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DENNY'S Corp - Quarter Report: 2016 June (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 June 29, 2016


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
þ
Accelerated filer
¨
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 August 1, 2016, 74,802,594 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.




TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 

2



PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
June 29, 2016
 
December 30, 2015
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,693

 
$
1,671

Receivables
14,109

 
16,552

Inventories
2,796

 
3,117

Assets held for sale

 
931

Prepaid and other current assets
6,894

 
14,143

Total current assets
30,492

 
36,414

Property, net of accumulated depreciation of $251,129 and $247,995, respectively
126,075

 
124,816

Goodwill
33,668

 
33,454

Intangible assets, net
48,779

 
46,074

Deferred financing costs, net
2,232

 
2,529

Deferred income taxes
26,664

 
29,159

Other noncurrent assets
25,330

 
24,591

Total assets
$
293,240

 
$
297,037

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of capital lease obligations
$
3,276

 
$
3,246

Accounts payable
14,289

 
20,759

Other current liabilities
57,441

 
77,548

Total current liabilities
75,006

 
101,553

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
198,000

 
195,000

Capital lease obligations, less current maturities
20,457

 
17,499

Liability for insurance claims, less current portion
14,471

 
15,949

Other noncurrent liabilities
37,963

 
27,631

Total long-term liabilities
270,891

 
256,079

Total liabilities
345,897

 
357,632

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity (deficit)
 

 
 

Common stock $0.01 par value; shares authorized - 135,000; June 29, 2016: 106,981 shares issued and 76,560 shares outstanding; December 30, 2015: 106,521 shares issued and 76,862 shares outstanding
$
1,070

 
$
1,065

Paid-in capital
568,697

 
565,364

Deficit
(403,843
)
 
(402,245
)
Accumulated other comprehensive loss, net of tax
(9,853
)
 
(23,777
)
Shareholders’ equity before treasury stock
156,071

 
140,407

Treasury stock, at cost, 30,421 and 29,659 shares, respectively
(208,728
)
 
(201,002
)
Total shareholders' deficit
(52,657
)
 
(60,595
)
Total liabilities and shareholders' deficit
$
293,240

 
$
297,037

See accompanying notes

3



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

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
89,210

 
$
88,629

 
$
179,596

 
$
174,611

Franchise and license revenue
35,105

 
34,690

 
69,361

 
68,879

Total operating revenue
124,315

 
123,319

 
248,957

 
243,490

Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
21,781

 
21,876

 
44,434

 
43,320

Payroll and benefits
34,088

 
33,665

 
68,549

 
66,869

Occupancy
4,993

 
4,913

 
9,793

 
9,808

Other operating expenses
11,975

 
11,866

 
24,172

 
23,631

Total costs of company restaurant sales
72,837

 
72,320

 
146,948

 
143,628

Costs of franchise and license revenue
10,759

 
11,216

 
20,762

 
22,194

General and administrative expenses
16,206

 
16,827

 
33,133

 
33,763

Depreciation and amortization
5,105

 
5,314

 
10,598

 
10,338

Operating (gains), losses and other charges, net
24,241

 
228

 
24,116

 
836

Total operating costs and expenses, net
129,148

 
105,905

 
235,557

 
210,759

Operating income (loss)
(4,833
)
 
17,414

 
13,400

 
32,731

Interest expense, net
3,014

 
2,264

 
5,788

 
4,351

Other nonoperating income, net
(119
)
 
(83
)
 
(92
)
 
(54
)
Net income (loss) before income taxes
(7,728
)
 
15,233

 
7,704

 
28,434

Provision for income taxes
3,824

 
5,499

 
9,302

 
10,167

Net income (loss)
$
(11,552
)
 
$
9,734

 
$
(1,598
)
 
$
18,267

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
(0.15
)
 
$
0.12

 
$
(0.02
)
 
$
0.22

Diluted net income (loss) per share
$
(0.15
)
 
$
0.11

 
$
(0.02
)
 
$
0.21

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
76,730

 
83,975

 
76,895

 
84,467

Diluted weighted average shares outstanding
76,730

 
86,080

 
76,895

 
86,547

 
See accompanying notes

4


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

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Net income (loss)
$
(11,552
)
 
$
9,734

 
$
(1,598
)
 
$
18,267

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax of $2,152, $169, $2,160 and $338
21,825

 
264

 
21,838

 
528

Recognition of unrealized gain (loss) on hedge transactions, net of tax of $(2,057), $2,124, $(5,054) and $963
(3,221
)
 
3,319

 
(7,914
)
 
1,505

Other comprehensive income
18,604

 
3,583

 
13,924

 
2,033

Total comprehensive income
$
7,052

 
$
13,317

 
$
12,326

 
$
20,300


See accompanying notes

5



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

 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Deficit
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Shareholders’
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance, December 30, 2015
106,521

 
$
1,065

 
(29,659
)
 
$
(201,002
)
 
$
565,364

 
$
(402,245
)
 
$
(23,777
)
 
$
(60,595
)
Net loss

 

 

 

 

 
(1,598
)
 

 
(1,598
)
Other comprehensive income

 

 

 

 

 

 
13,924

 
13,924

Share-based compensation on equity classified awards

 

 

 

 
2,988

 

 

 
2,988

Purchase of treasury stock

 

 
(762
)
 
(7,726
)
 

 

 

 
(7,726
)
Issuance of common stock for share-based compensation
383

 
4

 

 

 
(4
)
 

 

 

Exercise of common stock options
77

 
1

 

 

 
322

 

 

 
323

Tax benefit from share-based compensation

 

 

 

 
27

 

 

 
27

Balance, June 29, 2016
106,981

 
$
1,070

 
(30,421
)
 
$
(208,728
)
 
$
568,697

 
$
(403,843
)
 
$
(9,853
)
 
$
(52,657
)
 
See accompanying notes

6



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,598
)
 
$
18,267

Adjustments to reconcile net income (loss) to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
10,598

 
10,338

Operating (gains), losses and other charges, net
24,116

 
836

Amortization of deferred financing costs
296

 
243

(Gain) loss on early extinguishments of debt
(52
)
 
266

Deferred income tax expense
5,390

 
6,300

Share-based compensation
3,850

 
3,564

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
2,455

 
4,194

Inventories
322

 
131

Other current assets
7,248

 
1,012

Other assets
(1,113
)
 
271

Increase (decrease) in liabilities:
 
 
 
Accounts payable
(671
)
 
(337
)
Accrued salaries and vacations
(12,730
)
 
(4,092
)
Accrued taxes
94

 
(297
)
Other accrued liabilities
(13,405
)
 
(3,136
)
Other noncurrent liabilities
(1,975
)
 
(672
)
Net cash flows provided by operating activities
22,825

 
36,888

Cash flows from investing activities:
 
 
 
Capital expenditures
(7,973
)
 
(10,781
)
Acquisition of restaurants and real estate
(1,476
)
 
(1,620
)
Proceeds from disposition of property
1,883

 

Collections on notes receivable
730

 
974

Issuance of notes receivable
(637
)
 
(1,000
)
Net cash flows used in investing activities
(7,473
)
 
(12,427
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
30,000

 
156,500

Revolver payments
(27,000
)
 
(99,750
)
Long-term debt payments
(1,555
)
 
(56,681
)
Proceeds from exercise of stock options
323

 
401

Tax withholding on share-based payments

 
(982
)
Tax benefit for share-based compensation
27

 
553

Deferred financing costs

 
(1,261
)
Purchase of treasury stock
(7,764
)
 
(21,190
)
Net bank overdrafts
(4,361
)
 

Net cash flows used in financing activities
(10,330
)
 
(22,410
)
Increase in cash and cash equivalents
5,022

 
2,051

Cash and cash equivalents at beginning of period
1,671

 
3,074

Cash and cash equivalents at end of period
$
6,693

 
$
5,125

 
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 June 29, 2016, the Denny's brand consisted of 1,720 restaurants, 1,558 of which were franchised/licensed restaurants and 162 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 30, 2015 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 30, 2015. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 28, 2016.

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

Consolidation

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

Effective December 31, 2015, we adopted ASU 2015-02, which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The adoption of this guidance did not 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" and ASU 2015-15,"Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting  (SEC Update)"

Effective December 31, 2015, we adopted ASU 2015-03, which simplifies the guidance on the presentation of debt issuance costs. The new guidance requires debt issuance costs to be presented in the balance sheet as a reduction of the related debt liability rather than as an asset. Also effective December 31, 2015, we adopted ASU 2015-15, which addresses the SEC's comments related to the absence of authoritative guidance within ASU 2015-03 related to line-of-credit arrangements. According to this guidance, the SEC will not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of this guidance did not have any impact on our consolidated financial statements and we will continue to classify debt issuance costs as an asset.


8



Intangibles

ASU 2015-05,"Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement"

Effective December 31, 2015, we adopted, on a prospective basis, ASU 2015-05, which provides guidance about whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with the acquisition of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Inventory

ASU 2015-11,"Inventory (Topic 330): Simplifying the Measurement of Inventory"

Effective December 31, 2015, we adopted ASU 2015-11, which requires inventory that is measured using the first-in, first-out method to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Derivatives

ASU 2016-05,"Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)"

In March 2016, the FASB issued ASU 2016-05, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. We early adopted this guidance as of March 30, 2016 on a prospective basis. The adoption of this guidance did not have any impact on our consolidated financial statements.

Accounting Standards to be Adopted

Revenue Recognition
ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)",
ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date",
ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net",
ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" and
ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients"

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. In August 2015, the FASB issued ASU 2015-14, which defers the effective date for ASU 2014-09. The guidance is now effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018). The guidance allows for either a retrospective or cumulative effect transition method. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

9




In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance provided in ASU 2014-09 on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which clarifies the implementation guidance in ASU 2014-09 on licensing and identifying performance obligations. In May 2016, the FASB issued ASU 2016-12, which provides clarifying guidance and adds some practical expedients in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. These three new ASUs must be adopted concurrently with ASU 2014-09. The guidance is not expected to impact the recognition of company restaurant sales or royalties from franchised restaurants. We are currently evaluating the impact this guidance will have on the recognition of other transactions on our consolidated financial statements and related disclosures and have not yet selected a transition method.

Financial Instruments

ASU 2016-01 "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"

In January 2016, the FASB issued ASU 2016-01, which requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

ASU 2016-13 "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"

In June 2016, the FASB issued ASU 2016-13, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform financial statement users of credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 (our fiscal 2020) with early adoption permitted for annual and interim periods beginning after December 15, 2018 (our fiscal 2019). We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Leases

ASU 2016-02,"Leases (Topic 842)"

In February 2016, the FASB issued ASU 2016-02, which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (our fiscal 2019) with early adoption permitted. The guidance will be adopted using a modified retrospective approach. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements, but expect the adoption will result in a significant increase in the assets and liabilities on our consolidated balance sheet.


10



Stock Compensation

ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"

In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (our fiscal 2017) with early adoption permitted. The guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

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

Note 3.     Receivables
 
Receivables were comprised of the following:
 
 
June 29, 2016
 
December 30, 2015
 
(In thousands)
Current assets:
 
 
 
Receivables:
 
 
 
Trade accounts receivable from franchisees
$
10,163

 
$
10,591

Notes receivable from franchisees
1,363

 
1,352

Vendor receivables
1,438

 
3,049

Credit card receivables
1,245

 
1,606

Other
219

 
251

Allowance for doubtful accounts
(319
)
 
(297
)
Total current receivables, net
$
14,109

 
$
16,552

 
 
 
 
Noncurrent assets (included as a component of other noncurrent assets):
 
 
 
Notes receivable from franchisees
$
436

 
$
541


Note 4.    Goodwill and Other Intangible Assets

The following table reflects the changes in carrying amounts of goodwill.

 
(In thousands)
Balance, December 30, 2015
$
33,454

Additions related to acquisition
225

Write-offs and reclassifications associated with the sale of restaurants
(11
)
Balance, June 29, 2016
$
33,668


11




Other intangible assets were comprised of the following:
 
 
June 29, 2016
 
December 30, 2015
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,074

 
$

 
$
44,068

 
$

Liquor licenses
126

 

 
126

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Franchise and license agreements
3,907

 
3,800

 
12,237

 
12,026

Reacquired franchise rights
5,329

 
857

 
2,823

 
1,154

Intangible assets
$
53,436

 
$
4,657

 
$
59,254

 
$
13,180

 
During the two quarters ended June 29, 2016, we acquired three franchised restaurants for $3.9 million, of which $3.2 million was allocated to reacquired franchise rights, $0.5 million to property and $0.2 million to goodwill. As of June 29, 2016, we recorded a payable of $3.0 million related to these transactions that was settled subsequent to quarter-end. The $8.3 million decrease in gross franchise and license agreements during the two quarters ended June 29, 2016 primarily resulted from the removal of fully amortized agreements.

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

 
June 29, 2016
 
December 30, 2015
 
(In thousands)
Accrued salaries and vacation
$
20,653

 
$
30,549

Accrued insurance, primarily current portion of liability for insurance claims
6,499

 
7,076

Accrued taxes
7,405

 
7,311

Accrued advertising
6,066

 
7,737

Accrued pension
431

 
9,648

Gift cards
3,964

 
4,611

Other
12,423

 
10,616

Other current liabilities
57,441

 
77,548


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

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Pension settlement loss
$
24,297

 
$

 
$
24,297

 
$

Losses (gains) on sales of assets and other, net
(43
)
 
2

 
(687
)
 
(20
)
Restructuring charges and exit costs
(13
)
 
181

 
506

 
762

Impairment charges

 
45

 

 
94

Operating (gains), losses and other charges, net
$
24,241

 
$
228

 
$
24,116

 
$
836

 

12



The pre-tax pension settlement loss of $24.3 million related to the completion of the Pension Plan liquidation during the quarter ended June 29, 2016. See Note 9 for details on the Pension Plan liquidation. Gains on sales of assets and other, net of $0.7 million for the two quarters ended June 29, 2016 primarily related to restaurants sold to franchisees.

Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Exit costs
$
(36
)
 
$
87

 
$
115

 
$
540

Severance and other restructuring charges
23

 
94

 
391

 
222

Total restructuring charges and exit costs
$
(13
)
 
$
181

 
$
506

 
$
762


The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance, December 30, 2015
$
2,043

Exit costs (1)
115

Payments, net of sublease receipts
(269
)
Interest accretion
62

Balance, June 29, 2016
1,951

Less current portion included in other current liabilities
717

Long-term portion included in other noncurrent liabilities
$
1,234


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

As of June 29, 2016 and December 30, 2015, we had accrued severance and other restructuring charges of $0.3 million and $0.4 million, respectively. The balance as of June 29, 2016 is expected to be paid during the next 12 months.


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 June 29, 2016:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
10,566

 
$
10,566

 
$

 
$

 
market approach
Interest rate swaps (2)
(14,628
)
 

 
(14,628
)
 

 
income approach
Total
$
(4,062
)
 
$
10,566

 
$
(14,628
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements as of December 30, 2015:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
10,159

 
$
10,159

 
$

 
$

 
market approach
Interest rate swaps (2)
(1,660
)
 

 
(1,660
)
 

 
income approach
Total
$
8,499

 
$
10,159

 
$
(1,660
)
 
$

 
 

(1)
The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments.
(2)
The fair values of our interest rate swaps 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.

13




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

 
 
Significant Other Observable Inputs
(Level 2)
 
Impairment Charges
 
Valuation Technique
 
(In thousands)
 
 
Fair value measurements as of December 30, 2015:
 
 
 
 
 
Assets held for sale (1)
$
931

 
$
264

 
market approach

(1)
As of December 30, 2015, assets held for sale were written down to their fair value. The fair value of assets held for sale is based upon Level 2 inputs, which include sales agreements.

Note 8.     Long-Term Debt

Denny's Corporation and certain of its subsidiaries have a credit facility consisting of a five-year $325 million senior secured revolver (with a $30 million letter of credit sublimit). As of June 29, 2016, we had outstanding revolver loans of $198.0 million and outstanding letters of credit under the senior secured revolver of $22.4 million. These balances resulted in availability of $104.6 million under the revolving facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.21% and 1.76% as of June 29, 2016 and December 30, 2015, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 2.62% and 2.31% as of June 29, 2016 and December 30, 2015, respectively.

A commitment fee of 0.25% 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 set at LIBOR plus 175 basis points as of June 29, 2016. The maturity date for the credit facility is March 30, 2020.

The credit facility is available for working capital, capital expenditures and other general corporate purposes. The 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 credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio.

Interest Rate Hedges
We previously entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt. 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 specific notional debt obligations.

Based on the interest rate as determined by our consolidated leverage ratio in effect as of June 29, 2016, under the terms of the swaps, we will pay the following fixed rates on the notional amounts noted:

Period Covered
 
Notional Amount
 
Fixed Rate
 
 
(In thousands)
 
 
March 31, 2015 - March 29, 2018
 
$
120,000

 
2.88
%
March 29, 2018 - March 31, 2025
 
170,000

 
4.19
%
April 1, 2025 - March 31, 2026
 
50,000

 
4.21
%

As of June 29, 2016, the fair value of the interest rate swaps was a liability of $14.6 million, which is recorded as a component of other noncurrent liabilities in 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 2016, 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.

14




Note 9.     Defined Benefit Plans
 
The components of net periodic benefit cost were as follows:

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Pension Plan:
 
 
 
 
 
 
 
Service cost
$

 
$
95

 
$
105

 
$
190

Interest cost

 
746

 

 
1,492

Expected return on plan assets

 
(877
)
 

 
(1,754
)
Amortization of net loss

 
433

 

 
866

Net periodic benefit cost
$

 
$
397

 
$
105

 
$
794

 
 
 
 
 
 
 
 
Other Defined Benefit Plans:
 
 
 
 
 
 
 
Interest cost
$
23

 
$
27

 
$
46

 
$
54

Amortization of net loss
22

 
19

 
43

 
39

Net periodic benefit cost
$
45

 
$
46

 
$
89

 
$
93

 
During 2014, our Board of Directors approved the termination and liquidation of the Advantica Pension Plan (the "Pension Plan") as of December 31, 2014. During the quarter ended June 29, 2016, we completed the liquidation of the Pension Plan. Accordingly, we made a final contribution of $9.5 million to the Pension Plan. The resulting $67.7 million in Pension Plan assets were used to make lump sum payments and purchase annuity contracts, which are administered by a third-party provider. In addition, during the quarter, we recognized a pre-tax settlement loss of $24.3 million related to the liquidation, reflecting the recognition of unamortized actuarial losses that were recorded in accumulated other comprehensive income. See Note 14.

We made no contributions to the Pension Plan during the two quarters ended July 1, 2015. We made contributions of $0.1 million to our other defined benefit plans during both the two quarters ended June 29, 2016 and the two quarters ended July 1, 2015. We expect to contribute $0.1 million to our other defined benefit plans over the remainder of fiscal 2016.

Additional minimum pension liability, net of tax, of $0.9 million and $22.8 million is reported as a component of accumulated other comprehensive loss in our Condensed Consolidated Statement of Shareholders’ Equity as of June 29, 2016 and December 30, 2015, respectively.

Note 10.     Share-Based Compensation

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

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Performance share awards
1,688

 
1,655

 
$
3,422

 
$
3,178

Restricted stock units for board members
214

 
204

 
428

 
386

Total share-based compensation
$
1,902

 
$
1,859

 
$
3,850

 
$
3,564

 

15



Performance Share Awards
 
In February 2016, we granted certain employees approximately 0.3 million performance shares that vest based on the total shareholder return ("TSR") of our common 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 $9.43 per share. The performance shares based on the Adjusted EBITDA growth rate have a grant date fair value of $9.52 per share, the market value of our common stock on the date of grant. The awards granted to our named executive officers also contain a performance condition based on the attainment of an operating measure for the fiscal year ended December 28, 2016. The performance period for these performance shares is the three year fiscal period beginning December 31, 2015 and ending December 26, 2018. They 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 two quarters ended June 29, 2016, we made payments of $2.5 million in cash and issued 0.4 million shares of common stock related to performance share awards.
 
As of June 29, 2016, we had approximately $10.0 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which is expected to be recognized over a weighted average of 2.0 years.
 
Restricted Stock Units for Board Members

During the two quarters ended June 29, 2016, we granted approximately 0.1 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $10.77 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 our Board of Directors) or upon termination as a member of our Board of Directors. During the two quarters ended June 29, 2016, less than 0.1 million deferred stock units were converted into shares of common stock. As of June 29, 2016, we had approximately $0.7 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 0.8 years.
 
Note 11.     Income Taxes

The effective tax rate was (49.5)% for the quarter and 120.7% year-to-date compared to 36.1% and 35.8%, respectively, for the prior year periods. The 2016 and 2015 year-to-date rates benefited from state jobs tax credits claimed for the prior year's hiring activity of 3.2% and 0.9%, respectively. In addition, the 2016 rates were impacted by the recognition of a $2.1 million tax benefit related to the $24.3 million pre-tax settlement loss on the Pension Plan liquidation. This benefit was at a rate lower than the effective tax rate due to the previous recognition of an approximate $7.2 million tax benefit recognized with the reversal of our valuation allowance in 2011. Excluding the impact of the Pension Plan liquidation, our effective income tax rate would have been 35.8% for the two quarters ended June 29, 2016.


16



Note 12.     Net Income (Loss) Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands, except for per share amounts)
Net income (loss)
$
(11,552
)
 
$
9,734

 
$
(1,598
)
 
$
18,267

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
76,730

 
83,975

 
76,895

 
84,467

Effect of dilutive share-based compensation awards

 
2,105

 

 
2,080

Weighted average shares outstanding - diluted
76,730

 
86,080

 
76,895

 
86,547

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
(0.15
)
 
$
0.12

 
$
(0.02
)
 
$
0.22

Diluted net income (loss) per share
$
(0.15
)
 
$
0.11

 
$
(0.02
)
 
$
0.21

 
 
 
 
 
 
 
 
Anti-dilutive share-based compensation awards
2,636

 

 
2,636

 

    
Note 13.     Supplemental Cash Flow Information

 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Income taxes paid, net
$
938

 
$
4,160

Interest paid
$
5,215

 
$
4,136

 
 
 
 
Noncash investing and financing activities:
 
 
 
Property acquisition payable
$
2,973

 
$

Issuance of common stock, pursuant to share-based compensation plans
$
3,597

 
$
4,551

Execution of capital leases
$
4,623

 
$
1,731

Treasury stock payable
$
147

 
$
175

 
Note 14.     Shareholders' Equity

Share Repurchase
 
Our credit facility permits the purchase of Denny’s stock and the payment of cash dividends subject to certain limitations. In March 2015, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $100 million 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, as amended) or in privately negotiated transactions, subject to market and business conditions.

On May 23, 2016, 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 March 2015 repurchase program.


17



In November 2015, as part of our previously authorized share repurchase programs, we entered into a variable term, capped accelerated share repurchase (the "ASR") agreement with Wells Fargo Bank, National Association ("Wells Fargo") to repurchase an aggregate of $50 million of our common stock. During 2015, pursuant to the terms of the ASR agreement, we paid $50 million in cash and received approximately 3.5 million shares of our common stock, which represents the minimum number of shares to be delivered based on the cap price. We recorded $36.9 million of treasury stock related to these shares. As of June 29, 2016, the remaining balance of $13.1 million is included as additional paid-in capital in shareholders' equity as an equity forward contract. Subsequent to the end of the quarter ended June 29, 2016, we settled the ASR agreement. See Note 16.

During the two quarters ended June 29, 2016, we repurchased 0.8 million shares of our common stock for approximately $7.7 million. Taking into consideration the above mentioned ASR agreement, this brings the total amount repurchased under the March 2015 repurchase program to 5.4 million shares of our common stock for approximately $69.9 million, leaving $30.1 million of our common stock that can be repurchased under this program as of June 29, 2016.

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

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 30, 2015
$
(22,764
)
 
$
(1,013
)
 
$
(23,777
)
Net loss
(342
)
 

 
(342
)
Amortization of net loss (1)
43

 

 
43

Settlement loss recognized (2)
24,297

 

 
24,297

Net change in fair value of derivatives

 
(12,547
)
 
(12,547
)
Reclassification of derivatives to interest expense (3)

 
(421
)
 
(421
)
Income tax (expense) benefit related to items of other comprehensive loss
(2,160
)
 
5,054

 
2,894

Balance as of June 29, 2016
(926
)
 
(8,927
)
 
(9,853
)

(1)
Before-tax amount related to our Other Defined Benefit Plans 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 two quarters ended June 29, 2016. See Note 9 for additional details.
(2)
Before-tax amount related to the liquidation of our Pension Plan that was reclassified from accumulated other comprehensive loss and included as a component of operating (gains), losses and other charges, net in our Condensed Consolidated Statements of Income during the two quarters ended June 29, 2016. See Note 9 for additional details.
(3)
Amounts reclassified from accumulated other comprehensive loss into income, represent payments made to the counterparty for the effective portions of the interest rate swaps. These amounts are included as a component of interest expense in our Condensed Consolidated Statements of Income. We expect to reclassify approximately $0.8 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. 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 June 29, 2016, no events had occurred that caused us to make payments under these guarantees. There were $8.4 million and $8.7 million of loans outstanding under these programs as of June 29, 2016 and December 30, 2015, respectively. As of June 29, 2016, the maximum amounts payable under the lease and loan guarantees were $2.0 million and $1.3 million, respectively. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both June 29, 2016 and December 30, 2015, which are included as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets and other nonoperating expense in our Condensed Consolidated Statements of Income.

18



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
 
On July 19, 2016, we settled the ASR agreement with Wells Fargo. As a result, we received final delivery of an additional 1.5 million shares of our common stock, bringing the total number of shares repurchased pursuant to the ASR agreement to 5.0 million. The total number of shares repurchased was based on a combined discounted volume-weighted average price (VWAP) of $9.90 per share, which was determined based on the average of the daily VWAP of our common stock, less a fixed discount, over the term of the ASR agreement. In addition, during July 2016, we recorded $13.1 million of treasury stock related to the settlement of the equity forward contract related to the ASR agreement, which was included in shareholders' equity as additional paid-in capital as of June 29, 2016.

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 June 29, 2016 and results of operations for the two quarters ended June 29, 2016 as compared to the two quarters ended July 1, 2015. 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; health concerns arising from food-related pandemics, outbreaks of flu viruses, such as avian flu, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (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 30, 2015. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.


19



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
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
89,210

 
71.8
 %
 
$
88,629

 
71.9
 %
 
$
179,596

 
72.1
 %
 
$
174,611

 
71.7
 %
Franchise and license revenue
35,105

 
28.2
 %
 
34,690

 
28.1
 %
 
69,361

 
27.9
 %
 
68,879

 
28.3
 %
Total operating revenue
124,315

 
100.0
 %
 
123,319

 
100.0
 %
 
248,957

 
100.0
 %
 
243,490

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Product costs
21,781

 
24.4
 %
 
21,876

 
24.7
 %
 
44,434

 
24.7
 %
 
43,320

 
24.8
 %
Payroll and benefits
34,088

 
38.2
 %
 
33,665

 
38.0
 %
 
68,549

 
38.2
 %
 
66,869

 
38.3
 %
Occupancy
4,993

 
5.6
 %
 
4,913

 
5.5
 %
 
9,793

 
5.5
 %
 
9,808

 
5.6
 %
Other operating expenses
11,975

 
13.4
 %
 
11,866

 
13.4
 %
 
24,172

 
13.5
 %
 
23,631

 
13.5
 %
Total costs of company restaurant sales
72,837

 
81.6
 %
 
72,320

 
81.6
 %
 
146,948

 
81.8
 %
 
143,628

 
82.3
 %
Costs of franchise and license revenue (a)
10,759

 
30.6
 %
 
11,216

 
32.3
 %
 
20,762

 
29.9
 %
 
22,194

 
32.2
 %
General and administrative expenses
16,206

 
13.0
 %
 
16,827

 
13.6
 %
 
33,133

 
13.3
 %
 
33,763

 
13.9
 %
Depreciation and amortization
5,105

 
4.1
 %
 
5,314

 
4.3
 %
 
10,598

 
4.3
 %
 
10,338

 
4.2
 %
Operating (gains), losses and other charges, net
24,241

 
19.5
 %
 
228

 
0.2
 %
 
24,116

 
9.7
 %
 
836

 
0.3
 %
Total operating costs and expenses, net
129,148

 
103.9
 %
 
105,905

 
85.9
 %
 
235,557

 
94.6
 %
 
210,759

 
86.6
 %
Operating income (loss)
(4,833
)
 
(3.9
)%
 
17,414

 
14.1
 %
 
13,400

 
5.4
 %
 
32,731

 
13.4
 %
Interest expense, net
3,014

 
2.4
 %
 
2,264

 
1.8
 %
 
5,788

 
2.3
 %
 
4,351

 
1.8
 %
Other nonoperating income, net
(119
)
 
(0.1
)%
 
(83
)
 
(0.1
)%
 
(92
)
 
0.0
 %
 
(54
)
 
0.0
 %
Net income (loss) before income taxes
(7,728
)
 
(6.2
)%
 
15,233

 
12.4
 %
 
7,704

 
3.1
 %
 
28,434

 
11.7
 %
Provision for income taxes
3,824

 
3.1
 %
 
5,499

 
4.5
 %
 
9,302

 
3.7
 %
 
10,167

 
4.2
 %
Net income (loss)
$
(11,552
)
 
(9.3
)%
 
$
9,734

 
7.9
 %
 
$
(1,598
)
 
(0.6
)%
 
$
18,267

 
7.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Company average unit sales
$
562

 
 

 
$
559

 
 

 
$
1,116

 
 

 
$
1,097

 
 

Franchise average unit sales
$
390

 
 

 
$
393

 
 

 
$
778

 
 

 
$
774

 
 

Company equivalent units (b)
159

 
 

 
158

 
 

 
161

 
 

 
159

 
 

Franchise equivalent units (b)
1,555

 
 

 
1,536

 
 

 
1,551

 
 

 
1,536

 
 

Company same-store sales increase (decrease) (c)(d)
(0.1
)%
 
 

 
7.9
%
 
 

 
1.7
%
 
 

 
7.7
%
 
 

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

 
7.2
%
 
 

 
0.9
%
 
 

 
7.2
%
 
 

            
(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 2016 comparable units.


20



Unit Activity
 
 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
Company restaurants, beginning of period
162

 
160

 
164

 
161

Units opened

 

 
1

 

Units acquired from franchisees
2

 
1

 
3

 
1

Units sold to franchisees
(2
)
 

 
(6
)
 

Units closed

 
(1
)
 

 
(2
)
End of period
162

 
160

 
162

 
160

 
 
 
 
 
 
 
 
Franchised and licensed restaurants, beginning of period
1,551

 
1,534

 
1,546

 
1,541

Units opened 
13

 
13

 
24

 
22

Units purchased from Company
2

 

 
6

 

Units acquired by Company
(2
)
 
(1
)
 
(3
)
 
(1
)
Units closed
(6
)
 
(10
)
 
(15
)
 
(26
)
End of period
1,558

 
1,536

 
1,558

 
1,536

Total restaurants, end of period
1,720

 
1,696

 
1,720

 
1,696


Company Restaurant Operations
 
During the quarter ended June 29, 2016, company restaurant sales increased $0.6 million, or 0.7%, primarily resulting from a slight equivalent unit increase in company restaurants as compared to the prior year period. Company same-store sales decreased 0.1% during the current quarter. During the two quarters ended June 29, 2016, company restaurant sales increased $5.0 million, or 2.9%, primarily resulting from a 1.7% increase in company same-store sales.
 
Total costs of company restaurant sales as a percentage of company restaurant sales remained flat at 81.6% for the quarter and decreased to 81.8% year-to-date from 82.3% in the prior year.

Product costs were 24.4% for the quarter and 24.7% year-to-date compared to 24.7% and 24.8%, respectively, in the prior year. These decreases were primarily due to the leverage gained from pricing increases.

Payroll and benefits were 38.2% for the quarter and 38.2% year-to-date compared to 38.0% and 38.3%, respectively, in the prior year. The increase for the quarter was primarily due to a 1.2 percentage point increase in labor costs and a 0.7 percentage point increase in group insurance, partially offset by a 1.1 percentage point decrease in incentive compensation and a 0.6 percentage point decrease in workers' compensation costs. The year-to-date decrease was primarily due to a 0.9 percentage point decrease in incentive compensation and a 0.6 percentage point decrease in workers' compensation costs, partially offset by a 1.0 percentage point increase in labor costs and a 0.4 percentage point increase in group insurance. Contributing to the increase in labor costs was the impact of the California Paid Sick Leave law, which became effective in July 2015.

Occupancy costs essentially remained flat at 5.6% for the quarter and 5.5% year-to-date from 5.5% and 5.6%, respectively, in the prior year.



21



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

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(Dollars in thousands)
Utilities
$
2,852

 
3.2
%
 
$
3,132

 
3.5
%
 
$
5,803

 
3.2
%
 
$
6,308

 
3.6
%
Repairs and maintenance
1,732

 
1.9
%
 
1,497

 
1.7
%
 
3,334

 
1.9
%
 
2,947

 
1.7
%
Marketing
3,381

 
3.8
%
 
3,258

 
3.7
%
 
6,623

 
3.7
%
 
6,465

 
3.7
%
Other direct costs
4,010

 
4.5
%
 
3,979

 
4.5
%
 
8,412

 
4.7
%
 
7,911

 
4.5
%
Other operating expenses
$
11,975

 
13.4
%
 
$
11,866

 
13.4
%
 
$
24,172

 
13.5
%
 
$
23,631

 
13.5
%

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
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(Dollars in thousands)
Royalties
$
24,511

 
69.8
%
 
$
23,774

 
68.5
%
 
$
48,655

 
70.1
%
 
$
46,937

 
68.1
%
Initial fees
798

 
2.3
%
 
656

 
1.9
%
 
1,324

 
1.9
%
 
1,101

 
1.6
%
Occupancy revenue 
9,796

 
27.9
%
 
10,260

 
29.6
%
 
19,382

 
28.0
%
 
20,841

 
30.3
%
Franchise and license revenue 
$
35,105

 
100.0
%
 
$
34,690

 
100.0
%
 
$
69,361

 
100.0
%
 
$
68,879

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Occupancy costs 
$
7,287

 
20.8
%
 
$
7,733

 
22.3
%
 
$
14,350

 
20.7
%
 
$
15,624

 
22.7
%
Other direct costs 
3,472

 
9.9
%
 
3,483

 
10.0
%
 
6,412

 
9.2
%
 
6,570

 
9.5
%
Costs of franchise and license revenue 
$
10,759

 
30.6
%
 
$
11,216

 
32.3
%
 
$
20,762

 
29.9
%
 
$
22,194

 
32.2
%

During the quarter ended June 29, 2016, royalties increased $0.7 million, or 3.1%, primarily resulting from a 19 equivalent unit increase in franchised and licensed restaurants and a higher average royalty rate as compared to the prior year period, partially offset by the effects of a 0.5% decrease in domestic same-store sales. During the two quarters ended June 29, 2016, royalties increased $1.7 million, or 3.7%, primarily resulting from a 15 equivalent unit increase in franchised and licensed restaurants and a 0.9% increase in domestic same-store sales as compared to the prior year period. Initial fees increased $0.1 million for the quarter and $0.2 million year-to-date as a higher number of restaurants were sold to franchisees during the current year periods. The decrease in occupancy revenue of $0.5 million, or 4.5%, for the quarter and $1.5 million, or 7.0%, year-to-date was primarily the result of lease expirations.

Costs of franchise and license revenue decreased $0.5 million, or 4.1%, for the quarter and decreased $1.4 million, or 6.5%, year-to-date. Occupancy costs decreased $0.4 million, or 5.8%, for the quarter and $1.3 million, or 8.2%, year-to-date primarily resulting from lease expirations. Other direct costs were flat for the quarter and decreased $0.2 million, or 2.4%, year-to-date primarily due to decreased franchise administrative expenses. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 30.6% for the quarter from 32.3% for the prior year quarter and decreased to 29.9% year-to-date from 32.2% for the prior year period.

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.


22



General and administrative expenses were comprised of the following:

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Share-based compensation
$
1,902

 
$
1,859

 
$
3,850

 
$
3,564

Other general and administrative expenses
14,304

 
14,968

 
29,283

 
30,199

Total general and administrative expenses
$
16,206

 
$
16,827

 
$
33,133

 
$
33,763


Other general and administrative expenses decreased by $0.7 million for the quarter and $0.9 million year-to-date primarily resulting from decreases in incentive compensation of $1.0 million and $1.4 million, respectively.
 
Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Depreciation of property and equipment
$
3,928

 
$
4,140

 
$
8,279

 
$
7,924

Amortization of capital lease assets
862

 
831

 
1,688

 
1,707

Amortization of intangible and other assets
315

 
343

 
631

 
707

Total depreciation and amortization expense
$
5,105

 
$
5,314

 
$
10,598

 
$
10,338

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

 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Pension settlement loss
$
24,297

 
$

 
$
24,297

 
$

Losses (gains) on sales of assets and other, net
$
(43
)
 
$
2

 
$
(687
)
 
$
(20
)
Restructuring charges and exit costs
(13
)
 
181

 
506

 
762

Impairment charges

 
45

 

 
94

Operating (gains), losses and other charges, net
$
24,241

 
$
228

 
$
24,116

 
$
836


The pre-tax pension settlement loss of $24.3 million related to the completion of the Pension Plan liquidation during the quarter ended June 29, 2016. See Note 9 for details on the Pension Plan liquidation. Gains on sales of assets and other, net of $0.7 million for the two quarters ended June 29, 2016 primarily related to restaurants sold to franchisees.

Restructuring charges and exit costs were comprised of the following:
 
 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Exit costs
$
(36
)
 
$
87

 
$
115

 
$
540

Severance and other restructuring charges
23

 
94

 
391

 
222

Total restructuring and exit costs
$
(13
)
 
$
181

 
$
506

 
$
762




23



Operating income (loss) was a loss of $4.8 million for the quarter and income of $13.4 million year-to-date compared with income of $17.4 million and $32.7 million, respectively, for the prior year periods. The current year periods were significantly impacted by the $24.3 million pre-tax settlement loss related to the Pension Plan liquidation.

Interest expense, net was comprised of the following:
 
 
Quarter Ended
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Interest on credit facilities
$
1,148

 
$
619

 
$
2,194

 
$
1,388

Interest on interest rate swaps
209

 
287

 
421

 
294

Interest on capital lease liabilities
1,107

 
845

 
2,102

 
1,603

Letters of credit and other fees
313

 
286

 
591

 
614

Interest income
(14
)
 
(17
)
 
(27
)
 
(34
)
Total cash interest
2,763

 
2,020

 
5,281

 
3,865

Amortization of deferred financing costs
148

 
123

 
296

 
243

Interest accretion on other liabilities
103

 
121

 
211

 
243

Total interest expense, net
$
3,014

 
$
2,264

 
$
5,788

 
$
4,351


Interest expense, net increased by $0.8 million for the quarter and $1.4 million year-to-date primarily due to the increased balance of our credit facility and an increase in capital leases.

The provision for income taxes was $3.8 million for the quarter and $9.3 million for the two quarters ended June 29, 2016 compared to $5.5 million for the quarter and $10.2 million for the two quarters ended July 1, 2015. The effective tax rate was (49.5)% for the quarter and 120.7% year-to-date compared to 36.1% and 35.8%, respectively, for the prior year periods. The 2016 and 2015 year-to-date rates benefited from state jobs tax credits claimed for the prior year's hiring activity of 3.2% and 0.9%, respectively. In addition, the 2016 rates were impacted by the recognition of a $2.1 million tax benefit related to the $24.3 million pre-tax settlement loss on the Pension Plan liquidation. This benefit was at a rate lower than the effective tax rate due to the previous recognition of an approximate $7.2 million tax benefit recognized with the reversal of our valuation allowance in 2011. Excluding the impact of the Pension Plan liquidation, our effective income tax rate would have been 36.0% for the quarter and 35.8% for the two quarters ended June 29, 2016. We expect the 2016 fiscal year effective tax rate to be between 33% and 37% excluding the impact of the Pension Plan liquidation. The annual effective tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.

Net income (loss) was a loss of $11.6 million for the quarter and a loss of $1.6 million year-to-date compared with income of $9.7 million and $18.3 million, respectively, for the prior year periods. The current year periods were significantly impacted by the $24.3 million pre-tax settlement loss related to the Pension Plan liquidation.

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 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:
 
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Net cash provided by operating activities
$
22,825

 
$
36,888

Net cash used in investing activities
(7,473
)
 
(12,427
)
Net cash used in financing activities
(10,330
)
 
(22,410
)
Increase in cash and cash equivalents
$
5,022

 
$
2,051

  

24



Net cash flows provided by operating activities were $22.8 million for the two quarters ended June 29, 2016 compared to $36.9 million for the two quarters ended July 1, 2015. The decrease in cash flows provided by operating activities is primarily due to the payout of accrued incentive compensation and the funding of our pension liability during the two quarters ended June 29, 2016. We believe that our estimated cash flows from operations for 2016, 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 $7.5 million for the two quarters ended June 29, 2016. These cash flows include capital expenditures of $8.0 million and restaurant acquisition costs of $1.5 million. The restaurant acquisition costs include $0.9 million for a franchised restaurant reacquired during the first quarter of 2016 and the payment of $0.6 million for a franchised restaurant that was reacquired during 2015. These costs were partially offset by proceeds from asset sales of $1.9 million related to restaurants sold to franchisees. In addition to these investing cash flows, we recorded a payable of $3.0 million that was funded the day after quarter-end related to the acquisition of two franchised restaurants which closed on the last day of the quarter.

Our principal capital requirements have been largely associated with the following:
  
 
Two Quarters Ended
 
June 29, 2016
 
July 1, 2015
 
(In thousands)
Facilities
$
3,064

 
$
3,832

New construction 
1,529

 
690

Remodeling
2,688

 
5,501

Information technology
385

 
466

Other
307

 
292

Capital expenditures
$
7,973

 
$
10,781

 
Capital expenditures for fiscal 2016 are expected to be approximately $29 to $31 million, including the acquisition of seven franchised restaurants, the completion of approximately 25 remodels at company restaurants, the opening of one new company restaurant, and the scrape and rebuild of a company restaurant. During the two quarters ended June 29, 2016, we remodeled six company restaurants.
 
Cash flows used in financing activities were $10.3 million for the two quarters ended June 29, 2016, which included cash payments for stock repurchases of $7.8 million and accounts payable funding of $4.4 million, partially offset by net long-term debt borrowings of $1.4 million.

Our working capital deficit was $44.5 million at June 29, 2016 compared to $65.1 million at December 30, 2015. The decrease in working capital deficit was primarily related to the payout of accrued incentive compensation and the funding of our pension liability during the two quarters ended June 29, 2016. 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 June 29, 2016, we had outstanding revolver loans of $198.0 million and outstanding letters of credit under the senior secured revolver of $22.4 million. These balances resulted in availability of $104.6 million under the revolving facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.21% as of June 29, 2016. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 2.62% as of June 29, 2016.

A commitment fee of 0.25% 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 set at LIBOR plus 175 basis points as of June 29, 2016. The maturity date for the credit facility is March 30, 2020.

25




The credit facility is available for working capital, capital expenditures and other general corporate purposes. The 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 credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio.

Interest Rate Hedges

We previously entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt. 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 specific notional debt obligations.

Based on the interest rate as determined by our consolidated leverage ratio in effect as of June 29, 2016, under the terms of the swaps, we will pay the following fixed rates on the notional amounts noted:

Period Covered
 
Notional Amount
 
Fixed Rate
 
 
(In thousands)
 
 
March 31, 2015 - March 29, 2018
 
$
120,000

 
2.88
%
March 29, 2018 - March 31, 2025
 
170,000

 
4.19
%
April 1, 2025 - March 31, 2026
 
50,000

 
4.21
%

As of June 29, 2016, the fair value of the interest rate swaps was a liability of $14.6 million, which is recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets.

Implementation of New Accounting Standards

Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our condensed consolidated financial statements set forth in Part I of this report.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk
 
There have been no material changes in our quantitative and qualitative market risks since the prior reporting period.
 
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

Information regarding legal proceedings is incorporated by reference from Note 15 to our condensed consolidated financial statements set forth in Part I of this report.

26




Item 1A.     Risk Factors

There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2015.

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 June 29, 2016
 
Period
 
Total Number of Shares Purchased
 
 Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs (2)(3)
 
(In thousands, except per share amounts)
 
 
March 31, 2016 - April 27, 2016
108

 
$
10.16

 
108

 
$
32,825

April 28, 2016 - May 25, 2016
125

 
10.56

 
125

 
$
131,501

May 26, 2016 - June 29, 2016
129

 
10.88

 
129

 
$
130,100

Total
362

 
$
10.55

 
362

 
 

(1)
 Average price paid per share excludes commissions.
(2)
On March 31, 2015, we announced that 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 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 June 29, 2016, we purchased 361,567 shares of our common stock for an aggregate consideration of approximately $3.8 million, pursuant to the share repurchase program.
(3)
On May 23, 2016, 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 March 31, 2015 repurchase program.


27



Item 6.     Exhibits
 
The following are included as exhibits to this report: 
Exhibit No.
 
Description 
 
 
 
10.1
 
Second Amendment to Second Amended and Restated Credit Agreement dated April 8, 2016 among Denny's Inc., as the Borrower, Denny's Corporation, as Parent, and each of the Subsidiaries of Parent party thereto, as Guarantors, and Wells Fargo Bank, National Association, as Administrative Agent on behalf of the Lenders.
 
 
 
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


28



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:
August 3, 2016
By:    
/s/ F. Mark Wolfinger
 
 
 
 
F. Mark Wolfinger
 
 
 
 
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
 
 
 
 
 
 
Date:
August 3, 2016
By:    
/s/ Jay C. Gilmore
 
 
 
 
Jay C. Gilmore
 
 
 
 
Vice President,
Chief Accounting Officer and
Corporate Controller
 

29