity before treasury stock
117,332

 
109,909

Treasury stock, at cost, 21,561 and 21,111 shares, respectively
(113,429
)
 
(108,326
)
Total shareholders' equity
3,903

 
1,583

Total liabilities and shareholders' equity
$
281,064

 
$
289,858

See accompanying notes

3



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

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands, except per share amounts)
Revenue:
 
 
 
Company restaurant sales
$
85,982

 
$
79,304

Franchise and license revenue
34,189

 
32,616

Total operating revenue
120,171

 
111,920

Costs of company restaurant sales:
 
 
 
Product costs
21,444

 
20,583

Payroll and benefits
33,204

 
33,099

Occupancy
4,895

 
5,128

Other operating expenses
11,765

 
11,365

Total costs of company restaurant sales
71,308

 
70,175

Costs of franchise and license revenue
10,978

 
10,697

General and administrative expenses
16,936

 
14,116

Depreciation and amortization
5,024

 
5,238

Operating (gains), losses and other charges, net
608

 
422

Total operating costs and expenses, net
104,854

 
100,648

Operating income
15,317

 
11,272

Interest expense, net
2,087

 
2,322

Other nonoperating expense (income), net
29

 
(100
)
Net income before income taxes
13,201

 
9,050

Provision for income taxes
4,668

 
2,619

Net income
$
8,533

 
$
6,431

 
 
 
 
Basic net income per share
$
0.10

 
$
0.07

Diluted net income per share
$
0.10

 
$
0.07

 
 
 
 
Basic weighted average shares outstanding
84,875

 
88,803

Diluted weighted average shares outstanding
87,465

 
90,816

 
See accompanying notes

4


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

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Net income
$
8,533

 
$
6,431

Other comprehensive loss, net of tax:
 
 
 
Minimum pension liability adjustment, net of tax expense of $169 and $90
264

 
141

Recognition of unrealized loss on hedge transaction, net of tax benefit of $1,161 and $224
(1,814
)
 
(349
)
Other comprehensive loss
(1,550
)
 
(208
)
Total comprehensive income
$
6,983

 
$
6,223


See accompanying notes



5



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

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
(Deficit)
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, December 31, 2014
105,818

 
$
1,058

 
(21,111
)
 
$
(108,326
)
 
$
571,674

 
$
(438,221
)
 
$
(24,602
)
 
$
1,583

Net income

 

 

 

 

 
8,533

 

 
8,533

Other comprehensive loss

 

 

 

 

 

 
(1,550
)
 
(1,550
)
Share-based compensation on equity classified awards

 

 

 

 
(43
)
 

 

 
(43
)
Purchase of treasury stock

 

 
(450
)
 
(5,103
)
 

 

 

 
(5,103
)
Issuance of common stock for share-based compensation
368

 
4

 

 

 
(4
)
 

 

 

Exercise of common stock options
88

 
1

 

 

 
367

 

 

 
368

Tax benefit from share-based compensation

 

 

 

 
115

 

 

 
115

Balance, April 1, 2015
106,274

 
$
1,063

 
(21,561
)
 
$
(113,429
)
 
$
572,109

 
$
(429,688
)
 
$
(26,152
)
 
$
3,903

 
See accompanying notes

6



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
8,533

 
$
6,431

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
5,024

 
5,238

Operating (gains), losses and other charges, net
608

 
422

Amortization of deferred financing costs
120

 
121

Loss (gain) on early extinguishments of debt
278

 
(1
)
Loss on change in the fair value of interest rate caps

 
10

Deferred income tax expense
2,826

 
2,159

Share-based compensation
1,705

 
1,164

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
3,774

 
2,836

Inventories
272

 
(36
)
Other current assets
822

 
1,478

Other assets
(843
)
 
(586
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(275
)
 
3,306

Accrued salaries and vacations
(9,333
)
 
(3,967
)
Accrued taxes
(38
)
 
(320
)
Other accrued liabilities
(2,762
)
 
(3,961
)
Other noncurrent liabilities and deferred credits
(88
)
 
(963
)
Net cash flows provided by operating activities
10,623

 
13,331

Cash flows from investing activities:
 
 
 
Capital expenditures
(3,446
)
 
(6,857
)
Proceeds from disposition of property

 
4

Collections on notes receivable
495

 
727

Issuance of notes receivable
(449
)
 
(305
)
Net cash flows used in investing activities
(3,400
)
 
(6,431
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
140,500

 
3,000

Revolver payments
(90,250
)
 

Long-term debt payments
(55,839
)
 
(1,746
)
Proceeds from exercise of stock options
368

 
44

Tax withholding on share-based payments
(982
)
 
(419
)
Tax benefit (expense) for share-based compensation
115

 
(275
)
Deferred financing costs
(1,171
)
 

Purchase of treasury stock
(4,912
)
 
(8,596
)
Net bank overdrafts
3,592

 
(437
)
Net cash flows used in financing activities
(8,579
)
 
(8,429
)
Decrease in cash and cash equivalents
(1,356
)
 
(1,529
)
Cash and cash equivalents at beginning of period
3,074

 
2,943

Cash and cash equivalents at end of period
$
1,718

 
$
1,414

 
See accompanying notes

7



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. At April 1, 2015, the Denny's brand consisted of 1,694 restaurants, 1,534 of which were franchised/licensed restaurants and 160 of which were company operated.

Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles 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 31, 2014 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 31, 2014. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 30, 2015.

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

Discontinued Operations

ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity"

Effective January 1, 2015, we adopted ASU 2014-08, which raises the threshold for a disposal to qualify as a discontinued operation and modifies the related disclosure requirements. Under the new guidance, only disposals resulting in a strategic shift that will have a major effect on an entity's operations and financial results will be reported as discontinued operations. ASU 2014-08 also removes the requirement that an entity not have any significant continuing involvement in the operations of the component after disposal to qualify for reporting of the disposal as a discontinued operation. This guidance requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Accounting Standards to be Adopted

Revenue Recognition

ASU 2014-09, "Revenue from Contracts with Customers"

In May 2014, the FASB issued ASU 2014-09, which clarifies the principles used to recognize revenue for all entities. The new guidance requires companies to recognize revenue when it transfers goods or service to a customer in an amount that reflects the consideration to which a company expects to be entitled. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016 (our fiscal 2017), however on April 29, 2015 the FASB issued a proposed ASU that would defer the effective date one year (our fiscal 2018). The guidance allows for either a "full retrospective" adoption or a "modified retrospective" adoption, however early adoption is not permitted (under the proposed ASU earlier application would be permitted as of the original effective date). We are currently evaluating the adoption methods and the impact the adoption of this guidance will have on our consolidated financial statements.


8



Consolidation

ASU 2015-02,"Consolidation (Topic 810): Amendments to the Consolidation Analysis"

In February 2015, the FASB issued ASU 2015-02, which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015 (our fiscal 2016) with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

Debt Issuance

ASU 2015-03,"Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs"

In April 2015, the FASB issued ASU 2015-03, which simplifies the guidance on the presentation of debt issuance costs. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 (our fiscal 2016) with early adoption permitted. The new guidance is to be applied retrospectively to all prior periods. The adoption of this guidance will result in a reclassification between other noncurrent assets and long-term debt, less current maturities on the Consolidated Balance Sheets.

Defined Benefit Plans

ASU 2015-04,"Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets"

In April 2015, the FASB issued ASU 2015-04, which provides a practical expedient for entities with a fiscal year-end that does not coincide with a month-end. The practical expedient permits an entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end. ASU 2015-04 is effective for annual and interim periods beginning after December 15, 2015 (our fiscal 2016) with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on the financial statements as a result of future adoption.

Note 3.     Receivables
 
Receivables were comprised of the following:
 
 
April 1, 2015
 
December 31, 2014
 
(In thousands)
Current assets:
 
 
 
Receivables:
 
 
 
Trade accounts receivable from franchisees
$
9,855

 
$
10,929

Notes receivable from franchisees
1,275

 
1,419

Vendor receivables
973

 
2,534

Credit card receivables
1,385

 
1,661

Other
926

 
1,816

Allowance for doubtful accounts
(274
)
 
(300
)
Total current receivables, net
$
14,140

 
$
18,059

 
 
 
 
Noncurrent assets (included as a component of other noncurrent assets):
 
 
 
Notes receivable from franchisees
$
523

 
$
425

 


9



Note 4.    Goodwill and Other Intangible Assets

Goodwill had a carrying value of $31.5 million as of April 1, 2015 and December 31, 2014.

Other intangible assets were comprised of the following:
 
 
April 1, 2015
 
December 31, 2014
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,065

 
$

 
$
44,065

 
$

Liquor licenses
126

 

 
126

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Franchise and license agreements
12,824

 
12,081

 
22,366

 
21,426

Reacquired franchise rights
1,857

 
799

 
1,857

 
710

Intangible assets
$
58,872

 
$
12,880

 
$
68,414

 
$
22,136

 
The $9.5 million decrease in franchise and license agreements primarily resulted from the removal of fully amortized agreements.

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

 
April 1, 2015
 
December 31, 2014
 
(In thousands)
Accrued salaries and vacation
$
16,520

 
$
23,928

Accrued insurance, primarily current portion of liability for insurance claims
7,312

 
6,340

Accrued taxes
7,091

 
7,129

Accrued advertising
6,832

 
8,027

Gift cards
3,158

 
4,017

Other
8,651

 
9,991

Other current liabilities
49,564

 
59,432


Note 6.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Gains on sales of assets and other, net
$
(22
)
 
$
(8
)
Restructuring charges and exit costs
581

 
430

Impairment charges
49

 

Operating (gains), losses and other charges, net
$
608

 
$
422

 

10



Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Exit costs
$
453

 
$
54

Severance and other restructuring charges
128

 
376

Total restructuring charges and exit costs
$
581

 
$
430


The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance, December 31, 2014
$
2,142

Exit costs (1)
453

Payments, net of sublease receipts
(283
)
Interest accretion
34

Balance, April 1, 2015
2,346

Less current portion included in other current liabilities
708

Long-term portion included in other noncurrent liabilities
$
1,638


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

Note 7.     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:
 
 
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)
 
 
Fair value measurements as of April 1, 2015:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
10,151

 
$
10,151

 
$

 
$

 
market approach
Interest rate swaps (2)
(2,332
)
 

 
(2,332
)
 

 
income approach
Total
$
7,819

 
$
10,151

 
$
(2,332
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements as of December 31, 2014:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
9,295

 
$
9,295

 
$

 
$

 
market approach
Interest rate swap (2)
642

 

 
642

 

 
income approach
Interest rate cap (2)
0

 

 
0

 

 
income approach
Total
$
9,937

 
$
9,295

 
$
642

 
$

 
 
 
(1)
The fair values of our deferred compensation plan investments are based on the closing market prices of the participants’ elected investments.
(2)
The fair values of our interest rate swaps and interest rate cap are based upon Level 2 inputs, which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. See Note 8 for details on the interest rate swaps and interest rate cap.


11



Those assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

 
 
Significant Unobservable Inputs
(Level 3)
 
Impairment Charges
 
Valuation Technique
 
 
 
 
 
 
Fair value measurements as of December 31, 2014:
 
 
 
 
 
 
Assets held and used (1)
 
$

 
$
320

 
income approach

(1)
As of December 31, 2014, impaired assets related to an underperforming restaurant were written down to their fair value. To determine fair value, we used the income approach, which assumes that the future cash flows reflect current market expectations. These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows from operations, which are not observable from the market, directly or indirectly.

Note 8.     Long-Term Debt

Refinancing of Credit Facility

On March 30, 2015, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new five-year $250 million senior secured revolver (with a $30 million letter of credit sublimit) (the “New Credit Facility”). The New Credit Facility includes an accordion feature that would allow us to increase the size of the revolver to $325 million. A commitment fee of 0.20% is paid on the unused portion of the revolving credit facility. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was initially set at LIBOR plus 150 basis points. The maturity date for the credit facility is March 30, 2020.

The New Credit Facility was 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 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 and a minimum consolidated fixed charge coverage ratio.

As a result of the debt refinancing, we recorded $0.3 million of losses on early extinguishment of debt from the write-off of deferred financing costs related to the Old Credit Facility. These losses are included as a component of other nonoperating expense in the Condensed Consolidated Statements of Comprehensive Income.

As of April 1, 2015, we had outstanding revolver loans of $135.5 million and outstanding letters of credit under the senior secured revolver of $25.7 million. These balances resulted in availability of $88.8 million under the revolving facility. Prior to considering the impact of our interest rate swap, described below, the weighted-average interest rate on outstanding revolver loans was 1.69% and 2.17% as of April 1, 2015 and December 31, 2014, respectively. Taking into consideration our interest rate swap, which became effective on March 31, 2015, the weighted-average interest rate of outstanding revolver loans was 2.53% as of April 1, 2015.

Aggregate annual maturities of long-term debt, excluding capital lease obligations, at April 1, 2015 are as follows:

 
 
In thousands
Remainder of 2015
 
$

2016
 

2017
 

2018
 

2019
 

Thereafter
 
135,500

Total long-term debt, excluding capital lease obligations
 
$
135,500



12



Interest Rate Hedges
We previously entered into interest rate hedges that capped the LIBOR rate on borrowings under our credit facility. The 200 basis point LIBOR cap applied to $125 million of borrowings from April 14, 2013 through April 13, 2014 and to $150 million of borrowings from April 14, 2014 through March 31, 2015.

We also previously entered into an interest rate swap to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 to March 29, 2018. During the quarter ended April 1, 2015, we entered into an additional interest rate swap to hedge a portion of the cash flows of our floating rate debt from March 29, 2018 through March 31, 2025. 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 $120 million notional debt obligation. Based on the interest rate as determined by our consolidated leverage ratio in effect as of April 1, 2015, under the terms of the swap, we will pay an average fixed rate of 2.63% on the notional amounts from March 31, 2015 to March 29, 2018, pay an average fixed rate of 3.936% from March 29, 2018 through March 31, 2025 and receive payments during these periods from a counterparty based on the 30-day LIBOR rate. As of April 1, 2015, the fair value of the interest rate swaps was a liability of $2.3 million, which is recorded as a component of other noncurrent liabilities and deferred credits on our Condensed Consolidated Balance Sheets. See Note 14 for the amounts recorded in accumulated other comprehensive loss related to the interest rate swaps.

We believe that our estimated cash flows from operations for 2015, 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 9.     Defined Benefit Plans
 
The components of net periodic benefit cost were as follows:

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Pension Plan:
 
 
 
Service cost
$
95

 
$
95

Interest cost
746

 
779

Expected return on plan assets
(877
)
 
(989
)
Amortization of net loss
433

 
231

Net periodic benefit cost
$
397

 
$
116

 
 
 
 
Other Defined Benefit Plans:
 
 
 
Interest cost
$
27

 
$
31

Amortization of net loss
20

 
15

Net periodic benefit cost
$
47

 
$
46

 
We made no contributions to our qualified pension plan during the quarter ended April 1, 2015. We made contributions of $1.3 million to our qualified pension plan during the quarter ended March 26, 2014. We made contributions of $0.1 million to our other defined benefit plans during both the quarters ended April 1, 2015 and March 26, 2014. We expect to contribute $0.1 million to our other defined benefit plans over the remainder of fiscal 2015.

During 2014, our Board of Directors approved the termination of the Advantica Pension Plan as of December 31, 2014. We currently expect that the termination of the plan will be completed by the end of fiscal 2015 or early 2016. Settlement gain or loss, if any, resulting from the termination will be recognized at that time. We will be required to make contributions to the qualified pension plan as a result of the termination, dependent upon market conditions and participant elections. We currently expect that these contributions will be between $6 million and $8 million.

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 April 1, 2015 and December 31, 2014, respectively.
 

13



Note 10.     Share-Based Compensation

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

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Stock options
$

 
$
52

Performance share awards
1,523

 
928

Restricted stock units for board members
182

 
184

Total share-based compensation
$
1,705

 
$
1,164

 
Performance Share Awards
 
In February 2015, we granted certain employees approximately 0.2 million performance shares that vest based on the total shareholder return ("TSR") of our stock compared to the TSRs of a group of peer companies and 0.3 million performance shares that vest based on our Adjusted EBITDA growth rate, as defined under the terms of the award. As the TSR based performance shares contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value of $11.86 per share. The performance shares based on the Adjusted EBITDA growth rate have a grant date fair value of $11.03 per share, the market value of our stock on the date of grant. The awards granted to our named executive officers also contain a performance condition based on certain operating measures for the fiscal year ended December 30, 2015. The TSR and Adjusted EBITDA growth rate performance period is the three year fiscal period beginning January 1, 2015 and ending December 27, 2017. The performance shares will vest and be earned (from 0% to 150% of the target award for each such increment) at the end of the performance period.

During the quarter ended April 1, 2015, we made payments of $3.4 million in cash and issued 0.4 million shares of common stock related to performance share awards.
 
As of April 1, 2015, we had approximately $8.3 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which is expected to be recognized over a weighted average of 2.1 years.
 
Restricted Stock Units for Board Members

As of April 1, 2015, we had approximately $0.1 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 0.1 years.
 
Note 11.     Income Taxes

The effective tax rate for the quarter ended April 1, 2015 was 35.4%, compared to 28.9% for the quarter ended March 26, 2014. The increase in the effective rate is primarily related to discrete tax items. The 2015 and 2014 rates benefited from state jobs tax credits claimed for the prior year's hiring activity of 2.3% and 3.7%, respectively. In addition, the 2014 rate benefited 5.0% from out-of-period share-based compensation adjustments. We do not believe the out-of-period adjustment was material to any prior year financial statements or on earnings trends.


14



Note 12.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands, except for per share amounts)
Net income
$
8,533

 
$
6,431

 
 
 
 
Weighted average shares outstanding - basic
84,875

 
88,803

Effect of dilutive share-based compensation awards
2,590

 
2,013

Weighted average shares outstanding - diluted
87,465

 
90,816

 
 
 
 
Basic net income per share
$
0.10

 
$
0.07

Diluted net income per share
$
0.10

 
$
0.07

 
 
 
 
Anti-dilutive share-based compensation awards

 
573

    
Note 13.     Supplemental Cash Flow Information

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Income taxes paid, net
$
298

 
$
820

Interest paid
$
2,100

 
$
2,069

 
 
 
 
Noncash investing and financing activities:
 
 
 
Issuance of common stock, pursuant to share-based compensation plans
$
3,963

 
$
1,030

Execution of capital leases
$
282

 
$
423

Treasury stock payable
$
344

 
$
721

Accrued deferred financing costs
$
80

 
$

 
Note 14.     Shareholders' Equity

Share Repurchase
 
Our Old Credit Facility (as defined in Note 8) permitted and our New Credit Facility (as defined in Note 8) permits the payment of cash dividends and the purchase of Denny’s stock subject to certain limitations. In April 2013, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to an additional 10.0 million shares of our common stock (in addition to prior authorizations). 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. During the quarter ended April 1, 2015, we repurchased 450,000 shares of our common stock for approximately $5.1 million. This brings the total amount repurchased under this program to 6.6 million shares of our common stock for approximately $46.1 million, leaving 3.4 million shares that can be repurchased as of April 1, 2015.

On March 31, 2015, our Board of Directors approved a new share repurchase program authorizing us to repurchase an additional $100 million of our common stock, in addition to repurchases previously authorized. Such repurchases are to be made in a manner similar to, and will be in addition to, authorizations under the April 2013 repurchase program.

Repurchased shares are included as treasury stock in the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Shareholders' Equity.

15




Accumulated Other Comprehensive Loss

The components of the change in accumulated other comprehensive loss were as follows:

 
Pensions
 
Derivatives
 
Accumulated Other Comprehensive Loss
 
(In thousands)
Balance as of December 31, 2014
$
(24,994
)
 
$
392

 
$
(24,602
)
Amortization of net loss (1)
433

 

 
433

Net change in fair value of derivatives

 
(2,975
)
 
(2,975
)
Income tax (expense) benefit related to items of other comprehensive loss
(169
)
 
1,161

 
992

Balance as of April 1, 2015
$
(24,730
)
 
$
(1,422
)
 
$
(26,152
)

(1)
Before-tax amount that was reclassified from accumulated other comprehensive loss and included as a component of pension expense within general and administrative expenses in our Condensed Consolidated Statements of Income during the quarter ended April 1, 2015. See Note 9 for additional details.

We expect to reclassify approximately $1.1 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. This amount will be included as a component of interest expense in our Condensed Consolidated Statements of Income. See Note 8 for additional details.


Note 15.     Commitments and Contingencies

We have guarantees related to certain franchisee leases and loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through April 1, 2015, no events had occurred that caused us to make payments under the guarantees. There were $9.8 million of loans outstanding under these programs as of both April 1, 2015 and December 31, 2014. As of April 1, 2015, the maximum amounts payable under the lease guarantee and loan guarantees were $2.0 million and $1.7 million, respectively. As a result of these guarantees, we have recorded liabilities of approximately $0.1 million as of both April 1, 2015 and December 31, 2014, which are included as a component of other noncurrent liabilities and deferred credits in our Condensed Consolidated Balance Sheets and other nonoperating expense in our Condensed Consolidated Statements of Income.
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. 
Note 16.     Subsequent Events
 
We performed an evaluation of subsequent events and determined that no events required disclosure.



16



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 April 1, 2015 and results of operations for the quarter ended April 1, 2015 compared to the quarter ended March 26, 2014. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 31, 2014.


17



Statements of Income
 
The following table contains information derived from our Condensed Consolidated Statements of Income expressed as a percentage of total operating revenues, except as noted below. Percentages may not add due to rounding.
 
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
85,982

 
71.5
%
 
$
79,304

 
70.9
 %
Franchise and license revenue
34,189

 
28.5
%
 
32,616

 
29.1
 %
Total operating revenue
120,171

 
100.0
%
 
111,920

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
Product costs
21,444

 
24.9
%
 
20,583

 
26.0
 %
Payroll and benefits
33,204

 
38.6
%
 
33,099

 
41.7
 %
Occupancy
4,895

 
5.7
%
 
5,128

 
6.5
 %
Other operating expenses
11,765

 
13.7
%
 
11,365

 
14.3
 %
Total costs of company restaurant sales
71,308

 
82.9
%
 
70,175

 
88.5
 %
Costs of franchise and license revenue (a)
10,978

 
32.1
%
 
10,697

 
32.8
 %
General and administrative expenses
16,936

 
14.1
%
 
14,116

 
12.6
 %
Depreciation and amortization
5,024

 
4.2
%
 
5,238

 
4.7
 %
Operating (gains), losses and other charges, net
608

 
0.5
%
 
422

 
0.4
 %
Total operating costs and expenses, net
104,854

 
87.3
%
 
100,648

 
89.9
 %
Operating income
15,317

 
12.7
%
 
11,272

 
10.1
 %
Interest expense, net
2,087

 
1.7
%
 
2,322

 
2.1
 %
Other nonoperating expense (income), net
29

 
0.0
%
 
(100
)
 
(0.1
)%
Net income before income taxes
13,201

 
11.0
%
 
9,050

 
8.1
 %
Provision for income taxes
4,668

 
3.9
%
 
2,619

 
2.3
 %
Net income
$
8,533

 
7.1
%
 
$
6,431

 
5.7
 %
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

Company average unit sales
$
538

 
 

 
$
498

 
 

Franchise average unit sales
$
383

 
 

 
$
356

 
 

Company equivalent units (b)
160

 
 

 
159

 
 

Franchise equivalent units (b)
1,537

 
 

 
1,536

 
 

Company same-store sales increase (c)(d)
7.6
%
 
 

 
3.2
%
 
 

Domestic franchise same-store sales increase (c)(d)
7.1
%
 
 

 
1.5
%
 
 

            
(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 2015 comparable units.


18



Quarter Ended April 1, 2015 Compared with Quarter Ended March 26, 2014
  
Unit Activity

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
Company restaurants, beginning of period
161

 
163

Units opened

 

Units closed
(1
)
 
(2
)
End of period
160

 
161

 
 
 
 
Franchised and licensed restaurants, beginning of period
1,541

 
1,537

Units opened 
9

 
4

Units closed
(16
)
 
(6
)
End of period
1,534

 
1,535

Total restaurants, end of period
1,694

 
1,696


Company Restaurant Operations

During the quarter ended April 1, 2015, company restaurant sales increased $6.7 million, or 8.4%, primarily resulting from a 7.6% increase in company same-store sales and the November 2014 reopening of our highest volume restaurant in Las Vegas, Nevada.
 
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 82.9% from 88.5%. Product costs decreased to 24.9% from 26.0% primarily due to the favorable impact of product mix and higher menu pricing. Payroll and benefits decreased to 38.6% from 41.7% primarily due to a 2.3 percentage point decrease in labor costs, a 0.8 percentage point decrease in workers' compensation costs and a 0.3 percentage point decrease in group insurance. The decrease in labor costs was primarily due to the leveraging effect of higher sales. The current year period included $0.2 million in favorable workers' compensation claims development, as compared to $0.4 million in unfavorable claims development in the prior year period. Occupancy costs decreased to 5.7% from 6.5%. The occupancy decrease is primarily due to a $0.2 million increase in general liability costs during the prior year period and the leveraging effect of higher sales in the current year period. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(Dollars in thousands)
Utilities
$
3,176

 
3.7
%
 
$
3,331

 
4.2
%
Repairs and maintenance
1,450

 
1.7
%
 
1,459

 
1.8
%
Marketing
3,207

 
3.7
%
 
3,007

 
3.8
%
Other direct costs
3,932

 
4.6
%
 
3,568

 
4.5
%
Other operating expenses
$
11,765

 
13.7
%
 
$
11,365

 
14.3
%


19



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
 
April 1, 2015
 
March 26, 2014
 
(Dollars in thousands)
Royalties
$
23,163

 
67.7
%
 
$
21,481

 
65.9
%
Initial fees
445

 
1.3
%
 
117

 
0.3
%
Occupancy revenue
10,581

 
31.0
%
 
11,018

 
33.8
%
Franchise and license revenue
$
34,189

 
100.0
%
 
$
32,616

 
100.0
%
 
 
 
 
 
 
 
 
Occupancy costs
7,891

 
23.1
%
 
8,268

 
25.4
%
Other direct costs
3,087

 
9.0
%
 
2,429

 
7.4
%
Costs of franchise and license revenue
$
10,978

 
32.1
%
 
$
10,697

 
32.8
%
 
Royalties increased by $1.7 million, or 7.8%, primarily resulting from a 7.1% increase in domestic same-store sales, as compared to the prior year. Initial fees increased by $0.3 million as a higher number of restaurants were opened by franchisees during the current year period. The decrease in occupancy revenue of $0.4 million, or 4.0%, is primarily the result of lease expirations.

Costs of franchise and license revenue increased by $0.3 million, or 2.6%. The decrease in occupancy costs of $0.4 million, or 4.6%, is primarily the result of lease expirations. Other direct costs increased by $0.7 million, or 27.1%, primarily due to increased franchise administrative expenses. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 32.1% for the quarter ended April 1, 2015 from 32.8% for the quarter ended March 26, 2014.
 
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 were comprised of the following:

 
Quarter Ended
  
April 1, 2015
 
March 26, 2014
 
(In thousands)
Share-based compensation
$
1,705

 
$
1,164

Other general and administrative expenses
15,231

 
12,952

Total general and administrative expenses
$
16,936

 
$
14,116

 
The $2.8 million increase in general and administrative expenses is primarily the result of increases in incentive compensation of $0.9 million, payroll and benefits of $0.8 million and share-based compensation of $0.5 million.


20



Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Depreciation of property and equipment
$
3,784

 
$
3,817

Amortization of capital lease assets
876

 
888

Amortization of intangible and other assets
364

 
533

Total depreciation and amortization expense
$
5,024

 
$
5,238

 
Operating (gains), losses and other charges, net were comprised of the following:

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Gains on sales of assets and other, net
$
(22
)
 
$
(8
)
Restructuring charges and exit costs
581

 
430

Impairment charges
49

 

Operating (gains), losses and other charges, net
$
608

 
$
422

 
Restructuring charges and exit costs were comprised of the following:
         
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Exit costs 
$
453

 
$
54

Severance and other restructuring charges
128

 
376

Total restructuring and exit costs
$
581

 
$
430


Operating income was $15.3 million for the quarter ended April 1, 2015 and $11.3 million for the quarter ended March 26, 2014.
 
Interest expense, net was comprised of the following:

 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Interest on credit facilities
$
776

 
$
840

Interest on capital lease liabilities
758

 
880

Letters of credit and other fees
328

 
353

Interest income
(17
)
 
(21
)
Total cash interest
1,845

 
2,052

Amortization of deferred financing costs
120

 
121

Interest accretion on other liabilities
122

 
149

Total interest expense, net
$
2,087

 
$
2,322

 
The decrease in interest expense primarily resulted from a decrease in our long-term debt and capital lease obligations.


21



Other nonoperating expense, net was less than $0.1 million for the quarter ended April 1, 2015 compared with other nonoperating income, net of $0.1 million for the quarter ended March 26, 2014. The amount for the 2015 period was primarily the result of $0.3 million of write-offs of deferred financing costs related to our 2015 debt refinancing, partially offset by $0.2 million of gains on deferred compensation plan investments. The amount for the 2014 period was primarily the result of $0.1 million of gains on deferred compensation plan investments.

The provision for income taxes was $4.7 million for the quarter ended April 1, 2015 compared to $2.6 million for the quarter ended March 26, 2014. The effective tax rate for the quarter ended April 1, 2015 was 35.4%, compared to 28.9% for the quarter ended March 26, 2014. The increase in the effective rate is primarily related to discrete tax items. The 2015 and 2014 rates benefited from state jobs tax credits claimed for the prior year's hiring activity of 2.3% and 3.7%, respectively. In addition, the 2014 rate benefited 5.0% from out-of-period share-based compensation adjustments. We do not believe the out-of-period adjustment was material to any prior year financial statements or on earnings trends. We expect the 2015 fiscal year tax rate to be between 36% and 38%. The annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.

Net income was $8.5 million for the quarter ended April 1, 2015 compared with $6.4 million for the quarter ended March 26, 2014.
 
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
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Net cash provided by operating activities
$
10,623

 
$
13,331

Net cash used in investing activities
(3,400
)
 
(6,431
)
Net cash used in financing activities
(8,579
)
 
(8,429
)
Decrease in cash and cash equivalents
$
(1,356
)
 
$
(1,529
)
  
We believe that our estimated cash flows from operations for 2015, 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.
 
Net cash flows used in investing activities were $3.4 million for the quarter ended April 1, 2015. These cash flows include capital expenditures of $3.4 million and net notes receivable collections and issuances of less than $0.1 million of positive cash flow. Our principal capital requirements have been largely associated with the following:
  
 
Quarter Ended
 
April 1, 2015
 
March 26, 2014
 
(In thousands)
Facilities
$
1,181

 
$
1,355

Remodeling
1,958

 
4,382

Information technology
135

 
96

Other
172

 
1,024

Capital expenditures
$
3,446

 
$
6,857

 
Capital expenditures for fiscal 2015 are expected to be approximately $24-$26 million, including 45-50 remodels anticipated to be completed at company restaurants. During the quarter ended April 1, 2015, we remodeled seven company restaurants.
 

22



Cash flows used in financing activities were $8.6 million for the quarter ended April 1, 2015, which included a net decrease in long-term debt of $5.6 million, cash payments for stock repurchases of $4.9 million and debt refinancing costs of $1.2 million.

Our working capital deficit was $19.6 million at April 1, 2015 compared with $24.3 million at December 31, 2014. The decrease in working capital deficit is primarily related to the reduction in the current portion of long-term debt resulting from our debt refinancing during the current year period (as explained below). 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.

Refinancing of Credit Facility

On March 30, 2015, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new five-year $250 million senior secured revolver (with a $30 million letter of credit sublimit) (the “New Credit Facility”). The New Credit Facility includes an accordion feature that would allow us to increase the size of the revolver to $325 million. A commitment fee of 0.20% is paid on the unused portion of the revolving credit facility. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was initially set at LIBOR plus 150 basis points. The maturity date for the credit facility is March 30, 2020.

The New Credit Facility was 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 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 and a minimum consolidated fixed charge coverage ratio.

As a result of the debt refinancing, we recorded $0.3 million of losses on early extinguishment of debt from the write-off of deferred financing costs related to the Old Credit Facility. These losses are included as a component of other nonoperating expense in the Condensed Consolidated Statements of Comprehensive Income.

As of April 1, 2015, we had outstanding revolver loans of $135.5 million and outstanding letters of credit under the senior secured revolver of $25.7 million. These balances resulted in availability of $88.8 million under the revolving facility. Prior to considering the impact of our interest rate swap, described below, the weighted-average interest rate on outstanding revolver loans was 1.69% and 2.17% as of April 1, 2015 and December 31, 2014, respectively. Taking into consideration our interest rate swap, which became effective on March 31, 2015 and is described below, the weighted-average interest rate of outstanding revolver loans was 2.53% as of April 1, 2015.

Our future contractual obligations relating to long-term debt and related interest obligations as of April 1, 2015 are as follows.

 
Payments Due by Period
 
Total
 
Less than 1 Year
 
1-2 Years
 
3-4 Years
 
5 Years and Thereafter
 
(In thousands)
Long-term debt 
$
135,500

 
$

 
$

 
$

 
$
135,500

Interest obligations (a)
20,268

 
2,570

 
6,854

 
9,596

 
1,248

Total 
$
155,768

 
$
2,570

 
$
6,854

 
$
9,596

 
$
136,748


(a)
Interest obligations represent payments related to our long-term debt outstanding at April 1, 2015. For long-term debt with variable rates, we have used the rate applicable at April 1, 2015 to project interest over the periods presented in the table above.

See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2014 for information concerning other future contractual obligations and commitments.




23



Interest Rate Hedges

We previously entered into interest rate hedges that capped the LIBOR rate on borrowings under our credit facility. The 200 basis point LIBOR cap applied to $125 million of borrowings from April 14, 2013 through April 13, 2014 and to $150 million of borrowings from April 14, 2014 through March 31, 2015.

We also previously entered into an interest rate swap to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 to March 29, 2018. During the quarter ended April 1, 2015, we entered into an additional interest rate swap to hedge a portion of the cash flows of our floating rate debt from March 29, 2018 through March 31, 2025. 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 $120 million notional debt obligation. Based on the interest rate as determined by our consolidated leverage ratio in effect as of April 1, 2015, under the terms of the swap, we will pay an average fixed rate of 2.63% on the notional amounts from March 31, 2015 to March 29, 2018, pay an average fixed rate of 3.936% from March 29, 2018 through March 31, 2025 and receive payments during these periods from a counterparty based on the 30-day LIBOR rate. As of April 1, 2015, the fair value of the interest rate swaps was a liability of $2.3 million, which is recorded as a component of other noncurrent liabilities and deferred credits on our Condensed Consolidated Balance Sheets.

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 April 1, 2015, borrowings under our credit facility bore interest at variable rates based on LIBOR plus a spread of 150 basis points per annum. Through March 31, 2015, up to $150 million of the borrowings under our credit facility had a 200 basis point LIBOR point cap. Our interest rate swap became effective on March 31, 2015, which hedges our exposure to variability in future cash flows attributable to payments of LIBOR due on a related $120 million notional debt obligation. Based on the interest rate as determined by our consolidated leverage ratio in effect as of April 1, 2015, under the terms of the swap, we will pay an average fixed rate of 2.63% on the notional amounts from March 31, 2015 to March 29, 2018, pay an average fixed rate of 3.936% from March 29, 2018 through March 31, 2025 and receive payments during these periods from a counterparty based on the 30-day LIBOR rate. As of April 1, 2015, the swap effectively increased our ratio of fixed rate debt from approximately 12% of total debt to approximately 90% of total debt. We expect to reclassify approximately $1.1 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. This amount will be included as a component of interest expense in our Condensed Consolidated Statements of Income. See Note 8 for additional details.
 
Based on the levels of borrowings under the credit facility at April 1, 2015, if interest rates changed by 100 basis points, our annual cash flow and income before taxes would change by approximately $0.2 million. This computation is determined by considering the impact of hypothetical interest rates on the variable rate portion of the credit facility at April 1, 2015, taking into consideration the interest rate swap. 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 $2.0 million and would impact the pension plan's net periodic benefit cost by approximately $0.1 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.
 

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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.
 
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.


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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 April 1, 2015
 
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)(3)
 
(In thousands, except per share amounts)
 
 
January 1, 2015 - January 28, 2015
90

 
$
10.69

 
90

 
3,799

January 29, 2015 - February 25, 2015
110

 
11.18

 
110

 
3,689

February 26, 2015 - April 1, 2015
250

 
11.61

 
250

 
3,439

Total
450

 
$
11.32

 
450

 
 
 
(1)
Average price paid per share excludes commissions.
(2)
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 million shares of our common stock (in addition to prior authorizations). Such repurchases may take place from time to time on the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended April 1, 2015, we purchased 450,000 shares of common stock for an aggregate consideration of approximately $5.1 million, pursuant to the share repurchase program.
(3)
On March 31, 2015, our Board of Directors approved a new share repurchase program, authorizing us to repurchase up to an additional $100 million of our common stock (in addition to prior authorizations). Such repurchases are to be made in a manner similar to, and will be in addition to, authorizations under the April 25, 2013 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 2015 Long-Term Performance Incentive Program Performance Share Award Certificate
 
 
 
10.2
 
Written Description of the Denny's 2015 Long-Term Performance Incentive Program
 
 
 
10.3
 
Second Amended and Restated Credit Agreement dated as of March 30, 2015 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 Citizens Bank, National Association, as Co-Syndication Agents, Cadence Bank, N.A. and Fifth Third Bank, as Co-Documentation Agents, and The Other Lenders Party Hereto, Wells Fargo Securities, LLC, Regions Capital Markets, a Division of Regions Bank and Citizens Bank, National Association, as Joint Lead Arrangers and Joint Bookrunners.
 
 
 
10.4
 
Second Amended and Restated Guarantee and Collateral Agreement dated as of March 30, 2015 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, National Association, 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


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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 4, 2015
By:    
/s/ F. Mark Wolfinger
 
 
 
 
F. Mark Wolfinger
 
 
 
 
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
 
 
 
 
 
 
Date:
May 4, 2015
By:    
/s/ Jay C. Gilmore
 
 
 
 
Jay C. Gilmore
 
 
 
 
Vice President,
Chief Accounting Officer and
Corporate Controller
 

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