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EX-10.2 - EXHIBIT 10.2 - DENNYS CORPq32017ex102.htm


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 September 27, 2017

dennyslogo2017.jpg

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨  No  þ

 As of October 27, 2017, 65,282,790 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)
 
September 27, 2017
 
December 28, 2016
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,663

 
$
2,592

Receivables
17,423

 
19,841

Inventories
2,998

 
3,046

Assets held for sale

 
1,020

Prepaid and other current assets
8,573

 
9,408

Total current assets
30,657

 
35,907

Property, net of accumulated depreciation of $243,107 and $255,185, respectively
138,049

 
133,102

Goodwill
37,821

 
35,233

Intangible assets, net
56,075

 
54,493

Deferred financing costs, net
1,491

 
1,936

Deferred income taxes
17,966

 
17,683

Other noncurrent assets
27,167

 
27,797

Total assets
$
309,226

 
$
306,151

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Current maturities of capital lease obligations
$
3,289

 
$
3,285

Accounts payable
19,002

 
25,289

Other current liabilities
53,748

 
64,796

Total current liabilities
76,039

 
93,370

Long-term liabilities:
 

 
 

Long-term debt, less current maturities
261,800

 
218,500

Capital lease obligations, less current maturities
26,296

 
23,806

Liability for insurance claims, less current portion
13,584

 
14,853

Other noncurrent liabilities
29,104

 
26,734

Total long-term liabilities
330,784

 
283,893

Total liabilities
406,823

 
377,263

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity (deficit)
 

 
 

Common stock $0.01 par value; shares authorized - 135,000; September 27, 2017: 107,554 shares issued and 65,685 shares outstanding; December 28, 2016: 107,115 shares issued and 71,358 shares outstanding
$
1,076

 
$
1,071

Paid-in capital
591,773

 
577,951

Deficit
(347,976
)
 
(382,843
)
Accumulated other comprehensive loss, net of tax
(3,323
)
 
(1,407
)
Shareholders’ equity before treasury stock
241,550

 
194,772

Treasury stock, at cost, 41,869 and 35,757 shares, respectively
(339,147
)
 
(265,884
)
Total shareholders' deficit
(97,597
)
 
(71,112
)
Total liabilities and shareholders' deficit
$
309,226

 
$
306,151

See accompanying notes

3



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

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Company restaurant sales
$
97,915

 
$
93,122

 
$
290,049

 
$
272,718

Franchise and license revenue
34,469

 
35,264

 
103,621

 
104,625

Total operating revenue
132,384

 
128,386

 
393,670

 
377,343

Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
24,896

 
22,819

 
72,798

 
67,253

Payroll and benefits
37,332

 
35,999

 
113,221

 
104,548

Occupancy
5,054

 
4,928

 
15,291

 
14,721

Other operating expenses
14,040

 
13,372

 
39,544

 
37,544

Total costs of company restaurant sales
81,322

 
77,118

 
240,854

 
224,066

Costs of franchise and license revenue
9,493

 
10,275

 
29,483

 
31,037

General and administrative expenses
16,446

 
17,558

 
50,536

 
50,691

Depreciation and amortization
5,958

 
5,609

 
17,493

 
16,207

Operating (gains), losses and other charges, net
630

 
249

 
3,459

 
24,365

Total operating costs and expenses, net
113,849

 
110,809

 
341,825

 
346,366

Operating income
18,535

 
17,577

 
51,845

 
30,977

Interest expense, net
4,067

 
3,117

 
11,348

 
8,905

Other nonoperating income, net
(286
)
 
(543
)
 
(1,053
)
 
(635
)
Net income before income taxes
14,754

 
15,003

 
41,550

 
22,707

Provision for income taxes
5,429

 
5,277

 
15,103

 
14,579

Net income
$
9,325

 
$
9,726

 
$
26,447

 
$
8,128

 
 
 
 
 
 
 
 
Basic net income per share
$
0.14

 
$
0.13

 
$
0.38

 
$
0.11

Diluted net income per share
$
0.13

 
$
0.13

 
$
0.37

 
$
0.10

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
66,873

 
74,851

 
69,095

 
76,214

Diluted weighted average shares outstanding
69,210

 
76,791

 
71,377

 
78,052

 
See accompanying notes

4


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

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Net income
$
9,325

 
$
9,726

 
$
26,447

 
$
8,128

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax of $9, $8, $27 and $2,168
14

 
13

 
42

 
21,851

Recognition of unrealized gain (loss) on hedge transactions, net of tax of $133, $20, $(1,249) and $(5,034)
209

 
32

 
(1,958
)
 
(7,882
)
Other comprehensive income (loss)
223

 
45

 
(1,916
)
 
13,969

Total comprehensive income
$
9,548

 
$
9,771

 
$
24,531

 
$
22,097


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 28, 2016
107,115

 
$
1,071

 
(35,757
)
 
$
(265,884
)
 
$
577,951

 
$
(382,843
)
 
$
(1,407
)
 
$
(71,112
)
Cumulative effect adjustment

 

 

 

 
551

 
8,420

 

 
8,971

Net income

 

 

 

 

 
26,447

 

 
26,447

Other comprehensive loss

 

 

 

 

 

 
(1,916
)
 
(1,916
)
Share-based compensation on equity classified awards

 

 

 

 
6,219

 

 

 
6,219

Purchase of treasury stock

 

 
(5,558
)
 
(66,379
)
 

 

 

 
(66,379
)
Equity forward contract settlement

 

 
(554
)
 
(6,884
)
 
6,884

 

 

 

Issuance of common stock for share-based compensation
398

 
4

 

 

 
(4
)
 

 

 

Exercise of common stock options
41

 
1

 

 

 
172

 

 

 
173

Balance, September 27, 2017
107,554

 
$
1,076

 
(41,869
)
 
$
(339,147
)
 
$
591,773

 
$
(347,976
)
 
$
(3,323
)
 
$
(97,597
)
 
See accompanying notes

6



Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
26,447

 
$
8,128

Adjustments to reconcile net income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
17,493

 
16,207

Operating (gains), losses and other charges, net
3,459

 
24,365

Amortization of deferred financing costs
446

 
445

(Gain) loss on early extinguishments of debt and leases
68

 
(3
)
Deferred income tax expense
9,936

 
8,942

Share-based compensation
6,546

 
5,625

Changes in assets and liabilities:
 
 
 
Decrease (increase) in assets:
 
 
 
Receivables
3,279

 
2,582

Inventories
(55
)
 
108

Other current assets
834

 
6,662

Other assets
(5,068
)
 
(1,800
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(5,121
)
 
(83
)
Accrued salaries and vacations
(9,094
)
 
(11,006
)
Accrued taxes
1,474

 
1,647

Other accrued liabilities
(4,834
)
 
(16,627
)
Other noncurrent liabilities
(2,285
)
 
(2,060
)
Net cash flows provided by operating activities
43,525

 
43,132

Cash flows from investing activities:
 
 
 
Capital expenditures
(13,558
)
 
(14,615
)
Acquisition of restaurants and real estate
(10,043
)
 
(12,956
)
Proceeds from disposition of property
2,318

 
1,921

Collections on notes receivable
3,773

 
1,151

Issuance of notes receivable
(2,278
)
 
(1,394
)
Net cash flows used in investing activities
(19,788
)
 
(25,893
)
Cash flows from financing activities:
 
 
 
Revolver borrowings
105,900

 
38,000

Revolver payments
(62,600
)
 
(30,000
)
Long-term debt payments
(2,467
)
 
(2,378
)
Proceeds from exercise of stock options
173

 
492

Purchase of treasury stock
(65,951
)
 
(19,137
)
Net bank overdrafts
279

 
(4,361
)
Net cash flows used in financing activities
(24,666
)
 
(17,384
)
Decrease in cash and cash equivalents
(929
)
 
(145
)
Cash and cash equivalents at beginning of period
2,592

 
1,671

Cash and cash equivalents at end of period
$
1,663

 
$
1,526

 
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 or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At September 27, 2017, the Denny's brand consisted of 1,725 restaurants, 1,551 of which were franchised/licensed restaurants and 174 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 28, 2016 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 28, 2016. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 27, 2017.

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

Effective December 29, 2016, we adopted Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The new guidance 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.

As required by the guidance, excess tax benefits recognized on share-based compensation expense are reflected on a prospective basis in our condensed consolidated statements of income as a component of the provision for income taxes rather than paid-in capital. The cumulative-effect adjustment to retained earnings from previously unrecognized excess tax benefits resulted in an $8.8 million increase in deferred tax assets and a decrease to opening deficit.

In addition, we have elected to account for forfeitures as they occur. The cumulative-effect adjustment to retained earnings from previously estimated forfeitures resulted in a $0.4 million increase to opening deficit, a $0.2 million increase in deferred tax assets and a $0.6 million increase to additional paid-in capital. As allowed by the update, on a retrospective basis, cash flows related to excess tax benefits recognized on stock-based compensation expense are classified as operating activities in the condensed consolidated statements of cash flows. There was no material impact on the prior periods retrospectively adjusted. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as financing activites.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The new guidance simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test. Impairment is measured based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. We early adopted ASU 2017-04 as of March 29, 2017 on a prospective basis. The adoption of this guidance did not have any impact on our consolidated financial statements.


8



Accounting Standards to be Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (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 service to a customer in an amount that reflects the consideration to which a company expects to be entitled. The FASB has subsequently amended this guidance by issuing additional ASUs that provide clarification and further guidance around areas identified as potential implementation issues, including principal versus agent considerations, licensing and identifying performance obligations, assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach upon adoption. All of the standards are 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 with early application permitted.

The guidance is not expected to impact the recognition of company restaurant sales or royalties from franchised restaurants. Upon adoption, initial franchise fees, which are currently recognized upon the opening of a franchise restaurant, are expected to be deferred and recognized over the term of the underlying franchise agreement. The effect of the required deferral of initial franchise fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively deferred from prior years. During the year ended December 28, 2016, we recognized revenue related to initial franchise fees of $2.7 million.

The new guidance will also impact our advertising arrangements with franchisees. Currently we record advertising expense net of contributions from franchisees to our advertising programs, including local co-operatives. Under the new guidance, we would include franchisee contributions to and expenditures from our advertising programs on a gross basis within the consolidated statements of income. While this change will materially impact the gross amount of reported franchise and license revenue and costs of franchise and license revenue, the impact would be an offsetting increase to both revenue and expense such that there will not be a significant, if any, impact on operating income and net income. During the year ended December 28, 2016, contributions from franchisees to our advertising programs, including local co-operatives, were $76.5 million.

Gift card breakage will also be impacted by the new guidance. Currently we record breakage income as a benefit to our advertising fund or reduction to other operating expenses, depending on where the gift cards were sold, and breakage is recognized when the likelihood of redemption is remote. Upon adoption, gift card breakage income will be presented within revenue and breakage will be recognized proportionately as redemptions occur. During the year ended December 28, 2016, we recognized breakage of $0.3 million.

We are currently evaluating the impact this guidance will have on our consolidated financial statements related to other transactions with our franchisees and the effect it will have on our disclosures. We preliminarily expect to use the modified retrospective method of adoption.  However, the adoption method is subject to change as we continue to evaluate the impact of the standard.

In January 2016, the FASB issued 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. 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.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, 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. Based on a preliminary assessment, we expect the adoption will result in a significant increase in the assets and liabilities on our consolidated balance sheets, as most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets. We are continuing our evaluation, which may identify additional impacts this standard will have on our consolidated financial statements and related disclosures.


9




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.

In August 2016, the FASB issued 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. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied using a retrospective transition method to each period presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The new guidance clarifies the definition of a business. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied prospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In March 2017, the FASB issued 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. ASU 2017-07 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied prospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In May 2017, the FASB issued 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. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied prospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In August 2017, the FASB issued 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. ASU 2017-12 is effective for annual and interim periods beginning after December 15, 2018 (our fiscal 2019) with early adoption permitted. The amended presentation and disclosure guidance is to be applied on a prospective basis. Adjustments to the measurement of ineffectiveness should be recorded through a cumulative effect adjustment as of the beginning of the adoption period. 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.


10



Note 3.     Receivables
 
Receivables were comprised of the following:
 
 
September 27, 2017
 
December 28, 2016
 
(In thousands)
Current assets:
 
 
 
Receivables:
 
 
 
Trade accounts receivable from franchisees
$
11,471

 
$
10,513

Financing receivables from franchisees
2,228

 
2,804

Vendor receivables
1,844

 
3,865

Credit card receivables
1,505

 
1,678

Other
656

 
1,261

Allowance for doubtful accounts
(281
)
 
(280
)
Total current receivables, net
$
17,423

 
$
19,841

 
 
 
 
Noncurrent assets (included as a component of other noncurrent assets):
 
 
 
Financing receivables from franchisees
$
479

 
$
732


During the three quarters ended September 27, 2017, we wrote-off $0.2 million of financing receivables from a franchisee. Also, during the three quarters ended September 27, 2017, we recorded $0.4 million of insurance receivables related to hurricane damages incurred during the period, which are included as a component of other receivables in the above table.


Note 4.    Goodwill and Other Intangible Assets

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

 
(In thousands)
Balance, December 28, 2016
$
35,233

Additions related to acquisition
2,573

Adjustments related to the sale of restaurants
15

Balance, September 27, 2017
$
37,821


Other intangible assets were comprised of the following:
 
 
September 27, 2017
 
December 28, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
Trade names
$
44,076

 
$

 
$
44,076

 
$

Liquor licenses
166

 

 
166

 

Intangible assets with definite lives:
 
 
 
 
 
 
 
Franchise and license agreements

 

 
190

 
186

Reacquired franchise rights
14,363

 
2,530

 
11,498

 
1,251

Intangible assets
$
58,605

 
$
2,530

 
$
55,930

 
$
1,437

 

11



During the three quarters ended September 27, 2017, we acquired seven franchised restaurants and one former franchised restaurant, which was being remodeled and subsequently opened in the fourth quarter of fiscal 2017, for $6.5 million, of which $2.9 million was allocated to reacquired franchise rights, $1.0 million to property and $2.6 million to goodwill. In addition, we recorded $1.9 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 5.     Other Current Liabilities
 
Other current liabilities consisted of the following:

 
September 27, 2017
 
December 28, 2016
 
(In thousands)
Accrued payroll
$
18,321

 
$
27,056

Accrued insurance, primarily current portion of liability for insurance claims
6,481

 
6,651

Accrued taxes
8,880

 
7,407

Accrued advertising
6,066

 
8,051

Gift cards
4,537

 
5,474

Other
9,463

 
10,157

Other current liabilities
$
53,748

 
$
64,796


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

Operating (gains), losses and other charges, net are comprised of the following:
 
 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Pension settlement loss
$

 
$

 
$

 
$
24,297

Software implementation costs
1,001

 

 
4,669

 

Gains on sales of assets and other, net
(411
)
 
(77
)
 
(1,646
)
 
(764
)
Restructuring charges and exit costs
40

 
326

 
436

 
832

Operating (gains), losses and other charges, net
$
630

 
$
249

 
$
3,459

 
$
24,365

 
Software implementation costs of $4.7 million for the three quarters ended September 27, 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 $1.6 million for the three quarters ended September 27, 2017 primarily related to real estate sold to franchisees. The pre-tax pension settlement loss of $24.3 million related to the completion of the liquidation of the Advantica Pension Plan during the three quarters ended September 28, 2016. Gains on sales of assets and other, net of $0.8 million for the three quarters ended September 28, 2016 primarily related to restaurants sold to franchisees.

12




Restructuring charges and exit costs were comprised of the following: 
 
 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Exit costs
$
40

 
$
154

 
$
366

 
$
269

Severance and other restructuring charges

 
172

 
70

 
563

Total restructuring charges and exit costs
$
40

 
$
326

 
$
436

 
$
832


The components of the change in accrued exit cost liabilities are as follows:
 
 
(In thousands)
Balance, December 28, 2016
$
1,896

Exit costs (1)
366

Payments, net of sublease receipts
(1,067
)
Interest accretion
69

Balance, September 27, 2017
1,264

Less current portion included in other current liabilities
309

Long-term portion included in other noncurrent liabilities
$
955


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

As of September 27, 2017 and December 28, 2016, we had accrued severance and other restructuring charges of less than $0.1 million and $0.4 million, respectively. The balance as of September 27, 2017 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 September 27, 2017:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
12,036

 
$
12,036

 
$

 
$

 
market approach
Interest rate swaps, net (2)
(3,962
)
 

 
(3,962
)
 

 
income approach
Total
$
8,074

 
$
12,036

 
$
(3,962
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements as of December 28, 2016:
 
 
 
 
 
 
 
 
 
Deferred compensation plan investments (1)
$
11,248

 
$
11,248

 
$

 
$

 
market approach
Interest rate swaps (2)
(756
)
 

 
(756
)
 

 
income approach
Total
$
10,492

 
$
11,248

 
$
(756
)
 
$

 
 

(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 28, 2016:
 
 
 
 
 
Assets held for sale (1)
$
1,020

 
$
1,098

 
market approach

(1)
As of December 28, 2016, assets were classified as assets held for sale and were written down to their fair value. The fair value of assets held for sale was based upon Level 2 inputs, which included 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 September 27, 2017, we had outstanding revolver loans of $261.8 million and outstanding letters of credit under the senior secured revolver of $21.5 million. These balances resulted in availability of $41.7 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 3.27% and 2.45% as of September 27, 2017 and December 28, 2016, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 3.22% and 2.74% as of September 27, 2017 and December 28, 2016, respectively.

A commitment fee is paid on the unused portion of the revolving credit facility and was 0.30% as of September 27, 2017. 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 200 basis points as of September 27, 2017. 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. We were in compliance with all financial covenants as of September 27, 2017.

Subsequent to the end of the quarter, we refinanced our credit facility. See Note 16.

Interest Rate Hedges
We have 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 September 27, 2017, 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

 
3.13
%
March 29, 2018 - March 31, 2025
 
170,000

 
4.44
%
April 1, 2025 - March 31, 2026
 
50,000

 
4.46
%

As of September 27, 2017, the fair value of the interest rate swaps was a net liability of $4.0 million, which is comprised of assets of $0.1 million recorded as a component of other noncurrent assets and liabilities of $4.1 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.


14



Note 9.     Defined Benefit Plans

During the second quarter of 2016, we completed the liquidation of the Advantica Pension Plan (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.

The components of net periodic benefit cost were as follows:

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Pension Plan:
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$
105

Net periodic benefit cost
$

 
$

 
$

 
$
105

 
 
 
 
 
 
 
 
Other Defined Benefit Plans:
 
 
 
 
 
 
 
Interest cost
$
20

 
$
23

 
$
62

 
$
69

Amortization of net loss
23

 
21

 
69

 
64

Net periodic benefit cost
$
43

 
$
44

 
$
131

 
$
133


We made contributions of $0.2 million and $0.1 million to our other defined benefit plans during the three quarters ended September 27, 2017 and September 28, 2016, respectively. We expect to contribute less than $0.1 million to our other defined benefit plans over the remainder of fiscal 2017.

Additional minimum pension liability, net of tax, of $0.9 million related to our other defined benefit plans is reported as a component of accumulated other comprehensive loss in our Condensed Consolidated Statement of Shareholders’ Equity as of both September 27, 2017 and December 28, 2016, respectively.

Note 10.     Share-Based Compensation

Refer to Note 2 for the impact of the adoption of ASU 2016-09. Total share-based compensation cost included as a component of net income was as follows:

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Performance share awards
$
2,246

 
$
1,862

 
$
6,090

 
$
5,284

Restricted stock units for board members
247

 
(87
)
 
456

 
341

Total share-based compensation
$
2,493

 
$
1,775

 
$
6,546

 
$
5,625

 

15



Performance Share Awards
 
During the three quarters ended September 27, 2017, 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 $13.05 per share. The performance shares based on the Adjusted EBITDA growth rate have a grant date fair value of $12.17 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 27, 2017. The performance period for these performance shares is the three year fiscal period beginning December 29, 2016 and ending December 25, 2019. 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 three quarters ended September 27, 2017, we made payments of $3.9 million in cash and issued 0.4 million shares of common stock related to performance share awards.
 
As of September 27, 2017, we had approximately $10.5 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which is expected to be recognized over a weighted average of 1.8 years.
 
Restricted Stock Units for Board Members

During the three quarters ended September 27, 2017, we granted approximately 0.1 million deferred stock units (which are equity classified) with a weighted average grant date fair value of $12.04 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. Also during the three quarters ended September 27, 2017, we made cash payments of $0.5 million related to the replacement cash awards issued in 2016 related to the canceled deferred stock units awards. As of September 27, 2017, 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 0.9 years.
 
Note 11.     Income Taxes

The effective income tax rate was 36.8% for the quarter ended September 27, 2017 and 36.3% for the three quarters ended September 27, 2017 compared to 35.2% and 64.2%, respectively, for the prior year periods. Refer to Note 2 for the impact of the adoption of ASU 2016-09. For the 2016 periods, the difference in the overall effective rate from the U.S. statutory rate was primarily due to the Pension Plan liquidation, foreign tax credits and certain discrete items. During the three quarters ended September 28, 2016, we amended prior years’ U.S. tax returns in order to maximize a foreign tax credit in lieu of a foreign tax deduction. This created a benefit to the effective tax rate of 4.8% for the quarter and 4.6% year-to-date. In addition, during the three quarters ended September 28, 2016, certain discrete items created an increase to the effective tax rate of 4.3% for the quarter and 4.7% year-to-date.

In addition to the items noted above, the 2016 year-to-date rate of 64.2% was also 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 35.6% for the three quarters ended September 28, 2016.
 

16



Note 12.     Net Income Per Share
 
The amounts used for the basic and diluted net income per share calculations are summarized below:
 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
 
 
 
 
(In thousands, except for per share amounts)
Net income
$
9,325

 
$
9,726

 
$
26,447

 
$
8,128

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
66,873

 
74,851

 
69,095

 
76,214

Effect of dilutive share-based compensation awards
2,337

 
1,940

 
2,282

 
1,838

Weighted average shares outstanding - diluted
69,210

 
76,791

 
71,377

 
78,052

 
 
 
 
 
 
 
 
Basic net income per share
$
0.14

 
$
0.13

 
$
0.38

 
$
0.11

Diluted net income per share
$
0.13

 
$
0.13

 
$
0.37

 
$
0.10

 
 
 
 
 
 
 
 
Anti-dilutive share-based compensation awards
606

 

 
606

 

    
Note 13.     Supplemental Cash Flow Information

 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Income taxes paid, net
$
5,039

 
$
1,140

Interest paid
$
10,547

 
$
8,197

 
 
 
 
Noncash investing and financing activities:
 
 
 
Property acquisition payable
$
500

 
$

Issuance of common stock, pursuant to share-based compensation plans
$
4,961

 
$
3,597

Execution of capital leases
$
4,959

 
$
7,180

Treasury stock payable
$
741

 
$
695

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 May 2016, 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.


17



In November 2016, as part of our previously authorized share repurchase programs, we entered into a variable term, capped accelerated share repurchase (the “ASR”) agreement with MUFG Securities EMEA plc (“MUFG”), to repurchase an aggregate of $25 million of our common stock. Pursuant to the terms of the ASR agreement, we paid $25 million in cash and received approximately 1.5 million shares of our common stock (which represents the minimum shares to be delivered based on the cap price) and recorded $18.1 million of treasury stock related to these shares. The remaining balance of $6.9 million was recorded as additional paid-in capital in shareholders' equity as of December 28, 2016 as an equity forward contract.

During the three quarters ended September 27, 2017, we settled the ASR agreement with MUFG. As a result, we received final delivery of an additional 0.5 million shares of our common stock, bringing the total number of shares repurchased pursuant to the ASR agreement to 2.0 million. The total number of shares repurchased was based on a combined discounted volume-weighted average price (“VWAP”) of $12.36 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. As a result of settling the ASR agreement, we recorded $6.9 million of treasury stock related to the settlement of the equity forward contract related to the ASR agreement.

In addition to the settlement of the ASR agreement, during the three quarters ended September 27, 2017, we repurchased 5.6 million shares of our common stock for approximately $66.4 million. This brings the total amount repurchased under the May 2016 repurchase program to 7.2 million shares of our common stock for approximately $87.2 million, leaving approximately $12.8 million that can be used to repurchase our common stock under this program as of September 27, 2017.

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

Subsequent to the end of the quarter, the Board of Directors of Denny’s Corporation approved a new share repurchase program. See Note 16.

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 28, 2016
$
(945
)
 
$
(462
)
 
$
(1,407
)
Amortization of net loss (1)
69

 

 
69

Net change in fair value of derivatives

 
(3,091
)
 
(3,091
)
Reclassification of derivatives to interest expense (2)

 
(116
)
 
(116
)
Income tax (expense) benefit related to items of other comprehensive loss
(27
)
 
1,249

 
1,222

Balance as of September 27, 2017
$
(903
)
 
$
(2,420
)
 
$
(3,323
)

(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 three quarters ended September 27, 2017. See Note 9 for additional details.
(2)
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 $1.0 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. See Note 8 for additional details.


18



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 September 27, 2017, no events had occurred that caused us to make payments under these guarantees. There were $6.0 million and $7.9 million of loans outstanding under these programs as of September 27, 2017 and December 28, 2016, respectively. As of September 27, 2017, the maximum amounts payable under the loan guarantees was $1.2 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both September 27, 2017 and December 28, 2016, 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

Share Repurchase Program

On October 27, 2017, the Board of Directors of Denny’s Corporation approved a new share repurchase program authorizing the Company to repurchase an additional $200 million of its common stock, in addition to repurchases previously authorized. As of October 27, 2017, the Company had approximately $7.6 million remaining available in its current $100 million share stock repurchase program announced in May 2016.

Refinancing of Credit Facility

On October 26, 2017, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new five-year $400 million senior secured revolver (with a $30 million letter of credit sublimit) (the “New Credit Facility”). The New Credit Facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million. A commitment fee, initially set at 0.30%, is paid on the unused portion of the revolving credit facility. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was initially set at LIBOR plus 200 basis points. The maturity date for the credit facility is October 26, 2022.

The New Credit Facility was used to refinance the Old Credit Facility and will also be available for working capital, capital expenditures and other general corporate purposes. The New Credit Facility is guaranteed by the Company and its material subsidiaries and is secured by assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The New Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio.

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements reflect our best judgment based on factors currently known and are intended to speak only as of the date such statements are made. Forward-looking statements 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. You should consider our forward-looking statements in light of the risks discussed under Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. 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
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
97,915

 
74.0
 %
 
$
93,122

 
72.5
 %
 
$
290,049

 
73.7
 %
 
$
272,718

 
72.3
 %
Franchise and license revenue
34,469

 
26.0
 %
 
35,264

 
27.5
 %
 
103,621

 
26.3
 %
 
104,625

 
27.7
 %
Total operating revenue
132,384

 
100.0
 %
 
128,386

 
100.0
 %
 
393,670

 
100.0
 %
 
377,343

 
100.0
 %
Costs of company restaurant sales (a):
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
Product costs
24,896

 
25.4
 %
 
22,819

 
24.5
 %
 
72,798

 
25.1
 %
 
67,253

 
24.7
 %
Payroll and benefits
37,332

 
38.1
 %
 
35,999

 
38.7
 %
 
113,221

 
39.0
 %
 
104,548

 
38.3
 %
Occupancy
5,054

 
5.2
 %
 
4,928

 
5.3
 %
 
15,291

 
5.3
 %
 
14,721

 
5.4
 %
Other operating expenses
14,040

 
14.3
 %
 
13,372

 
14.4
 %
 
39,544

 
13.6
 %
 
37,544

 
13.8
 %
Total costs of company restaurant sales
81,322

 
83.1
 %
 
77,118

 
82.8
 %
 
240,854

 
83.0
 %
 
224,066

 
82.2
 %
Costs of franchise and license revenue (a)
9,493

 
27.5
 %
 
10,275

 
29.1
 %
 
29,483

 
28.5
 %
 
31,037

 
29.7
 %
General and administrative expenses
16,446

 
12.4
 %
 
17,558

 
13.7
 %
 
50,536

 
12.8
 %
 
50,691

 
13.4
 %
Depreciation and amortization
5,958

 
4.5
 %
 
5,609

 
4.4
 %
 
17,493

 
4.4
 %
 
16,207

 
4.3
 %
Operating (gains), losses and other charges, net
630

 
0.5
 %
 
249

 
0.2
 %
 
3,459

 
0.9
 %
 
24,365

 
6.5
 %
Total operating costs and expenses, net
113,849

 
86.0
 %
 
110,809

 
86.3
 %
 
341,825

 
86.8
 %
 
346,366

 
91.8
 %
Operating income
18,535

 
14.0
 %
 
17,577

 
13.7
 %
 
51,845

 
13.2
 %
 
30,977

 
8.2
 %
Interest expense, net
4,067

 
3.1
 %
 
3,117

 
2.4
 %
 
11,348

 
2.9
 %
 
8,905

 
2.4
 %
Other nonoperating income, net
(286
)
 
(0.2
)%
 
(543
)
 
(0.4
)%
 
(1,053
)
 
(0.3
)%
 
(635
)
 
(0.2
)%
Net income before income taxes
14,754

 
11.1
 %
 
15,003

 
11.7
 %
 
41,550

 
10.6
 %
 
22,707

 
6.0
 %
Provision for income taxes
5,429

 
4.1
 %
 
5,277

 
4.1
 %
 
15,103

 
3.8
 %
 
14,579

 
3.9
 %
Net income
$
9,325

 
7.0
 %
 
$
9,726

 
7.6
 %
 
$
26,447

 
6.7
 %
 
$
8,128

 
2.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Company average unit sales
$
577

 
 

 
$
573

 
 

 
$
1,706

 
 

 
$
1,689

 
 

Franchise average unit sales
$
403

 
 

 
$
396

 
 

 
$
1,188

 
 

 
$
1,174

 
 

Company equivalent units (b)
170

 
 

 
163

 
 

 
170

 
 

 
161

 
 

Franchise equivalent units (b)
1,550

 
 

 
1,560

 
 

 
1,557

 
 

 
1,554

 
 

Company same-store sales increase (c)(d)
0.6
%
 
 

 
1.0
%
 
 

 
0.6
%
 
 

 
1.5
%
 
 

Domestic franchise same-store sales increase (c)(d)
0.6
%
 
 

 
1.0
%
 
 

 
0.7
%
 
 

 
0.9
%
 
 

            
(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 2017 comparable units.


20



Unit Activity
 
 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
Company restaurants, beginning of period
172

 
162

 
169

 
164

Units opened
1

 

 
2

 
1

Units acquired from franchisees
1

 
6

 
7

 
9

Units sold to franchisees

 

 
(4
)
 
(6
)
Units closed

 

 

 

End of period
174

 
168

 
174

 
168

 
 
 
 
 
 
 
 
Franchised and licensed restaurants, beginning of period
1,552

 
1,558

 
1,564

 
1,546

Units opened 
8

 
13

 
23

 
37

Units purchased from Company

 

 
4

 
6

Units acquired by Company
(1
)
 
(6
)
 
(7
)
 
(9
)
Units closed
(8
)
 
(5
)
 
(33
)
 
(20
)
End of period
1,551

 
1,560

 
1,551

 
1,560

Total restaurants, end of period
1,725

 
1,728

 
1,725

 
1,728


Company Restaurant Operations
 
During the quarter ended September 27, 2017, company restaurant sales increased $4.8 million, or 5.1%, primarily resulting from a seven equivalent unit increase in company restaurants and a 0.6% increase in company same-store sales as compared to the prior year period. During the three quarters ended September 27, 2017, company restaurant sales increased $17.3 million, or 6.4%, primarily resulting from a nine equivalent unit increase in company restaurants and a 0.6% increase in company same-store sales as compared to the prior year period.
 
Total costs of company restaurant sales as a percentage of company restaurant sales increased to 83.1% for the quarter and 83.0% year-to-date from 82.8% and 82.2%, respectively, in the prior year periods.

Product costs were 25.4% for the quarter and 25.1% year-to-date compared to 24.5% and 24.7%, respectively, in the prior year periods. The increase for the quarter was primarily due to increased commodity costs.

Payroll and benefits were 38.1% for the quarter and 39.0% year-to-date compared to 38.7% and 38.3%, respectively, in the prior year periods. The decrease for the quarter was primarily due to a 1.1 percentage point decrease in workers' compensation costs, as the current quarter included $1.3 million in favorable workers' compensation experience compared to $0.3 million of favorable workers' compensation experience in the prior year period. The increase year-to-date was primarily due to a 0.7 percentage point increase in labor costs resulting from minimum wage increases and a 0.1 percentage point increase in workers' compensation costs. The three quarters ended September 27, 2017 included $1.6 million in favorable workers' compensation experience, as compared to $1.9 million of favorable workers' compensation experience in the prior year period.

Occupancy costs were 5.2% for the quarter and 5.3% year-to-date compared to 5.3% and 5.4%, respectively, in the prior year periods. The decreases were primarily related to the increases in capital leases.



21



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

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(Dollars in thousands)
Utilities
$
3,767

 
3.8
%
 
$
3,429

 
3.7
%
 
$
9,873

 
3.4
%
 
$
9,232

 
3.4
%
Repairs and maintenance
1,642

 
1.7
%
 
1,559

 
1.7
%
 
4,972

 
1.7
%
 
4,893

 
1.8
%
Marketing
3,740

 
3.8
%
 
3,500

 
3.8
%
 
10,982

 
3.8
%
 
10,123

 
3.7
%
Other direct costs
4,891

 
5.0
%
 
4,884

 
5.2
%
 
13,717

 
4.7
%
 
13,296

 
4.9
%
Other operating expenses
$
14,040

 
14.3
%
 
$
13,372

 
14.4
%
 
$
39,544

 
13.6
%
 
$
37,544

 
13.8
%

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
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(Dollars in thousands)
Royalties
$
25,174

 
73.0
%
 
$
25,039

 
71.0
%
 
$
75,056

 
72.4
%
 
$
73,694

 
70.4
%
Initial fees
507

 
1.5
%
 
757

 
2.1
%
 
1,579

 
1.5
%
 
2,081

 
2.0
%
Occupancy revenue 
8,788

 
25.5
%
 
9,468

 
26.8
%
 
26,986

 
26.0
%
 
28,850

 
27.6
%
Franchise and license revenue 
$
34,469

 
100.0
%
 
$
35,264

 
100.0
%
 
$
103,621

 
100.0
%
 
$
104,625

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Occupancy costs 
$
6,343

 
18.4
%
 
$
7,023

 
19.9
%
 
$
19,420

 
18.7
%
 
$
21,373

 
20.4
%
Other direct costs 
3,150

 
9.1
%
 
3,252

 
9.2
%
 
10,063

 
9.7
%
 
9,664

 
9.2
%
Costs of franchise and license revenue 
$
9,493

 
27.5
%
 
$
10,275

 
29.1
%
 
$
29,483

 
28.5
%
 
$
31,037

 
29.7
%

During the quarter ended September 27, 2017, royalties increased $0.1 million, or 0.5%, primarily resulting from a 0.6% increase in domestic same-store sales and a higher average royalty rate as compared to the prior year period, partially offset by a 10 equivalent unit decrease in franchised and licensed restaurants. During the three quarters ended September 27, 2017, royalties increased $1.4 million, or 1.8%, primarily resulting from a higher average royalty rate as compared to the prior year period, a three equivalent unit increase in franchised and licensed restaurants and a 0.7% increase in domestic same-store sales. Initial fees decreased $0.3 million for the quarter and $0.5 million year-to-date as a higher number of restaurants were opened by franchisees during the prior year periods. The decrease in occupancy revenue of $0.7 million, or 7.2%, for the quarter and $1.9 million, or 6.5%, year-to-date was primarily the result of lease expirations.

Costs of franchise and license revenue decreased $0.8 million, or 7.6%, for the quarter and decreased $1.6 million, or 5.0%, year-to-date. Occupancy costs decreased $0.7 million, or 9.7%, for the quarter and $2.0 million, or 9.1%, year-to-date, primarily resulting from lease expirations. Other direct costs decreased $0.1 million, or 3.1%, for the quarter and increased $0.4 million, or 4.1%, year-to-date. The increase for the year-to-date period primarily resulted from increased franchise administration costs. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 27.5% for the quarter from 29.1% for the prior year quarter and decreased to 28.5% year-to-date from 29.7% 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
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Share-based compensation
$
2,493

 
$
1,775

 
$
6,546

 
$
5,625

Other general and administrative expenses
13,953

 
15,783

 
43,990

 
45,066

Total general and administrative expenses
$
16,446

 
$
17,558

 
$
50,536

 
$
50,691


Other general and administrative expenses decreased by $1.8 million for the quarter and $1.1 million year-to-date. The decrease for the quarter primarily resulted from a $1.1 million reduction in professional fees, a $0.5 million decrease in incentive compensation and $0.3 million related to market valuation changes in our non-qualified deferred compensation plan liabilities. The decrease for the year-to-date period primarily resulted from a $2.2 million decrease in incentive compensation. This decrease was partially offset by a $0.7 million increase in investments in personnel and a $0.5 million increase related to market valuation changes in our non-qualified deferred compensation plan liabilities. Offsetting gains on the underlying non-qualified deferred plan investments are included as a component of other non-operating income, net. Share-based compensation increased by $0.7 million for the quarter and $0.9 million year-to-date due in part to the cancellation of equity awards and subsequent issuance of cash awards to non-employee members of our Board of Directors in the 2016 period. Additionally, share-based compensation was impacted by the election to account for forfeitures as they occur, which was effective beginning in fiscal 2017. There have been no actual forfeitures during fiscal 2017.

Depreciation and amortization was comprised of the following:

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016
 
September 27, 2017
 
September 28, 2016
 
(In thousands)
Depreciation of property and equipment
$
4,261

 
$
4,289

 
$
12,711

 
$
12,568

Amortization of capital lease assets
1,021

 
941

 
3,011

 
2,629

Amortization of intangible and other assets
676

 
379

 
1,771

 
1,010

Total depreciation and amortization expense
$
5,958

 
$
5,609

 
$
17,493

 
$
16,207


The increase in amortization of intangible and other assets is primarily due to the increase in reacquired franchise rights related to acquisitions of franchised restaurants during the current and prior year.
 
Operating (gains), losses and other charges, net were comprised of the following:

 
Quarter Ended
 
Three Quarters Ended
 
September 27, 2017
 
September 28, 2016