Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Introduction and Basis of Presentation
Denny’s Corporation, or Denny’s or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At
June 27, 2018
, the Denny's brand consisted of
1,720
restaurants,
1,540
of which were franchised/licensed restaurants and
180
of which were company operated.
Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, 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 27, 2017
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 27, 2017
. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending
December 26, 2018
.
Note 2. Summary of Significant Accounting Policies
Newly Adopted Accounting Standards
Effective December 28, 2017, the first day of fiscal 2018, we adopted Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. The new guidance
clarifies the principles used to recognize revenue for all entities and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. We elected to apply the modified retrospective method of adoption to those contracts which were not completed as of December 28, 2017. In doing so, we applied the practical expedient to aggregate all contract modifications that occurred before December 28, 2017 in determining the satisfied and unsatisfied performance obligations, the transaction price and the allocation of the transaction price to the satisfied and unsatisfied performance obligations. Results for reporting periods beginning after December 28, 2017 are presented under Topic 606. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605 “Revenue Recognition.” Our transition to Topic 606 represents a change in accounting principle. See Note 3 for further information about our transition to Topic 606 and the newly required disclosures.
Effective December 28, 2017, we adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The new guidance 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. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”. The new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we adopted ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The new guidance clarifies the definition of a business. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we adopted ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The new guidance requires an entity to report the service cost component in the same line on the income statement as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we adopted ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”. The new update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we early adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and requires certain disclosures about stranded tax effects. Due to the immateriality of the stranded tax effects resulting from the implementation Tax Act, we have elected not to reclassify these amounts from accumulated other comprehensive income to retained earnings. Therefore the adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we early adopted ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The new update clarifies certain aspects of the guidance issued in ASU 2016-01. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Effective December 28, 2017, we early adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The new update better aligns an entity’s risk management activities and financial reporting for hedging relationships, simplifies the hedge accounting requirements, and improves the disclosures of hedging arrangements. The amended presentation and disclosure guidance has been applied on a prospective basis. The adoption of this guidance did not have any impact on our Consolidated Financial Statements.
Accounting Standards to be Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842)”,
which provides guidance for accounting for leases. The new guidance requires companies to recognize a right-of-use asset and a lease liability for all operating and capital (financing) leases with lease terms greater than 12 months. The FASB has subsequently amended this guidance by issuing ASU 2018-10 in July 2018 to provide clarification and further guidance around areas identified as potential implementation issues. Both standards are 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.
The adoption of ASU 2016-02 will have a material impact on our Consolidated Balance Sheets resulting from the recognition of operating lease right-of-use assets and liabilities. Although the new guidance is also expected to impact the measurement and presentation of certain expenses and cash flows related to leasing arrangements, we do not believe there will be a material impact to our Consolidated Statements of Income or Consolidated Statements of Cash Flows. We do not expect the recognition of the additional operating lease liabilities will impact any credit facility debt covenants as these liabilities are not considered to be debt.
We have decided to elect the package of practical expedients that do not require us to reassess whether existing contracts are or contain leases, lease classification or initial direct costs. In addition, we have decided not to elect the hindsight practical expedient which would allow us to reassess lease terms and impairment of the right-to-use assets. We have completed the implementation of a new lease management system in preparation for adoption and continue to assess the impact that the new guidance will have on our financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform financial statement users of credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 (our fiscal 2020) with early adoption permitted for annual and interim periods beginning after December 15, 2018 (our fiscal 2019). We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on our Consolidated Financial Statements as a result of future adoption.
Note 3. Revenues
Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and franchised and licensed restaurants. The following table disaggregates our revenue by sales channels and types of goods or services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
Two Quarters Ended
|
|
June 27, 2018
|
June 28, 2017
(1)
|
June 27, 2018
|
June 28, 2017
(1)
|
|
(Dollars in thousands)
|
Company restaurant sales
|
$
|
102,741
|
|
|
$
|
98,355
|
|
|
$
|
203,934
|
|
|
$
|
192,134
|
|
Franchise and license revenue:
|
|
|
|
|
|
|
|
Royalties
|
25,192
|
|
|
25,338
|
|
|
50,357
|
|
|
49,882
|
|
Advertising revenue
|
19,530
|
|
|
—
|
|
|
38,840
|
|
|
—
|
|
Initial and other fees
|
1,810
|
|
|
588
|
|
|
3,227
|
|
|
1,072
|
|
Occupancy revenue
|
8,061
|
|
|
9,095
|
|
|
16,249
|
|
|
18,198
|
|
Franchise and license revenue
|
54,593
|
|
|
35,021
|
|
|
108,673
|
|
|
69,152
|
|
Total operating revenue
|
$
|
157,334
|
|
|
$
|
133,376
|
|
|
$
|
312,607
|
|
|
$
|
261,286
|
|
|
|
(1)
|
As disclosed in Note 2, prior period amounts have not been adjusted under the modified retrospective method of adoption of Topic 606.
|
Company Restaurant Revenue
Company restaurant revenue is recognized at the point in time when food and beverage products are sold at company restaurants. We present company restaurant sales net of sales-related taxes collected from customers and remitted to governmental taxing authorities. The adoption of Topic 606 did not impact the recognition of company restaurant sales.
Franchise Revenue
Franchise and license revenues consist primarily of royalties, advertising revenue, initial and other fees and occupancy revenue. Our performance obligations under franchise agreements consist of a license of our brand’s symbolic intellectual property, administration of advertising programs (including local co-operatives), and other ongoing support services. These performance obligations are highly interrelated so we do not consider them to be individually distinct, and therefore account for them under Topic 606 as a single performance obligation. Revenue from franchise agreements is recognized evenly over the term of the agreement with the exception of sales-based royalties and revenue allocated to goods and services distinct from the franchise right.
Royalty and advertising revenues represent sales-based royalties that are recognized in the period in which the sales occur. Sales-based royalties are variable consideration related to our performance obligations to our franchisees to maintain the intellectual property being licensed. Under our franchise agreements, franchisee advertising contributions must be spent on marketing and related activities. The adoption of Topic 606 did not impact the recognition of royalties. Upon adoption of Topic 606, advertising revenues and expenditures are recorded on a gross basis within the Consolidated Statements of Income. Under the previous guidance of Topic 605, we recorded franchise advertising expense net of contributions from franchisees to our advertising programs, including local co-operatives. While this change materially impacts the gross amount of reported franchise and license revenue and costs of franchise and license revenue, the impact is generally an offsetting increase to both revenue and expense with little, if any, impact on operating income and net income.
Initial and other fees consist of initial, successor and assignment franchise fees (“initial franchise fees”), training fees and other franchise services fees. Initial franchise fees are billed and received upon the signing of the franchise agreement. Under Topic 606, recognition of these fees is deferred until the commencement date of the agreement and occurs over time based on the term of the underlying franchise agreement. In the event a franchise agreement is terminated, any remaining deferred fees are recognized in the period of termination. Under the previous guidance, initial franchise fees were recognized upon the opening of a franchise restaurant. Training and other franchise services fees are billed and recognized at a point in time as services are rendered. Similar to advertising revenue, upon adoption of Topic 606, other franchise services fees are recorded on a gross basis within the Consolidated Statements of Income, whereas, under previous guidance, they were netted against the related expenses.
Occupancy revenue results from leasing or subleasing restaurants to franchisees and is recognized over the term of the lease agreement.
With the exception of initial and other franchise fees, revenues are typically billed and collected on a weekly basis.
Gift Card Breakage
Under previous guidance, we recorded gift card breakage when the likelihood of redemption was remote. Breakage was recorded as a benefit to our advertising fund or reduction to other operating expenses, depending on where the gift cards were sold. Upon adoption of Topic 606, gift card breakage is recognized proportionally as redemptions occur. Our gift card breakage primarily relates to cards sold by third parties. Breakage revenue related to third party sales is recorded as advertising revenue (included as a component of franchise and license revenue) with an offsetting amount recorded as advertising expense (included as a component of costs of franchise and license revenue).
Financial Statement Impact of Adoption
The following tables summarize the impact of adopting Topic 606 on our financial statement line items as of
June 27, 2018
and for the quarter and
two quarters ended June 27, 2018
.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 27, 2018
|
Consolidated Balance Sheet
|
As Reported
|
|
Adjustments
|
|
Amounts without adoption of Topic 606
|
|
(In thousands)
|
Prepaid and other current assets
|
$
|
12,040
|
|
|
$
|
509
|
|
|
$
|
12,549
|
|
Deferred income taxes
|
19,333
|
|
|
(5,141
|
)
|
|
14,192
|
|
Other current liabilities
|
53,218
|
|
|
(1,230
|
)
|
|
51,988
|
|
Other noncurrent liabilities
|
47,831
|
|
|
(18,138
|
)
|
|
29,693
|
|
Deficit
|
(328,722
|
)
|
|
14,736
|
|
|
(313,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 27, 2018
|
|
Two quarters ended June 27, 2018
|
Consolidated Statement of Income
|
As Reported
|
|
Adjustments
|
|
Amounts without adoption of Topic 606
|
|
As Reported
|
|
Adjustments
|
|
Amounts without adoption of Topic 606
|
|
(In thousands, except per share amounts)
|
Franchise and license revenue
|
$
|
54,593
|
|
|
$
|
(20,949
|
)
|
|
$
|
33,644
|
|
|
$
|
108,673
|
|
|
$
|
(41,256
|
)
|
|
$
|
67,417
|
|
Costs of franchise and license revenue
|
29,049
|
|
|
(20,535
|
)
|
|
8,514
|
|
|
57,605
|
|
|
(40,299
|
)
|
|
17,306
|
|
Provision for income taxes
|
2,578
|
|
|
(107
|
)
|
|
2,471
|
|
|
4,407
|
|
|
(247
|
)
|
|
4,160
|
|
Net income
|
11,626
|
|
|
(307
|
)
|
|
11,319
|
|
|
21,385
|
|
|
(710
|
)
|
|
20,675
|
|
Basic net income per share
|
$
|
0.18
|
|
|
$
|
0.00
|
|
|
$
|
0.18
|
|
|
$
|
0.33
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.32
|
|
Diluted net income per share
|
$
|
0.18
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 27, 2018
|
|
Two quarters ended June 27, 2018
|
Consolidated Statement of Comprehensive Income
|
As Reported
|
|
Adjustments
|
|
Amounts without adoption of Topic 606
|
|
As Reported
|
|
Adjustments
|
|
Amounts without adoption of Topic 606
|
|
(In thousands)
|
Net income
|
$
|
11,626
|
|
|
$
|
(307
|
)
|
|
$
|
11,319
|
|
|
$
|
21,385
|
|
|
$
|
(710
|
)
|
|
$
|
20,675
|
|
Total comprehensive income
|
15,016
|
|
|
(307
|
)
|
|
14,709
|
|
|
21,684
|
|
|
(710
|
)
|
|
20,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two quarters ended June 27, 2018
|
Consolidated Statement of Cash Flow
|
As Reported
|
|
Adjustments
|
|
Amounts without adoption of Topic 606
|
|
(In thousands)
|
Net income
|
$
|
21,385
|
|
|
$
|
(710
|
)
|
|
$
|
20,675
|
|
Deferred income tax expense
|
2,896
|
|
|
(247
|
)
|
|
2,649
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Other current assets
|
(253
|
)
|
|
(509
|
)
|
|
(762
|
)
|
Other accrued liabilities
|
(6,352
|
)
|
|
851
|
|
|
(5,501
|
)
|
Other noncurrent liabilities
|
(1,345
|
)
|
|
615
|
|
|
(730
|
)
|
Net cash flows provided by operating activities
|
26,096
|
|
|
—
|
|
|
26,096
|
|
The following significant changes impacted our financial statement line items as of
June 27, 2018
and for the quarter and
two quarters ended June 27, 2018
:
|
|
•
|
Upon adoption of Topic 606, we recorded a cumulative effect adjustment related to previously recognized initial franchise fees resulting in a
$21.0 million
increase to deferred franchise revenue, a
$15.6 million
increase to opening deficit and a
$5.4 million
increase to deferred tax assets. The deferred franchise revenue resulting from the cumulative effect adjustment will be amortized over the remaining lives of the individual franchise agreements. Also upon adoption, we recorded a cumulative effect adjustment to recognize breakage in proportion to redemptions that occurred prior to December 28, 2017 resulting in a decrease of
$0.6 million
to gift card liability (a component of other current liabilities), a
$0.5 million
increase to accrued advertising (a component of other current liabilities) and a
$0.1 million
decrease to opening deficit.
|
|
|
•
|
We recognized franchise and license revenue and costs of franchise and license revenue of
$19.5 million
for the quarter and
$38.8 million
year-to-date resulting from the recording of advertising revenues and expenditures on a gross basis under Topic 606 versus recording these amounts on a net basis under Topic 605.
|
|
|
•
|
We recognized additional franchise and license revenue of
$0.4 million
for the quarter and
$1.0 million
year-to-date under Topic 606 than we would have recognized under Topic 605, resulting from the timing of recognition of initial franchise fees.
|
|
|
•
|
We recognized franchise and license revenue and costs of franchise and license revenue of
$1.0 million
for the quarter and
$1.5 million
year-to-date resulting from the recording of other franchise services fees on a gross basis under Topic 606 versus recording these amount on a net basis under Topic 605.
|
Contract Balances
Contract balances related to contracts with customers consists of receivables, deferred franchise revenue and deferred gift card revenue. See Note 4 for details on our receivables.
Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being amortized into revenue and amounts related to development agreements and unopened restaurants that will begin amortizing into revenue when the related restaurants are opened. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sale-based royalties and advertising. The components of the change in deferred franchise revenue are as follows:
|
|
|
|
|
|
(In thousands)
|
Balance, December 27, 2017
|
$
|
1,643
|
|
Cumulative effect adjustment recognized upon adoption of Topic 606
|
20,976
|
|
Fees received from franchisees
|
521
|
|
Revenue recognized
(1)
|
(1,710
|
)
|
Balance, June 27, 2018
|
21,430
|
|
Less current portion included in other current liabilities
|
3,292
|
|
Deferred franchise revenue included in other noncurrent liabilities
|
$
|
18,138
|
|
(1) Of this amount
$1.7 million
was included in either the deferred franchise revenue balance as of December 27, 2017 or the cumulative effect adjustment.
As of
June 27, 2018
, the deferred franchise revenue expected to be recognized in the future is as follows:
|
|
|
|
|
|
(In thousands)
|
Remainder of 2018
|
$
|
1,093
|
|
2019
|
2,107
|
|
2020
|
1,983
|
|
2021
|
1,773
|
|
2022
|
1,665
|
|
Thereafter
|
11,360
|
|
Development agreements and unopened restaurants
|
1,449
|
|
Deferred franchise revenue
|
$
|
21,430
|
|
Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. We recognize gift card revenue when a gift card is redeemed in one of our company restaurants. Gift card breakage is recognized proportionally as redemptions occur. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The balance of deferred gift card liabilities as of
June 27, 2018
and
December 27, 2017
was
$4.5 million
and
$6.5 million
, respectively. During the
two quarters ended June 27, 2018
, we recognized revenue of
$1.1 million
from gift card redemptions at company restaurants.
Note 4. Receivables
Receivables were comprised of the following:
|
|
|
|
|
|
|
|
|
|
June 27, 2018
|
|
December 27, 2017
|
|
(In thousands)
|
Receivables, net:
|
|
|
|
Trade accounts receivable from franchisees
|
$
|
10,060
|
|
|
$
|
10,688
|
|
Financing receivables from franchisees
|
4,046
|
|
|
5,084
|
|
Vendor receivables
|
2,003
|
|
|
3,256
|
|
Credit card receivables
|
1,458
|
|
|
1,870
|
|
Other
|
1,835
|
|
|
762
|
|
Allowance for doubtful accounts
|
(427
|
)
|
|
(276
|
)
|
Total receivables, net
|
$
|
18,975
|
|
|
$
|
21,384
|
|
|
|
|
|
Other noncurrent assets:
|
|
|
|
Financing receivables from franchisees
|
$
|
1,329
|
|
|
$
|
427
|
|
During the
two quarters ended June 27, 2018
, we recorded an allowance for doubtful accounts of
$0.2 million
of financing receivables from a franchisee.
Note 5. Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill.
|
|
|
|
|
|
(In thousands)
|
Balance, December 27, 2017
|
$
|
38,269
|
|
Additions related to acquisition
|
1,574
|
|
Balance, June 27, 2018
|
$
|
39,843
|
|
Other intangible assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2018
|
|
December 27, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
(In thousands)
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
Trade names
|
$
|
44,082
|
|
|
$
|
—
|
|
|
$
|
44,080
|
|
|
$
|
—
|
|
Liquor licenses
|
166
|
|
|
—
|
|
|
166
|
|
|
—
|
|
Intangible assets with definite lives:
|
|
|
|
|
|
|
|
Reacquired franchise rights
|
20,672
|
|
|
4,069
|
|
|
15,252
|
|
|
2,389
|
|
Intangible assets
|
$
|
64,920
|
|
|
$
|
4,069
|
|
|
$
|
59,498
|
|
|
$
|
2,389
|
|
During the
two quarters ended June 27, 2018
, we acquired
six
franchised restaurants for
$8.1 million
, of which
$5.4 million
was allocated to reacquired franchise rights,
$1.1 million
to property and
$1.6 million
to goodwill. In addition, we recorded
$2.4 million
of capital leases in connection with the acquired franchised restaurants. We account for the acquisition of franchised restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on Level 3 fair value estimates.
Note 6. Other Current Liabilities
Other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 27, 2018
|
|
December 27, 2017
|
|
(In thousands)
|
Accrued payroll
|
$
|
19,022
|
|
|
$
|
20,998
|
|
Accrued insurance, primarily current portion of liability for insurance claims
|
7,194
|
|
|
6,922
|
|
Accrued taxes
|
7,812
|
|
|
7,384
|
|
Accrued advertising
|
4,614
|
|
|
8,417
|
|
Gift cards
|
4,463
|
|
|
6,480
|
|
Other
|
10,113
|
|
|
9,045
|
|
Other current liabilities
|
$
|
53,218
|
|
|
$
|
59,246
|
|
Note 7. 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 27, 2018
|
|
June 28, 2017
|
|
June 27, 2018
|
|
June 28, 2017
|
|
(In thousands)
|
Software implementation costs
|
—
|
|
|
1,544
|
|
|
$
|
—
|
|
|
$
|
3,668
|
|
(Gains) losses on sales of assets and other, net
|
(27
|
)
|
|
205
|
|
|
(64
|
)
|
|
(1,235
|
)
|
Restructuring charges and exit costs
|
408
|
|
|
297
|
|
|
768
|
|
|
396
|
|
Impairment charges
|
81
|
|
|
—
|
|
|
118
|
|
|
—
|
|
Operating (gains), losses and other charges, net
|
$
|
462
|
|
|
$
|
2,046
|
|
|
$
|
822
|
|
|
$
|
2,829
|
|
Software implementation costs of
$3.7 million
for the
two quarters ended June 28, 2017
were the result of our investment in a new cloud-based Enterprise Resource Planning system. Gains on sales of assets and other, net of
$1.2 million
for the
two quarters ended June 28, 2017
primarily related to real estate sold to a franchisee.
Restructuring charges and exit costs were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
June 27, 2018
|
|
June 28, 2017
|
|
June 27, 2018
|
|
June 28, 2017
|
|
(In thousands)
|
Exit costs
|
$
|
275
|
|
|
$
|
295
|
|
|
$
|
299
|
|
|
$
|
326
|
|
Severance and other restructuring charges
|
133
|
|
|
2
|
|
|
469
|
|
|
70
|
|
Total restructuring charges and exit costs
|
$
|
408
|
|
|
$
|
297
|
|
|
$
|
768
|
|
|
$
|
396
|
|
The components of the change in accrued exit cost liabilities are as follows:
|
|
|
|
|
|
(In thousands)
|
Balance, December 27, 2017
|
$
|
1,180
|
|
Exit costs
(1)
|
299
|
|
Payments, net of sublease receipts
|
(316
|
)
|
Interest accretion
|
40
|
|
Balance, June 27, 2018
|
1,203
|
|
Less current portion included in other current liabilities
|
519
|
|
Long-term portion included in other noncurrent liabilities
|
$
|
684
|
|
|
|
(1)
|
Included as a component of operating (gains), losses and other charges, net.
|
As of
June 27, 2018
and
December 27, 2017
, we had accrued severance and other restructuring charges of
$0.2 million
and less than
$0.1 million
, respectively. The balance as of
June 27, 2018
is expected to be paid during the next 12 months.
Note 8. Fair Value of Financial Instruments
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 27, 2018:
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan investments
(1)
|
$
|
12,679
|
|
|
$
|
12,679
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
market approach
|
Interest rate swaps, net
(2)
|
(1,841
|
)
|
|
—
|
|
|
(1,841
|
)
|
|
—
|
|
|
income approach
|
Total
|
$
|
10,838
|
|
|
$
|
12,679
|
|
|
$
|
(1,841
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of December 27, 2017:
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan investments
(1)
|
$
|
12,663
|
|
|
$
|
12,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
market approach
|
Interest rate swaps, net
(2)
|
(2,187
|
)
|
|
—
|
|
|
(2,187
|
)
|
|
—
|
|
|
income approach
|
Total
|
$
|
10,476
|
|
|
$
|
12,663
|
|
|
$
|
(2,187
|
)
|
|
$
|
—
|
|
|
|
|
|
(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 9 for details on the interest rate swaps.
|
Note 9. Long-Term Debt
Denny's and certain of its subsidiaries have a credit facility consisting of a five-year
$400 million
senior secured revolver (with a
$30 million
letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the revolver to
$450 million
. As of
June 27, 2018
, we had outstanding revolver loans of
$282.0 million
and outstanding letters of credit under the senior secured revolver of
$20.8 million
. These balances resulted in availability of
$97.2 million
under the credit facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was
4.30%
and
3.42%
as of
June 27, 2018
and
December 27, 2017
, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was
4.57%
and
3.32%
as of
June 27, 2018
and
December 27, 2017
, respectively.
A commitment fee, which is based on our consolidated leverage ratio, is paid on the unused portion of the credit facility and was
0.35%
as of
June 27, 2018
. Borrowings under the credit facility bear a tiered interest rate, also based on our leverage ratio, and was set at LIBOR plus 225 basis points as of
June 27, 2018
. The maturity date for the credit facility is
October 26, 2022
.
The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We were in compliance with all financial covenants as of
June 27, 2018
.
Interest Rate Hedges
We have interest rate swaps to hedge a portion of the forecasted 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 forecasted notional amounts.
Under the interest rate swaps, we pay a fixed rate on the notional amount in addition to the current interest rate as determined by our consolidated leverage ratio in effect at the time. A summary of our interest rate swaps as of
June 27, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Date
|
|
Effective Date
|
|
Maturity Date
|
|
Notional Amount
|
|
Fixed Rate
|
|
|
|
|
|
|
(In thousands)
|
|
|
March 20, 2015
|
|
March 29, 2018
|
|
March 31, 2025
|
|
$
|
120,000
|
|
|
2.44
|
%
|
October 1, 2015
|
|
March 29, 2018
|
|
March 31, 2026
|
|
50,000
|
|
|
2.46
|
%
|
February 15, 2018
|
|
March 31, 2020
|
|
December 31, 2033
|
|
80,000
|
|
(1)
|
3.19
|
%
|
|
|
(1)
|
The notional amount of the swaps entered into on February 15, 2018 increases annually beginning September 30, 2020 until they reach the maximum notional amount of
$425.0 million
on September 28, 2029.
|
As of
June 27, 2018
, the fair value of the interest rate swaps was a net liability of
$1.8 million
, which is comprised of assets of
$3.3 million
recorded as a component of other noncurrent assets and liabilities of
$5.2 million
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.
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 27, 2018
|
|
June 28, 2017
|
|
June 27, 2018
|
|
June 28, 2017
|
|
(In thousands)
|
Performance share awards
|
$
|
942
|
|
|
$
|
1,904
|
|
|
$
|
2,020
|
|
|
$
|
3,844
|
|
Restricted stock units for board members
|
269
|
|
|
176
|
|
|
541
|
|
|
209
|
|
Total share-based compensation
|
$
|
1,211
|
|
|
$
|
2,080
|
|
|
$
|
2,561
|
|
|
$
|
4,053
|
|
Performance Share Units
During the
two quarters ended June 27, 2018
, we granted certain employees approximately
0.2 million
performance share units 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 share units that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based performance share units contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value of
$18.17
per share. The performance share units based on the Adjusted EPS growth rate have a grant date fair value of
$15.93
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 26, 2018
. The performance period for these performance share units is the
three
year fiscal period beginning December 28, 2017 and ending December 30, 2020. 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 27, 2018
, we issued
0.2 million
shares of common stock related to vested performance share units. In addition
0.3 million
shares of common stock were deferred and
0.1 million
shares of common stock were withheld in lieu of taxes related to vested performance share units.
As of
June 27, 2018
, we had approximately
$11.7 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 27, 2018
, we granted less than
0.1 million
deferred stock units (which are equity classified) with a weighted average grant date fair value of
$15.49
per unit to non-employee members of our Board of Directors. The deferred stock units vest after a
one
year service period. 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 27, 2018
,
0.2 million
deferred stock units were converted into shares of common stock. As of
June 27, 2018
, we had approximately
$0.8 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 income tax rate was
18.1%
for the
quarter ended June 27, 2018
and
17.1%
for the
two quarters ended June 27, 2018
compared to
36.0%
and
36.1%
, respectively, for the prior year periods. The 2018 periods were impacted by the Tax Act. In addition, the 2018 quarterly and year-to-date rates benefited from a discrete item relating to share-based compensation of
5.2%
and
4.6%
, respectively. The Tax Act reduces the U.S. statutory tax rate from
35%
to
21%
for years after 2017. We revalued our deferred taxes during fiscal 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are realized. The implementation of the Tax Act resulted in certain stranded tax effects in accumulated other comprehensive income. Due to the immateriality of the stranded tax effects, we have elected not to reclassify these amounts from accumulated other comprehensive income to retained earnings.
Note 12. Net Income Per Share
The amounts used for the basic and diluted net income per share calculations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Two Quarters Ended
|
|
June 27, 2018
|
|
June 28, 2017
|
|
June 27, 2018
|
|
June 28, 2017
|
|
(In thousands, except for per share amounts)
|
Net income
|
$
|
11,626
|
|
|
$
|
8,749
|
|
|
$
|
21,385
|
|
|
$
|
17,122
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
63,644
|
|
|
69,407
|
|
|
64,038
|
|
|
70,205
|
|
Effect of dilutive share-based compensation awards
|
2,484
|
|
|
2,254
|
|
|
2,514
|
|
|
2,254
|
|
Weighted average shares outstanding - diluted
|
66,128
|
|
|
71,661
|
|
|
66,552
|
|
|
72,459
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.33
|
|
|
$
|
0.24
|
|
Diluted net income per share
|
$
|
0.18
|
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
Anti-dilutive share-based compensation awards
|
1
|
|
|
606
|
|
|
1
|
|
|
606
|
|
Note 13. Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
June 27, 2018
|
|
June 28, 2017
|
|
(In thousands)
|
Income taxes paid, net
|
$
|
1,495
|
|
|
$
|
2,668
|
|
Interest paid
|
$
|
9,224
|
|
|
$
|
6,718
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
Insurance proceeds receivable
|
$
|
282
|
|
|
$
|
—
|
|
Issuance of common stock, pursuant to share-based compensation plans
|
$
|
4,619
|
|
|
$
|
4,961
|
|
Execution of capital leases
|
$
|
2,484
|
|
|
$
|
4,225
|
|
Treasury stock payable
|
$
|
—
|
|
|
$
|
1,394
|
|
Notes received in connection with disposition of property
|
$
|
—
|
|
|
$
|
1,750
|
|
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 October 2017, our Board of Directors approved a share repurchase program authorizing us to repurchase up to
$200 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.
During the
two quarters ended June 27, 2018
, we repurchased
1.9 million
shares of our common stock for approximately
$28.8 million
. This brings the total amount repurchased under the current repurchase program to
2.1 million
shares of our common stock for approximately
$32.5 million
, leaving approximately
$167.5 million
that can be used to repurchase our common stock under this program as of
June 27, 2018
. 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 27, 2017
|
$
|
(982
|
)
|
|
$
|
(1,334
|
)
|
|
$
|
(2,316
|
)
|
Amortization of net loss
(1)
|
56
|
|
|
—
|
|
|
56
|
|
Net change in fair value of derivatives
|
—
|
|
|
260
|
|
|
260
|
|
Reclassification of derivatives to interest expense, net
(2)
|
—
|
|
|
86
|
|
|
86
|
|
Income tax (expense) benefit related to items of other comprehensive loss
|
(13
|
)
|
|
(90
|
)
|
|
(103
|
)
|
Balance as of June 27, 2018
|
$
|
(939
|
)
|
|
$
|
(1,078
|
)
|
|
$
|
(2,017
|
)
|
|
|
(1)
|
Before-tax amount related to our 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 27, 2018
.
|
|
|
(2)
|
Amounts reclassified from accumulated other comprehensive loss into income represent payments either received from or made to the counterparty for the effective portions of the interest rate swaps. These amounts are included as a component of interest expense, net in our Condensed Consolidated Statements of Income. We expect to make payments to the counterparty and reclassify approximately
$0.8 million
from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. See Note 9 for additional details.
|
Note 15. Commitments and Contingencies
We have guarantees related to certain franchisee loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through
June 27, 2018
, no events had occurred that caused us to make payments under these guarantees. There were
$4.2 million
and
$5.1 million
of loans outstanding under these programs as of
June 27, 2018
and
December 27, 2017
, respectively. As of
June 27, 2018
, the maximum amount payable under the loan guarantees was
$1.1 million
. As a result of these guarantees, we have recorded liabilities of less than
$0.1 million
as of both
June 27, 2018
and
December 27, 2017
, 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.
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.