UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneMarch 29, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
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 incorporation or organization) | | (I.R.S. Employer 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)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
$.01 Par Value, Common Stock | | DENN | | The Nasdaq Stock Market LLC |
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 ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ý☐ | Accelerated Filer | ☐ý | Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | Emerging Growth 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 ý
As of July 28, 2022, 57,929,626April 27, 2023, 56,043,779 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Denny’s Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| | | June 29, 2022 | | December 29, 2021 | | March 29, 2023 | | December 28, 2022 |
| | (In thousands, except per share amounts) | | (In thousands, except per share amounts) |
Assets | Assets | | | | Assets | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 1,360 | | | $ | 30,624 | | Cash and cash equivalents | $ | 8,895 | | | $ | 3,523 | |
Investments | Investments | 3,529 | | | 2,551 | | Investments | 3,051 | | | 1,746 | |
Receivables, net | Receivables, net | 23,193 | | | 19,621 | | Receivables, net | 23,443 | | | 25,576 | |
Inventories | Inventories | 12,208 | | | 5,060 | | Inventories | 3,253 | | | 5,538 | |
Assets held for sale | Assets held for sale | 1,319 | | | — | | Assets held for sale | 2,312 | | | 1,403 | |
Prepaid and other current assets | Prepaid and other current assets | 7,829 | | | 11,393 | | Prepaid and other current assets | 9,877 | | | 12,529 | |
Total current assets | Total current assets | 49,438 | | | 69,249 | | Total current assets | 50,831 | | | 50,315 | |
Property, net of accumulated depreciation of $152,311 and $151,836, respectively | 92,934 | | | 91,176 | | |
Financing lease right-of-use assets, net of accumulated amortization of $10,071 and $11,210, respectively | 7,103 | | | 7,709 | | |
Property, net of accumulated depreciation of $155,429 and $153,334, respectively | | Property, net of accumulated depreciation of $155,429 and $153,334, respectively | 92,205 | | | 94,469 | |
Finance lease right-of-use assets, net of accumulated amortization of $10,194 and $9,847, respectively | | Finance lease right-of-use assets, net of accumulated amortization of $10,194 and $9,847, respectively | 6,117 | | | 6,499 | |
Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 124,176 | | | 128,727 | | Operating lease right-of-use assets, net | 123,013 | | | 126,065 | |
Goodwill | Goodwill | 36,884 | | | 36,884 | | Goodwill | 72,142 | | | 72,740 | |
Intangible assets, net | Intangible assets, net | 49,581 | | | 50,226 | | Intangible assets, net | 94,622 | | | 95,034 | |
Deferred financing costs, net | Deferred financing costs, net | 2,654 | | | 2,971 | | Deferred financing costs, net | 2,179 | | | 2,337 | |
Deferred income taxes, net | — | | | 11,502 | | |
| Other noncurrent assets | Other noncurrent assets | 30,048 | | | 37,083 | | Other noncurrent assets | 39,338 | | | 50,876 | |
Total assets | Total assets | $ | 392,818 | | | $ | 435,527 | | Total assets | $ | 480,447 | | | $ | 498,335 | |
Liabilities | Liabilities | | | | Liabilities | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
Current finance lease liabilities | Current finance lease liabilities | $ | 1,896 | | | $ | 1,952 | | Current finance lease liabilities | $ | 1,514 | | | $ | 1,683 | |
Current operating lease liabilities | Current operating lease liabilities | 15,051 | | | 15,829 | | Current operating lease liabilities | 15,230 | | | 15,310 | |
Accounts payable | Accounts payable | 16,675 | | | 15,595 | | Accounts payable | 18,251 | | | 19,896 | |
Other current liabilities | Other current liabilities | 56,680 | | | 64,146 | | Other current liabilities | 50,407 | | | 56,762 | |
Total current liabilities | Total current liabilities | 90,302 | | | 97,522 | | Total current liabilities | 85,402 | | | 93,651 | |
Long-term liabilities: | Long-term liabilities: | | | | Long-term liabilities: | | | |
Long-term debt | Long-term debt | 187,000 | | | 170,000 | | Long-term debt | 264,000 | | | 261,500 | |
Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | 10,117 | | | 10,744 | | Noncurrent finance lease liabilities | 9,237 | | | 9,555 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | 121,807 | | | 126,296 | | Noncurrent operating lease liabilities | 120,140 | | | 123,404 | |
Liability for insurance claims, less current portion | Liability for insurance claims, less current portion | 7,386 | | | 8,438 | | Liability for insurance claims, less current portion | 7,138 | | | 7,324 | |
Deferred income taxes, net | Deferred income taxes, net | 1,994 | | | — | | Deferred income taxes, net | 7,673 | | | 7,419 | |
Other noncurrent liabilities | Other noncurrent liabilities | 32,920 | | | 87,792 | | Other noncurrent liabilities | 31,859 | | | 32,598 | |
Total long-term liabilities | Total long-term liabilities | 361,224 | | | 403,270 | | Total long-term liabilities | 440,047 | | | 441,800 | |
Total liabilities | Total liabilities | 451,526 | | | 500,792 | | Total liabilities | 525,449 | | | 535,451 | |
Shareholders' deficit | Shareholders' deficit | | | | Shareholders' deficit | | | |
Common stock $0.01 par value; 135,000 shares authorized; June 29, 2022: 64,998 shares issued and 58,344 outstanding; December 29, 2021: 64,200 shares issued and 62,210 shares outstanding | $ | 650 | | | $ | 642 | | |
Common stock $0.01 par value; 135,000 shares authorized; March 29, 2023: 65,468 shares issued and 56,392 outstanding; December 28, 2022: 64,998 shares issued and 56,728 shares outstanding | | Common stock $0.01 par value; 135,000 shares authorized; March 29, 2023: 65,468 shares issued and 56,392 outstanding; December 28, 2022: 64,998 shares issued and 56,728 shares outstanding | $ | 655 | | | $ | 650 | |
Paid-in capital | Paid-in capital | 138,347 | | | 135,596 | | Paid-in capital | 142,258 | | | 142,136 | |
Deficit | Deficit | (71,583) | | | (116,441) | | Deficit | (41,132) | | | (41,729) | |
Accumulated other comprehensive loss, net | Accumulated other comprehensive loss, net | (46,281) | | | (54,470) | | Accumulated other comprehensive loss, net | (42,340) | | | (42,697) | |
Treasury stock, at cost, 6,654 and 1,990 shares, respectively | (79,841) | | | (30,592) | | |
Treasury stock, at cost, 9,076 and 8,270 shares, respectively | | Treasury stock, at cost, 9,076 and 8,270 shares, respectively | (104,443) | | | (95,476) | |
Total shareholders' deficit | Total shareholders' deficit | (58,708) | | | (65,265) | | Total shareholders' deficit | (45,002) | | | (37,116) | |
Total liabilities and shareholders' deficit | Total liabilities and shareholders' deficit | $ | 392,818 | | | $ | 435,527 | | Total liabilities and shareholders' deficit | $ | 480,447 | | | $ | 498,335 | |
See accompanying notes
Denny’s Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) |
Revenue: | Revenue: | | | | | | Revenue: | | | |
Company restaurant sales | Company restaurant sales | $ | 49,167 | | | $ | 47,572 | | | $ | 93,143 | | | $ | 81,141 | | Company restaurant sales | | $ | 53,452 | | | $ | 43,976 | |
Franchise and license revenue | Franchise and license revenue | 65,850 | | | 58,593 | | | 124,981 | | | 105,600 | | Franchise and license revenue | | 64,019 | | | 59,131 | |
Total operating revenue | Total operating revenue | 115,017 | | | 106,165 | | | 218,124 | | | 186,741 | | Total operating revenue | | 117,471 | | | 103,107 | |
Costs of company restaurant sales, excluding depreciation and amortization: | Costs of company restaurant sales, excluding depreciation and amortization: | | | | | | | | Costs of company restaurant sales, excluding depreciation and amortization: | | | | |
Product costs | Product costs | 13,168 | | | 11,447 | | | 24,412 | | | 19,719 | | Product costs | | 14,039 | | | 11,244 | |
Payroll and benefits | Payroll and benefits | 18,336 | | | 16,970 | | | 35,422 | | | 29,935 | | Payroll and benefits | | 20,240 | | | 17,086 | |
Occupancy | Occupancy | 3,782 | | | 2,844 | | | 7,022 | | | 5,694 | | Occupancy | | 4,094 | | | 3,240 | |
Other operating expenses | Other operating expenses | 9,542 | | | 6,552 | | | 16,597 | | | 12,629 | | Other operating expenses | | 8,119 | | | 7,055 | |
Total costs of company restaurant sales, excluding depreciation and amortization | Total costs of company restaurant sales, excluding depreciation and amortization | 44,828 | | | 37,813 | | | 83,453 | | | 67,977 | | Total costs of company restaurant sales, excluding depreciation and amortization | | 46,492 | | | 38,625 | |
Costs of franchise and license revenue, excluding depreciation and amortization | Costs of franchise and license revenue, excluding depreciation and amortization | 35,265 | | | 28,735 | | | 65,934 | | | 52,493 | | Costs of franchise and license revenue, excluding depreciation and amortization | | 32,387 | | | 30,669 | |
General and administrative expenses | General and administrative expenses | 16,623 | | | 17,548 | | | 33,581 | | | 34,495 | | General and administrative expenses | | 20,118 | | | 16,958 | |
Depreciation and amortization | Depreciation and amortization | 3,590 | | | 3,897 | | | 7,138 | | | 7,558 | | Depreciation and amortization | | 3,656 | | | 3,548 | |
Operating (gains), losses and other charges, net | Operating (gains), losses and other charges, net | 846 | | | (113) | | | 846 | | | 419 | | Operating (gains), losses and other charges, net | | (1,329) | | | — | |
Total operating costs and expenses, net | Total operating costs and expenses, net | 101,152 | | | 87,880 | | | 190,952 | | | 162,942 | | Total operating costs and expenses, net | | 101,324 | | | 89,800 | |
Operating income | Operating income | 13,865 | | | 18,285 | | | 27,172 | | | 23,799 | | Operating income | | 16,147 | | | 13,307 | |
Interest expense, net | Interest expense, net | 2,878 | | | 4,066 | | | 5,838 | | | 8,343 | | Interest expense, net | | 4,505 | | | 2,960 | |
Other nonoperating expense (income), net | Other nonoperating expense (income), net | (19,795) | | | 16,251 | | | (39,410) | | | (13,797) | | Other nonoperating expense (income), net | | 10,093 | | | (19,615) | |
Income (loss) before income taxes | 30,782 | | | (2,032) | | | 60,744 | | | 29,253 | | |
Provision for (benefit from) income taxes | 7,779 | | | (1,204) | | | 15,886 | | | 6,900 | | |
Net income (loss) | $ | 23,003 | | | $ | (828) | | | $ | 44,858 | | | $ | 22,353 | | |
Income before income taxes | | Income before income taxes | | 1,549 | | | 29,962 | |
Provision for income taxes | | Provision for income taxes | | 952 | | | 8,107 | |
Net income | | Net income | | $ | 597 | | | $ | 21,855 | |
| Net income (loss) per share - basic | $ | 0.37 | | | $ | (0.01) | | | $ | 0.71 | | | $ | 0.34 | | |
Net income (loss) per share - diluted | $ | 0.37 | | | $ | (0.01) | | | $ | 0.71 | | | $ | 0.34 | | |
Net income per share - basic | | Net income per share - basic | | $ | 0.01 | | | $ | 0.35 | |
Net income per share - diluted | | Net income per share - diluted | | $ | 0.01 | | | $ | 0.34 | |
| Basic weighted average shares outstanding | Basic weighted average shares outstanding | 62,306 | | | 65,294 | | | 62,822 | | | 65,273 | | Basic weighted average shares outstanding | | 57,638 | | | 63,343 | |
Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | 62,430 | | | 65,294 | | | 63,003 | | | 65,789 | | Diluted weighted average shares outstanding | | 57,840 | | | 63,580 | |
See accompanying notes
Denny’s Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
| (In thousands) |
Net income (loss) | $ | 23,003 | | | $ | (828) | | | $ | 44,858 | | | $ | 22,353 | |
Other comprehensive income, net of tax: | | | | | | | |
Minimum pension liability adjustment, net of tax of $7, $11, $15 and $21, respectively | 22 | | | 29 | | | 46 | | | 59 | |
Changes in the fair value of cash flow hedges, net of tax of $613, $(192), $2,286 and $571, respectively | 1,840 | | | (561) | | | 6,855 | | | 1,654 | |
Reclassification of cash flow hedges to interest expense, net of tax of $180, $257, $428 and $512, respectively | 541 | | | 748 | | | 1,283 | | | 1,488 | |
| | | | | | | |
Amortization of unrealized losses related to dedesignated swaps to interest expense, net of tax of $1, $11, $1 and $42, respectively | 5 | | | 34 | | | 5 | | | 124 | |
Other comprehensive income | 2,408 | | | 250 | | | 8,189 | | | 3,325 | |
Total comprehensive income (loss) | $ | 25,411 | | | $ | (578) | | | $ | 53,047 | | | $ | 25,678 | |
| | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
| | | | | (In thousands) |
Net income | | | | | $ | 597 | | | $ | 21,855 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Minimum pension liability adjustment, net of tax of $22 and $8, respectively | | | | | 67 | | | 24 | |
Changes in the fair value of cash flow hedges, net of tax of $321 and $1,673, respectively | | | | | 942 | | | 5,015 | |
Reclassification of cash flow hedges to interest expense, net of tax of $(236) and $248, respectively | | | | | (694) | | | 742 | |
| | | | | | | |
Amortization of unrealized losses related to interest rate swaps to interest expense, net of tax of $14 and $0, respectively | | | | | 42 | | | — | |
Other comprehensive income | | | | | 357 | | | 5,781 | |
Total comprehensive income | | | | | $ | 954 | | | $ | 27,636 | |
See accompanying notes
Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended JuneMarch 29, 20222023 and JuneMarch 30, 20212022
(Unaudited)
| | | Common Stock | | Treasury Stock | | Paid-in Capital | | Deficit | | Accumulated Other Comprehensive Loss, Net | | Total Shareholders’ Deficit | | Common Stock | | Treasury Stock | | Paid-in Capital | | Deficit | | Accumulated Other Comprehensive Loss, Net | | Total Shareholders’ Deficit |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
| | (In thousands) | | (In thousands) |
Balance, March 30, 2022 | 64,457 | | | $ | 645 | | | (2,744) | | | $ | (42,457) | | | $ | 137,332 | | | $ | (94,586) | | | $ | (48,689) | | | (47,755) | | |
Balance, December 28, 2022 | | Balance, December 28, 2022 | 64,998 | | | $ | 650 | | | (8,270) | | | $ | (95,476) | | | $ | 142,136 | | | $ | (41,729) | | | $ | (42,697) | | | (37,116) | |
| Net income | Net income | — | | | — | | | — | | | — | | | — | | | 23,003 | | | — | | | 23,003 | | Net income | — | | | — | | | — | | | — | | | — | | | 597 | | | — | | | 597 | |
Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 2,408 | | | 2,408 | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 357 | | | 357 | |
| Share-based compensation on equity classified awards, net of withholding tax | Share-based compensation on equity classified awards, net of withholding tax | — | | | — | | | — | | | — | | | 1,020 | | | — | | | — | | | 1,020 | | Share-based compensation on equity classified awards, net of withholding tax | — | | | — | | | — | | | — | | | 127 | | | — | | | — | | | 127 | |
Purchase of treasury stock | Purchase of treasury stock | — | | | — | | | (3,910) | | | (37,384) | | | — | | | — | | | — | | | (37,384) | | Purchase of treasury stock | — | | | — | | | (806) | | | (8,967) | | | — | | | — | | | — | | | (8,967) | |
| Issuance of common stock for share-based compensation | Issuance of common stock for share-based compensation | 541 | | | 5 | | | — | | | — | | | (5) | | | — | | | — | | | — | | Issuance of common stock for share-based compensation | 470 | | | 5 | | | — | | | — | | | (5) | | | — | | | — | | | — | |
| Balance, June 29, 2022 | 64,998 | | | $ | 650 | | | (6,654) | | | $ | (79,841) | | | $ | 138,347 | | | $ | (71,583) | | | $ | (46,281) | | | $ | (58,708) | | |
Balance, March 29, 2023 | | Balance, March 29, 2023 | 65,468 | | | $ | 655 | | | (9,076) | | | $ | (104,443) | | | $ | 142,258 | | | $ | (41,132) | | | $ | (42,340) | | | $ | (45,002) | |
| | | Common Stock | | Treasury Stock | | Paid-in Capital | | Deficit | | Accumulated Other Comprehensive Loss, Net | | Total Shareholders’ Deficit | | Common Stock | | Treasury Stock | | Paid-in Capital | | Deficit | | Accumulated Other Comprehensive Loss, Net | | Total Shareholders’ Deficit |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
| | (In thousands) | | (In thousands) |
Balance, March 31, 2021 | 64,145 | | | $ | 641 | | | — | | | $ | — | | | $ | 125,950 | | | $ | (171,333) | | | $ | (57,330) | | | $ | (102,072) | | |
Balance, December 29, 2021 | | Balance, December 29, 2021 | 64,200 | | | $ | 642 | | | (1,990) | | | $ | (30,592) | | | $ | 135,596 | | | $ | (116,441) | | | $ | (54,470) | | | $ | (65,265) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (828) | | | — | | | (828) | | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 21,855 | | | — | | | 21,855 | |
Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 250 | | | 250 | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 5,781 | | | 5,781 | |
| Share-based compensation on equity classified awards, net of withholding tax | Share-based compensation on equity classified awards, net of withholding tax | — | | | — | | | — | | | — | | | 3,227 | | | — | | | — | | | 3,227 | | Share-based compensation on equity classified awards, net of withholding tax | — | | | — | | | — | | | — | | | 1,739 | | | — | | | — | | | 1,739 | |
| Purchase of treasury stock | | Purchase of treasury stock | — | | | — | | | (754) | | | (11,865) | | | — | | | — | | | — | | | (11,865) | |
| Issuance of common stock for share-based compensation | Issuance of common stock for share-based compensation | 55 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | | Issuance of common stock for share-based compensation | 257 | | | 3 | | | — | | | — | | | (3) | | | — | | | — | | | — | |
| Balance, June 30, 2021 | 64,200 | | | $ | 642 | | | — | | | $ | — | | | $ | 129,176 | | | $ | (172,161) | | | $ | (57,080) | | | $ | (99,423) | | |
Balance, March 30, 2022 | | Balance, March 30, 2022 | 64,457 | | | $ | 645 | | | (2,744) | | | $ | (42,457) | | | $ | 137,332 | | | $ | (94,586) | | | $ | (48,689) | | | $ | (47,755) | |
See accompanying notes
Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Two Quarters Ended June 29, 2022 and June 30, 2021
(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 29, 2021 | 64,200 | | | $ | 642 | | | (1,990) | | | $ | (30,592) | | | $ | 135,596 | | | $ | (116,441) | | | $ | (54,470) | | | $ | (65,265) | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 44,858 | | | — | | | 44,858 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 8,189 | | | 8,189 | |
| | | | | | | | | | | | | | | |
Share-based compensation on equity classified awards, net of withholding tax | — | | | — | | | — | | | — | | | 2,759 | | | — | | | — | | | 2,759 | |
Purchase of treasury stock | — | | | — | | | (4,664) | | | (49,249) | | | — | | | — | | | — | | | (49,249) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Issuance of common stock for share-based compensation | 798 | | | 8 | | | — | | | — | | | (8) | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Balance, June 29, 2022 | 64,998 | | | $ | 650 | | | (6,654) | | | $ | (79,841) | | | $ | 138,347 | | | $ | (71,583) | | | $ | (46,281) | | | $ | (58,708) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Paid-in Capital | | Deficit | | Accumulated Other Comprehensive Loss, Net | | Total Shareholders’ Deficit |
| Shares | | Amount | | Shares | | Amount | | | | |
| (In thousands) |
Balance, December 30, 2020 | 63,962 | | | $ | 640 | | | — | | | $ | — | | | $ | 123,833 | | | $ | (194,514) | | | $ | (60,405) | | | $ | (130,446) | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 22,353 | | | — | | | 22,353 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 3,325 | | | 3,325 | |
| | | | | | | | | | | | | | | |
Share-based compensation on equity classified awards, net of withholding tax | — | | | — | | | — | | | — | | | 5,229 | | | — | | | — | | | 5,229 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Issuance of common stock for share-based compensation | 208 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | |
Exercise of common stock options | 30 | | | — | | | — | | | — | | | 116 | | | — | | | — | | | 116 | |
Balance, June 30, 2021 | 64,200 | | | $ | 642 | | | — | | | $ | — | | | $ | 129,176 | | | $ | (172,161) | | | $ | (57,080) | | | $ | (99,423) | |
See accompanying notes
Denny’s Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| | | Two Quarters Ended | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | (In thousands) |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net income | Net income | $ | 44,858 | | | $ | 22,353 | | Net income | $ | 597 | | | $ | 21,855 | |
Adjustments to reconcile net income to cash flows provided by operating activities: | | | | |
Adjustments to reconcile net income to cash flows provided by (used in) operating activities: | | Adjustments to reconcile net income to cash flows provided by (used in) operating activities: | | | |
Depreciation and amortization | Depreciation and amortization | 7,138 | | | 7,558 | | Depreciation and amortization | 3,656 | | | 3,548 | |
Operating (gains), losses and other charges, net | Operating (gains), losses and other charges, net | 846 | | | 419 | | Operating (gains), losses and other charges, net | (1,329) | | | — | |
Gains and amortization on dedesignated interest rate swaps, net | (41,924) | | | (12,506) | | |
Losses (gains) and amortization on interest rate swaps, net | | Losses (gains) and amortization on interest rate swaps, net | 10,662 | | | (20,253) | |
Amortization of deferred financing costs | Amortization of deferred financing costs | 317 | | | 688 | | Amortization of deferred financing costs | 159 | | | 158 | |
Losses on investments | 223 | | | 3 | | |
Losses (gains) on early termination of debt and leases | 24 | | | (72) | | |
Losses (gains) on investments | | Losses (gains) on investments | (5) | | | 65 | |
Gains on early termination of debt and leases | | Gains on early termination of debt and leases | — | | | 24 | |
Deferred income tax expense | Deferred income tax expense | 10,766 | | | 2,211 | | Deferred income tax expense | 133 | | | 4,436 | |
Share-based compensation expense | Share-based compensation expense | 7,520 | | | 6,860 | | Share-based compensation expense | 3,094 | | | 4,015 | |
Changes in assets and liabilities: | | | | |
Changes in assets and liabilities, excluding acquisitions and dispositions: | | Changes in assets and liabilities, excluding acquisitions and dispositions: | | | |
Receivables | Receivables | (3,419) | | | 757 | | Receivables | 1,814 | | | (3,567) | |
Inventories | Inventories | (7,148) | | | (98) | | Inventories | 2,284 | | | (4,768) | |
Prepaids and other current assets | Prepaids and other current assets | 3,563 | | | 6,677 | | Prepaids and other current assets | 2,652 | | | 3,451 | |
Other noncurrent assets | Other noncurrent assets | 6,125 | | | (1,317) | | Other noncurrent assets | 1,119 | | | 4,085 | |
Operating lease assets and liabilities | Operating lease assets and liabilities | (466) | | | (821) | | Operating lease assets and liabilities | (246) | | | (244) | |
Accounts payable | Accounts payable | (1,541) | | | 5,620 | | Accounts payable | (1,131) | | | (2,405) | |
Accrued payroll | (5,721) | | | 1,992 | | |
Accrued taxes | (338) | | | 434 | | |
Other accrued liabilities | Other accrued liabilities | (5,003) | | | 4,649 | | Other accrued liabilities | (6,534) | | | (14,964) | |
Other noncurrent liabilities | Other noncurrent liabilities | (6,211) | | | (2,036) | | Other noncurrent liabilities | (772) | | | (2,500) | |
Net cash flows provided by operating activities | 9,609 | | | 43,371 | | |
Net cash flows provided by (used in) operating activities | | Net cash flows provided by (used in) operating activities | 16,153 | | | (7,064) | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Capital expenditures | Capital expenditures | (5,771) | | | (3,108) | | Capital expenditures | (1,304) | | | (2,778) | |
| | Proceeds from sales of restaurants, real estate and other assets | Proceeds from sales of restaurants, real estate and other assets | 170 | | | 1,612 | | Proceeds from sales of restaurants, real estate and other assets | 1,715 | | | 108 | |
Investment purchases | Investment purchases | (1,200) | | | — | | Investment purchases | (1,300) | | | (1,200) | |
Proceeds from sale of investments | — | | | 200 | | |
| Collections on notes receivable | Collections on notes receivable | 126 | | | 383 | | Collections on notes receivable | 320 | | | 67 | |
Issuance of notes receivable | — | | | (94) | | |
| Net cash flows used in investing activities | Net cash flows used in investing activities | (6,675) | | | (1,007) | | Net cash flows used in investing activities | (569) | | | (3,803) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Revolver borrowings | Revolver borrowings | 45,325 | | | 9,500 | | Revolver borrowings | 35,000 | | | 13,825 | |
Revolver payments | Revolver payments | (28,325) | | | (39,500) | | Revolver payments | (32,500) | | | (12,325) | |
Repayments of finance leases | Repayments of finance leases | (1,018) | | | (980) | | Repayments of finance leases | (506) | | | (503) | |
Proceeds from exercise of stock options | — | | | 116 | | |
| Tax withholding on share-based payments | Tax withholding on share-based payments | (4,782) | | | (1,377) | | Tax withholding on share-based payments | (2,846) | | | (2,165) | |
Deferred financing costs | — | | | (8) | | |
| Purchase of treasury stock | Purchase of treasury stock | (46,249) | | | — | | Purchase of treasury stock | (9,041) | | | (12,498) | |
| Net bank overdrafts | Net bank overdrafts | 2,851 | | | (3,125) | | Net bank overdrafts | (319) | | | — | |
Net cash flows used in financing activities | Net cash flows used in financing activities | (32,198) | | | (35,374) | | Net cash flows used in financing activities | (10,212) | | | (13,666) | |
Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | (29,264) | | | 6,990 | | Increase (decrease) in cash and cash equivalents | 5,372 | | | (24,533) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 30,624 | | | 3,892 | | Cash and cash equivalents at beginning of period | 3,523 | | | 30,624 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 1,360 | | | $ | 10,882 | | Cash and cash equivalents at end of period | $ | 8,895 | | | $ | 6,091 | |
See accompanying notes
Denny’s Corporation and Subsidiaries
Notes to 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 JuneAs of March 29, 2022,2023, the Denny's brandCompany consisted of 1,6311,648 restaurants, 1,5661,574 of which were franchised/licensed restaurants and 6574 of which were company operated.
The global crisis resulting fromCompany consists of the spreadDenny’s brand ("Denny's") and the Keke’s Breakfast Café brand (“Keke’s”). Keke’s was acquired on July 20, 2022. As of coronavirus ("COVID-19") has had a substantial impact on our restaurant operations starting inMarch 29, 2023, the quarter endedDenny's brand consisted of 1,594 restaurants, 1,528 of which were franchised/licensed restaurants and 66 of which were company operated. At March 25, 2020 with continuing impacts into29, 2023, the Keke's brand consisted of 54 restaurants, 46 of which were franchised restaurants and eight of which were company operated.
Through the current quarter ended JuneMarch 29, 2022. While we2023, many Denny’s restaurants have seen improvements comparednot returned to earlier periods duringfull operating hours, since closing or reducing hours in 2020 due to the COVID-19 pandemic, weparticularly at the late night daypart. Additionally, our restaurant operations have been negatively impacted by a tight labor market and inflated commodity costs. Our operating results substantially depend upon the sales volumes, restaurant profitability, and financial stability of our company and franchised and licensed restaurants.
We cannot currently estimate the duration or future negative financial impact of the COVID-19 pandemicthese economic conditions on our business. Ongoing material adverse effects of the COVID-19 pandemicthese economic conditions for an extended period could negatively affect our business, results of operations, liquidity and financial condition and could impact our impairment assessments of accounts receivable, property, right-of-useintangible assets, goodwilllong-lived assets and intangible assets.goodwill.
Our unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.Commission for interim financial information. 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 are reasonable.
These interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto as of and for the fiscal year ended December 29, 202128, 2022 which are contained in our audited Annual Report on Form 10-K for the fiscal year ended December 29, 2021.28, 2022. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 28, 2022.27, 2023. Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective rate.
Note 2. Summary of Significant Accounting Policies
Newly Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which was later clarified in January 2021 by ASU 2021-01, “Reference Rate Reform (Topic 848): Scope”. Additionally, in December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848):Deferral of the Sunset Date of Topic 848”, which allows ASU 2020-04 to be adopted and applied prospectively to contract modifications made on or before December 31, 2024. The guidance provides optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The Company adopted ASU 2020-04 on March 12, 2020. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on the Company’s consolidated financial position or results of operations. The guidance is effective through December 31, 2022.2024.
Accounting Standards to be Adopted
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements as a result of future adoption.
Note 3. Receivables
Receivables consisted of the following: | | | | | | | | | | | |
| March 29, 2023 | | December 28, 2022 |
| (In thousands) |
Receivables, net: | | | |
Trade accounts receivable from franchisees | $ | 14,863 | | | $ | 13,314 | |
Other receivables from franchisees | 4,469 | | | 6,731 | |
| | | |
Vendor receivables | 2,070 | | | 3,466 | |
Credit card receivables | 707 | | | 896 | |
Other | 1,621 | | | 1,545 | |
Allowance for doubtful accounts | (287) | | | (376) | |
Total receivables, net | $ | 23,443 | | | $ | 25,576 | |
| | | |
| | | |
| | | |
| | | |
Note 4. Goodwill and Intangible Assets
The following tables reflect the changes in carrying amounts of goodwill and goodwill by segment:
| | | | | | | | | | | |
| | | March 29, 2023 |
| | | (In thousands) |
Balance, beginning of year | | | $ | 72,740 | |
| | | |
Reclassifications to assets held for sale | | | (598) | |
| | | |
Balance, end of period | | | $ | 72,142 | |
| | | |
| March 29, 2023 | | December 28, 2022 |
| (In thousands) |
Goodwill by segment | | | |
Denny’s | $ | 37,527 | | | $ | 37,527 | |
Other | 34,615 | | | 35,213 | |
Total goodwill | $ | 72,142 | | | $ | 72,740 | |
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 29, 2023 | | December 28, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| (In thousands) |
Intangible assets with indefinite lives: | | | | | | | |
Trade names | $ | 79,687 | | | $ | — | | | $ | 79,687 | | | $ | — | |
Liquor licenses | 120 | | | — | | | 120 | | | — | |
Intangible assets with definite lives: | | | | | | | |
Reacquired franchise rights | 10,489 | | | 5,947 | | | 10,489 | | | 5,697 | |
Franchise agreements | 10,700 | | | 427 | | | 10,700 | | | 265 | |
Intangible assets, net | $ | 100,996 | | | $ | 6,374 | | | $ | 100,996 | | | $ | 5,962 | |
Amortization expense for intangible assets with definite lives totaled $0.4 million and $0.3 million for the quarters ended March 29, 2023 and March 30, 2022, respectively.
Note 3. Receivables
Receivables consisted of the following:
| | | | | | | | | | | |
| June 29, 2022 | | December 29, 2021 |
| (In thousands) |
Receivables, net: | | | |
Trade accounts receivable from franchisees | $ | 13,435 | | | $ | 13,430 | |
Financing receivables from franchisees | 6,310 | | | 1,027 | |
| | | |
Vendor receivables | 2,107 | | | 4,041 | |
Credit card receivables | 623 | | | 747 | |
Other | 1,267 | | | 950 | |
Allowance for doubtful accounts | (549) | | | (574) | |
Total receivables, net | $ | 23,193 | | | $ | 19,621 | |
| | | |
Other noncurrent assets: | | | |
Financing receivables from franchisees | $ | 14 | | | $ | 293 | |
Note 4. Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2022 | | December 29, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| (In thousands) |
Intangible assets with indefinite lives: | | | | | | | |
Trade names | $ | 44,087 | | | $ | — | | | $ | 44,087 | | | $ | — | |
Liquor licenses | 120 | | | — | | | 120 | | | — | |
Intangible assets with definite lives: | | | | | | | |
Reacquired franchise rights | 11,801 | | | 6,427 | | | 12,218 | | | 6,199 | |
Intangible assets, net | $ | 56,008 | | | $ | 6,427 | | | $ | 56,425 | | | $ | 6,199 | |
Note 5. Other Current Liabilities
Other current liabilities consisted of the following:
| | | June 29, 2022 | | December 29, 2021 | | March 29, 2023 | | December 28, 2022 |
| | (In thousands) | | (In thousands) |
Accrued payroll | Accrued payroll | $ | 14,949 | | | $ | 20,676 | | Accrued payroll | $ | 13,546 | | | $ | 17,903 | |
Current portion of liability for insurance claims | Current portion of liability for insurance claims | 3,652 | | | 4,285 | | Current portion of liability for insurance claims | 3,415 | | | 3,492 | |
Accrued taxes | Accrued taxes | 4,195 | | | 4,533 | | Accrued taxes | 4,035 | | | 4,452 | |
Accrued advertising | Accrued advertising | 10,476 | | | 15,355 | | Accrued advertising | 5,820 | | | 6,069 | |
Gift cards | Gift cards | 5,805 | | | 7,170 | | Gift cards | 6,286 | | | 7,675 | |
Accrued legal settlements | | Accrued legal settlements | 5,538 | | | 5,446 | |
Other | Other | 17,603 | | | 12,127 | | Other | 11,767 | | | 11,725 | |
Other current liabilities | Other current liabilities | $ | 56,680 | | | $ | 64,146 | | Other current liabilities | $ | 50,407 | | | $ | 56,762 | |
Note 6. 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) | | Total | | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (In thousands) | | (In thousands) |
Fair value measurements as of June 29, 2022: | | |
Deferred compensation plan investments (1) | $ | 10,930 | | | $ | 10,930 | | | $ | — | | | $ | — | | |
Interest rate swaps, net (2) | 2,419 | | | — | | | 2,419 | | | — | | |
Investments (3) | 3,529 | | | — | | | 3,529 | | | — | | |
Total | $ | 16,878 | | | $ | 10,930 | | | $ | 5,948 | | | $ | — | | |
| Fair value measurements as of December 29, 2021: | | |
Fair value measurements as of March 29, 2023: | | Fair value measurements as of March 29, 2023: | |
Deferred compensation plan investments (1) | Deferred compensation plan investments (1) | $ | 13,726 | | | $ | 13,726 | | | $ | — | | | $ | — | | Deferred compensation plan investments (1) | $ | 10,742 | | | $ | 10,742 | | | $ | — | | | $ | — | |
Interest rate swaps (2) | Interest rate swaps (2) | (52,121) | | | — | | | (52,121) | | | — | | Interest rate swaps (2) | 7,988 | | | — | | | 7,988 | | | — | |
Investments (3) | Investments (3) | 2,551 | | | — | | | 2,551 | | | — | | Investments (3) | 3,051 | | | — | | | 3,051 | | | — | |
Total | Total | $ | (35,844) | | | $ | 13,726 | | | $ | (49,570) | | | $ | — | | Total | $ | 21,781 | | | $ | 10,742 | | | $ | 11,039 | | | $ | — | |
| Fair value measurements as of December 28, 2022: | | Fair value measurements as of December 28, 2022: | |
Deferred compensation plan investments (1) | | Deferred compensation plan investments (1) | $ | 10,818 | | | $ | 10,818 | | | $ | — | | | $ | — | |
Interest rate swaps (2) | | Interest rate swaps (2) | 20,047 | | | — | | | 20,047 | | | — | |
Investments (3) | | Investments (3) | 1,746 | | | — | | | 1,746 | | | — | |
Total | | Total | $ | 32,611 | | | $ | 10,818 | | | $ | 21,793 | | | $ | — | |
(1) The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments and are included in other noncurrent assets in our Consolidated Balance Sheets.
(2) The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models. The key inputs for the valuation models are quoted market prices, interest rates, and forward yield curves. Seecurves and credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, see Note 7 for details on the interest rate swaps.7.
(3) The fair values of our investments are valued using a readily determinable net asset value per share based on the fair value of the underlying securities. There are no significant redemption restrictions associated with these investments.
Those assets and liabilities measured at fair value on a non-recurring basis are summarized below:
| | | | | | | | | | | | | | | | | |
| | | Significant Unobservable Inputs (Level 3) | | Impairment Charges |
| |
Fair value measurements for the year-to-date period ended June 29, 2022: | | | | | |
Assets held and used (1)
| | | $ | — | | | $ | 266 | |
| | | | | | | | | | | | | | | | | |
| | | Significant Unobservable Inputs (Level 2) | | Impairment Charges |
| (In thousands) |
Fair value measurements for the year-to-date period ended March 29, 2023: | | | | | |
Assets held for sale (1) | | | $ | 100 | | | $ | 129 | |
(1)As of JuneMarch 29, 2022, impaired2023, assets held for sale were written down to their estimated fair value. To determineThe fair value we used the income approach,of assets held for sale is based on Level 2 inputs, which assumes that the future cash flows reflect current market expectations. These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows from operations, which are not observable from the market, directly or indirectly. There is uncertainty in the projected future cash flows used in the Company's impairment analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods.include anticipated sales agreements.
Assets that are measured at fair value on a non-recurring basis include property, operating right-of-use assets, finance right-of-use assets, goodwill and reacquired franchise rights.intangible assets. During the year-to-date periodquarter ended JuneMarch 29, 2022,2023, we recognized impairment charges of $0.3$0.1 million related to certain of these assets. See Note 9.
The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses are deemed to approximate fair value due to the immediate or short-term maturity of these instruments. The fair value of notes receivable approximates the carrying value after consideration of recorded allowances and related risk-based interest rates. The outstanding senior secured revolver isliabilities under our credit facility are carried at historical cost, which approximates fair value. The fair value of our senior secured revolver approximates its carrying value since it is a variable rate facility (Level 2).
Note 7. Long-Term Debt
Denny'sThe Company and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $25 million letter of credit sublimit). The maturity date for the credit facility is August 26, 2026. The credit facility includes an accordion feature that would allow us to increase the size of the facility to $450 million. Borrowings bear a tiered interest rate, which is based on the Company's consolidated leverage ratio. The maturity date forcredit facility contains provisions specifying alternative interest rate calculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform. Subsequent to March 29, 2023, the credit facility is August 26, 2026.was amended to change the benchmark interest rate from LIBOR to Adjusted Daily Simple SOFR. See Note 17.
The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny'sthe Company and its material subsidiaries and is secured by assets of Denny'sthe Company and its subsidiaries, including the stock of its subsidiaries (other than its insurance captive subsidiary). 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 JuneMarch 29, 2022.2023.
As of JuneMarch 29, 2022,2023, we had outstanding revolver loans of $187.0$264.0 million and outstanding letters of credit under the credit facility of $14.2$12.3 million. These balances resulted in unused commitments of $198.8$123.7 million as of JuneMarch 29, 20222023 under the credit facility.
As of JuneMarch 29, 2022,2023, borrowings under the credit facility bore interest at a rate of LIBOR plus 1.75%2.25%, and the commitment fee, paid on the unused portion of the credit facility, was set to 0.25%0.35%.
Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.91%6.90% and 2.09%6.37% as of JuneMarch 29, 20222023 and December 29, 2021,28, 2022, respectively. Taking into consideration our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 4.17%5.34% and 4.44%5.31% as of JuneMarch 29, 20222023 and December 29, 2021,28, 2022, respectively.
Interest Rate Hedges
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt. We initially designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable interest payments due on forecasted notional amounts. A summary of our interest rate swaps as of JuneMarch 29, 20222023 is as follows:
| Trade Date | Trade Date | | Effective Date | | Maturity Date | | Notional Amount | | Fair Value | | Fixed Rate | Trade Date | | Effective Date | | Maturity Date | | Notional Amount | | Fair Value | | Fixed Rate |
| | | | | | | (In thousands) | | | | | | | | | (In thousands) | | |
Swaps designated as cash flow hedges | Swaps designated as cash flow hedges | | Swaps designated as cash flow hedges | |
March 20, 2015 | March 20, 2015 | | March 29, 2018 | | March 31, 2025 | | $ | 120,000 | | | $ | 2,165 | | | 2.44 | % | March 20, 2015 | | March 29, 2018 | | March 31, 2025 | | $ | 120,000 | | | $ | 3,969 | | | 2.44 | % |
October 1, 2015 | October 1, 2015 | | March 29, 2018 | | March 31, 2026 | | $ | 50,000 | | | $ | 1,055 | | | 2.46 | % | October 1, 2015 | | March 29, 2018 | | March 31, 2026 | | $ | 50,000 | | | $ | 1,926 | | | 2.46 | % |
Dedesignated swaps | | |
February 15, 2018 | February 15, 2018 | | March 31, 2020 | | December 31, 2033 | | $ | 120,000 | | (1) | $ | (801) | | | 3.19 | % | February 15, 2018 | | March 31, 2020 | | December 31, 2033 | | $ | 26,000 | | (1) | $ | 2,093 | | | 3.19 | % |
Total | Total | | $ | 290,000 | | | $ | 2,419 | | | Total | | $ | 196,000 | | | $ | 7,988 | | |
(1) The notional amounts of the swaps entered into on February 15, 2018 increase periodically until they reach the maximum notional amount of $425.0$335 million on September 28, 2029.August 31, 2033.
Termination and Designation of Certain Interest Rate Swaps
During the quarter ended March 29, 2023, we terminated a portion of our hedging relationship entered into in 2018 (“2018 Swaps”), reducing the previous maximum notional amount of $425 million on August 31, 2033 to $335 million. As a result, we expect our total swaps to approximate 80% of our outstanding debt prospectively. We received $1.5 million of cash as a result of the termination which is recorded as a component of operating activities in our Consolidated Statements of Cash Flow for the quarter end March 29, 2023.
In addition, during the quarter, we designated the remaining 2018 Swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable rate interest payments due on forecasted notional amounts. The fair value of $0.4 million related to the 2018 Swaps at the date of designation will be amortized into our Consolidated Statements of Operations as a component of interest expense, net over the remaining term of the 2018 Swaps. For the quarter ended March 29, 2023, we amortized less than $0.1 million of designation date fair value to interest expense, net related to the designation of the 2018 Swaps. At March 29, 2023, $0.3 million of designation date fair value was included in accumulated other comprehensive loss, net in our Consolidated Statements of Shareholders' Deficit. We expect to amortize $0.1 million of the designation date fair value to interest expense, net in our Consolidated Statements of Operations during the next 12 months.
See PreviouslyDedesignated Interest Rate Swaps below for information on the 2018 Swaps prior to their designation as cash flow hedges.
Interest Rate Swaps Designated as Cash Flow Hedges
To the extent the swaps are highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in the Consolidated Statements of Operations but are reported as a component of other comprehensive income.income (loss). The interest rate swaps entered into in 2015 and 2018 are designated as cash flow hedges with unrealized gains and losses recorded as a component of accumulated other comprehensive loss, net.
As of JuneMarch 29, 2022,2023, the fair value of the swaps designated as cash flow hedges was an asset of $3.2$8.0 million, recorded as a component of other noncurrent assets. The designated swaps have an offsetting amount (before taxes) recorded as a component of accumulated other comprehensive loss, net in our Consolidated Balance Sheets. See Note 13 for amounts recorded in accumulated other comprehensive loss related to interest rate swaps. We expect to reclassify approximately $1.3$4.9 million from accumulated other comprehensive loss, net as a reduction to interest expense, net in our Consolidated Statements of Operations related to swaps designated as cash flow hedges during the next 12 months.
Previously Dedesignated Interest Rate Swaps
During the year ended December 30, 2020, we determined that a portion of the underlying cash flows related to our hedging relationship entered into in 2018 (“2018 Swaps”)Swaps were no longer probable of occurring over the term of the interest rate swaps. Accordingly, we dedesignated the cash flow relationship and discontinued hedge accounting treatment for the 2018 Swaps.Swaps in 2020. As a result, we reclassified a portion of losses from accumulated other comprehensive loss, net to other nonoperating income,expense (income), net in our Consolidated Statements of Operations and began amortizing the remaining amounts of unrealized losses related to the 2018 Swaps from accumulated other comprehensive loss, net into our Consolidated Statements of Operations as a component of
interest expense, net over the remaining term of the 2018 Swaps. For the quarter and two quarters ended JuneMarch 29, 2023 and March 30, 2022, unrealized losses of less than $0.1 million were reclassified to interest expense, net related to the 2018 Swaps. For the quarter and two quarters ended June 30, 2021, we reclassified unrealized losses of less than $0.1 million and $0.2 million, respectively, to interest expense, net related to thededesignated 2018 Swaps. At JuneMarch 29, 2022, $64.22023, $64.1 million (before taxes) of unrealized losses remained in accumulated other comprehensive loss, net. These amounts will continue to amortize from accumulated other comprehensive loss, net subsequent to the redesignation of the 2018 Swaps. See Termination and Designation of Certain Interest Rate Swaps above. We expect to amortize approximately $0.1$0.3 million from accumulated other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to dedesignated interest rate swaps during the next 12 months.
As a result of the dedesignated cash flow relationship related to the 2018 Swaps, changes in the fair value of the 2018 Swaps arewere recorded as a component of other nonoperating income,expense (income), net in our Consolidated Statements of Operations.Operations for the periods prior to their designation as cash flow hedges during the quarter ended March 29, 2023. See Termination and Designation of Certain Interest Rate Swaps above. For the quarter ended March 29, 2023, we recorded expense of $10.6 million, and two quartersfor the quarter ended June 29,March 30, 2022, we recorded income of approximately $21.7$20.3 million, and $41.9 million, respectively, as a component of other nonoperating income,expense (income), net related to the 2018 Swaps resulting from changes in fair value. For the quarter and two quarters ended June 30, 2021, we recorded approximately $17.2 million of expense and $12.7 million of income, respectively, as a component of other nonoperating income, net related to the 2018 Swaps resulting from changes in fair value. As of June 29, 2022, the fair value of the dedesignated interest rate swaps was a liability of $0.8 million, $0.2 million of which was recorded as a component of other current liabilities and $0.6 million of which was recorded as a component of other noncurrent liabilities in our Consolidated Balance Sheets.
Note 8. Revenues
Our revenues are derived primarily from 2 sales channels, which we operate as 1 segment: company restaurants and franchised and licensed restaurants. The following table disaggregates our revenue by sales channel and type of good or service:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Company restaurant sales | Company restaurant sales | $ | 49,167 | | | $ | 47,572 | | | $ | 93,143 | | | $ | 81,141 | | Company restaurant sales | | $ | 53,452 | | | $ | 43,976 | |
Franchise and license revenue: | Franchise and license revenue: | | Franchise and license revenue: | | |
Royalties | Royalties | 28,759 | | | 27,117 | | | 55,284 | | | 47,961 | | Royalties | | 30,027 | | | 26,525 | |
Advertising revenue | Advertising revenue | 19,486 | | | 18,600 | | | 37,692 | | | 32,711 | | Advertising revenue | | 19,668 | | | 18,206 | |
Initial and other fees | Initial and other fees | 7,779 | | | 2,066 | | | 12,286 | | | 3,904 | | Initial and other fees | | 4,990 | | | 4,507 | |
Occupancy revenue | Occupancy revenue | 9,826 | | | 10,810 | | | 19,719 | | | 21,024 | | Occupancy revenue | | 9,334 | | | 9,893 | |
Franchise and license revenue | Franchise and license revenue | 65,850 | | | 58,593 | | | 124,981 | | | 105,600 | | Franchise and license revenue | | 64,019 | | | 59,131 | |
Total operating revenue | Total operating revenue | $ | 115,017 | | | $ | 106,165 | | | $ | 218,124 | | | $ | 186,741 | | Total operating revenue | | $ | 117,471 | | | $ | 103,107 | |
Franchise occupancy revenue consisted of the following:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Operating lease revenue | Operating lease revenue | $ | 7,253 | | | $ | 7,668 | | | $ | 14,671 | | | $ | 15,581 | | Operating lease revenue | | $ | 6,871 | | | $ | 7,418 | |
Variable lease revenue | Variable lease revenue | 2,573 | | | 3,142 | | | 5,048 | | | 5,443 | | Variable lease revenue | | 2,463 | | | 2,475 | |
Total occupancy revenue | Total occupancy revenue | $ | 9,826 | | | $ | 10,810 | | | $ | 19,719 | | | $ | 21,024 | | Total occupancy revenue | | $ | 9,334 | | | $ | 9,893 | |
Balances related to contracts with customers consistconsists of receivables, contract assets, deferred franchise revenue and deferred gift card revenue. See Note 3 for details on our receivables.
The components of the change in deferred franchise revenue are as follows:
| | | | | |
| (In thousands) |
Balance, December 29, 2021 | $ | 19,896 | |
Fees received from franchisees | 2,224 | |
Franchisee deferred costs (1)
| (1,722) | |
Revenue recognized, net (2)
| (1,302) | |
Balance, June 29, 2022 | 19,096 | |
Less current portion included in other current liabilities | 1,804 | |
Deferred franchise revenue included in other noncurrent liabilities | $ | 17,292 | |
(1) Deferred costs are contract assets consisting of incentives given to franchisees related to the rollout of kitchen equipment to all franchise locations.
(2) Of this amount $1.2 million was included in the deferred franchise revenue balance as of December 29, 2021.
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 we will begin amortizing into revenue when the related restaurants are opened net of certain deferred costs.opened. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sales-based royalties and advertising.
The Company has entered into equipment purchase contractscomponents of approximately $19.3the change in deferred franchise revenue are as follows: | | | | | |
| (In thousands) |
Balance, December 28, 2022 | $ | 20,751 | |
Fees received from franchisees | 455 | |
| |
Revenue recognized (1) | (745) | |
Balance, March 29, 2023 | 20,461 | |
Less current portion included in other current liabilities | 2,210 | |
Deferred franchise revenue included in other noncurrent liabilities | $ | 18,251 | |
(1) Of this amount $0.7 million was included in the deferred franchise revenue balance as of December 28, 2022.
We record contract assets related to the rollout of kitchenincentives and subsidies provided to franchisees related to new unit openings and/or equipment for franchise restaurants, which will be billed to the franchisee and recognized as revenue as the equipment is installed, less approximately $5.7 million in commitments from the Company. Amounts committed from the Company are contract assets that have been netted against deferred revenue andupgrades. These amounts will be recognized as a component of franchise and license revenue over the remaining term of the related franchise agreements.
The components of the change in contract assets are as follows: | | | | | |
| (In thousands) |
Balance, December 28, 2022 | $ | 5,361 | |
Franchisee deferred costs | 942 | |
Contract asset amortization | (291) | |
Balance, March 29, 2023 | 6,012 | |
Less current portion included in other current assets | 839 | |
Contract assets included in other noncurrent assets | $ | 5,173 | |
During 2021, 2022 and 2023, the Company purchased equipment related to a kitchen modernization program for franchise restaurants. We bill our franchisees and recognize revenue when the related equipment is installed, less amounts contributed from the Company, which have been deferred as contract assets in the table above. We recognized $2.2 million of revenue related to the sale of kitchen equipment to franchisees during the quarters ended March 29, 2023 and March 30, 2022, respectively. As of JuneMarch 29, 2022, our remaining obligation under these contracts was approximately $2.5 million, $0.7 million of which is included in accounts payable. As of June 29, 2022,2023, we had approximately $10.7$1.3 million in inventory and $1.6$4.7 million in contract assetsreceivables related to the kitchen equipment rollout. As of December 28, 2022, we had $3.6 million in inventory and $6.6 million in receivables related to the kitchen equipment rollout.
Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The balance of deferred gift card liabilities as of JuneMarch 29, 20222023 and December 29, 202128, 2022 was $5.8$6.3 million and $7.2$7.7 million, respectively. During the year-to-date periodquarter ended JuneMarch 29, 2022,2023, we recognized revenue of $0.3$0.2 million from gift card redemptions at company restaurants.
Note 9. Operating (Gains), Losses and Other Charges, Net
Operating (gains), losses and other charges, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
| (In thousands) |
Gains on sales of assets and other, net | $ | (99) | | | $ | (65) | | | $ | (245) | | | $ | (1,007) | |
Restructuring charges and exit costs | 679 | | | (48) | | | 825 | | | 1,426 | |
Impairment charges | 266 | | | — | | | 266 | | | — | |
Operating (gains), losses and other charges, net | $ | 846 | | | $ | (113) | | | $ | 846 | | | $ | 419 | |
| | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
| | | | | (In thousands) |
Gains on sales of assets and other, net | | | | | $ | (1,522) | | | $ | (146) | |
Restructuring charges and exit costs | | | | | 64 | | | 146 | |
Impairment charges | | | | | 129 | | | — | |
Operating (gains), losses and other charges, net | | | | | $ | (1,329) | | | $ | — | |
We recorded impairment charges of $0.1 million related to property during the quarter ended March 29, 2023, resulting from assets being classified as held for sale. As of JuneMarch 29, 2023, we had recorded assets held for sale at the lesser of carrying value or fair value amount of $2.3 million (consisting of property of $1.4 million, goodwill of $0.6 million and other assets of $0.3 million) related to three parcels of real estate and three Keke's restaurants. As of December 28, 2022, we had recorded assets held for sale at their carrying amount of $1.3$1.4 million (consisting of property of $1.0$1.1 million and other assets of $0.3 million) related to 3four parcels of real estate. There were no assets held for sale as of December 29, 2021.
Restructuring charges and exit costs consisted of the following:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Exit costs | Exit costs | $ | 38 | | | $ | 141 | | | $ | 50 | | | $ | 223 | | Exit costs | | $ | — | | | $ | 12 | |
Severance and other restructuring charges | Severance and other restructuring charges | 641 | | | (189) | | | 775 | | | 1,203 | | Severance and other restructuring charges | | 64 | | | 134 | |
Total restructuring charges and exit costs | Total restructuring charges and exit costs | $ | 679 | | | $ | (48) | | | $ | 825 | | | $ | 1,426 | | Total restructuring charges and exit costs | | $ | 64 | | | $ | 146 | |
Exit costs primarily consist of costs related to closed restaurants. Exit cost liabilities related to lease costs are included as a component of operating lease liabilities in our Consolidated Balance Sheets.
As of JuneMarch 29, 20222023 and December 29, 2021,28, 2022, we had accrued severance and other restructuring charges of $0.7$0.4 million and $0.1$0.7 million, respectively. The balance as of JuneMarch 29, 20222023 is expected to be paid during the next 12 months.
We recorded impairment charges of $0.3 million (consisting of property and right-of-use assets) during the quarter and year-to-date period ended June 29, 2022 resulting from our assessment of underperforming restaurants.
Note 10. Share-Based Compensation
Total share-based compensation included as a component of general and administrative expenses was as follows:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Employee share awards | Employee share awards | $ | 3,284 | | | $ | 3,164 | | | $ | 7,078 | | | $ | 6,417 | | Employee share awards | | $ | 2,847 | | | $ | 3,794 | |
Restricted stock units for board members | Restricted stock units for board members | 221 | | | 224 | | | 442 | | | 443 | | Restricted stock units for board members | | 247 | | | 221 | |
Total share-based compensation | Total share-based compensation | $ | 3,505 | | | $ | 3,388 | | | $ | 7,520 | | | $ | 6,860 | | Total share-based compensation | | $ | 3,094 | | | $ | 4,015 | |
Employee Share Awards
During the quarter ended March 30, 2022,29, 2023, we granted certain employees approximately 233,0000.3 million performance share units ("PSUs") with a weighted average grant date fair value of $24.51$18.36 per share that vest based on the total shareholder return (“TSR”) of our common stock compared to the TSRs of a group of peer companies and approximately 233,0000.3 million PSUs with a weighted average grant date fair value of $15.59$11.92 per share that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based PSUs contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value. The performance period for these PSUs is the three year fiscal period beginning December 30, 202129, 2022 and ending December 25, 2024.31, 2025. The PSUs will completely vest and be earned at the end of the performance period at which point the relative TSR and Adjusted EPS growth rate achievement percentages will be applied to the vested units (from 0% to 200% of the target award). We recognize compensation cost associated with approximately 312,0000.5 million of these PSU awards over the entire performance period on a straight-line basis, with compensation cost for the remaining 154,0000.1 million PSU awards recognized on a graded-vesting basis due to the accelerated vesting terms for certain retirement eligible individuals.
During the quarter ended March 30, 2022,29, 2023, we also granted certain employees approximately 310,0000.7 million restricted stock units ("RSUs") with a weighted average grant date fair value of $15.59$11.85 per share. TheThese RSUs generally vest evenly over the three year fiscal period beginning December 30, 202129, 2022 and ending December 25, 2024.31, 2025. We recognize compensation cost associated with these RSU awards on a straight-line basis over the entire performance period of the award.
During the quarter ended JuneMarch 29, 2022, we granted PSUs and RSUs to our newly appointed Chief Executive Officer and President, Kelli A. Valade. The grants included approximately 69,000 PSUs with a grant date fair value of $12.18 per share that vest based on the TSR of our common stock compared to the TSRs of a group of peer companies and approximately 69,000 PSUs with a grant date fair value of $9.89 per share that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based PSUs contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value. The performance period and application of achievement percentages for these PSUs are the same as mentioned above. We recognize compensation cost associated with these PSU awards on a straight-line basis. In addition, the grants included approximately 93,000 RSUs with a grant date fair value of $9.89 per share.
During the two quarters ended June 29, 2022,2023, we issued approximately 768,0000.5 million shares of common stock related to vested PSUs and RSUs. In addition, approximately 24,000 shares of common stock were deferred and approximately 407,0000.3 million shares of common stock were withheld in lieu of taxes related to vested PSUs and RSUs.
As of JuneMarch 29, 2022,2023, we had approximately $19.3$24.1 million of unrecognized compensation cost related to unvested PSU awards and RSU awards outstanding, which have a weighted average remaining contractual term of 2.12.3 years.
Restricted Stock Units for Board Members
During the quarter and two quarters ended June 29, 2022, we granted less than 0.1 million RSUs (which are equity classified) with a weighted average grant date fair value of $9.95 per unit to non-employee members of our Board of Directors. The RSUs 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), upon termination as a member of our Board of Directors, or in 3 equal annual installments commencing after termination of service as a member of our Board of Directors.
During the quarter and two quarters ended June 29, 2022, less than 0.1 million RSUs were converted into shares of common stock.
As of JuneMarch 29, 2022,2023, we had approximately $0.8$0.1 million of unrecognized compensation cost related to these unvested RSU awards outstanding, which have a weighted average remaining contractual term of 0.90.1 years.
Note 11. Income Taxes
The effective income tax rate was 25.3%61.5% for the quarter and 26.2% for the year-to-date period ended JuneMarch 29, 2022,2023, compared to 59.3% and 23.6%27.1% for the prior year periods, respectively.period. The 2021 quarterly and year-to-date rateseffective income tax rate for the quarter ended March 29, 2023 included the impact of excess tax benefitsa 36.6% discrete item relating to share-based compensation of 13.4% and (1.2)%, respectively.compensation.
Note 12. Net Income (Loss) Per Share
The amounts used for the basic and diluted net income (loss) per share calculations are summarized below:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) |
Net income (loss) | $ | 23,003 | | | $ | (828) | | | $ | 44,858 | | | $ | 22,353 | | |
Net income | | Net income | | $ | 597 | | | $ | 21,855 | |
| Weighted average shares outstanding - basic | Weighted average shares outstanding - basic | 62,306 | | | 65,294 | | | 62,822 | | | 65,273 | | Weighted average shares outstanding - basic | | 57,638 | | | 63,343 | |
Effect of dilutive share-based compensation awards | Effect of dilutive share-based compensation awards | 124 | | | — | | | 181 | | | 516 | | Effect of dilutive share-based compensation awards | | 202 | | | 237 | |
Weighted average shares outstanding - diluted | Weighted average shares outstanding - diluted | 62,430 | | | 65,294 | | | 63,003 | | | 65,789 | | Weighted average shares outstanding - diluted | | 57,840 | | | 63,580 | |
| Net income (loss) per share - basic | $ | 0.37 | | | $ | (0.01) | | | $ | 0.71 | | | $ | 0.34 | | |
Net income (loss) per share - diluted | $ | 0.37 | | | $ | (0.01) | | | $ | 0.71 | | | $ | 0.34 | | |
Net income per share - basic | | Net income per share - basic | | $ | 0.01 | | | $ | 0.35 | |
Net income per share - diluted | | Net income per share - diluted | | $ | 0.01 | | | $ | 0.34 | |
| Anti-dilutive share-based compensation awards | Anti-dilutive share-based compensation awards | 740 | | | 998 | | | 785 | | | 483 | | Anti-dilutive share-based compensation awards | | 807 | | | 829 | |
Note 13. Shareholders' Deficit
Share Repurchases
Our credit facility permits the repurchase of Denny’sthe Company's stock and the payment of cash dividends subject to certain limitations. Our Board of Directors approves share repurchases of our common stock. Under these authorizations, 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 (the "Exchange Act"))amended) or in privately negotiated transactions, subject to market and business conditions. Currently, we are operating under a $250 million share repurchase authorization approved by the Board of Directors in December 2019.
During the two quartersquarter ended JuneMarch 29, 2022,2023, we repurchased a total of 4.70.8 million shares of our common stock for approximately $49.2 million.$9.0 million under the current authorization. This brings the total amount repurchased under the current authorization to approximately $81.8$106.4 million, leaving approximately $168.2$143.6 million that can be used to repurchase our common stock under this authorization as of JuneMarch 29, 2022.2023. Repurchased shares are included as treasury stock in our Consolidated Balance Sheets and our Consolidated Statements of Shareholders' Deficit.
As of JuneMarch 29, 2022, 6.72023, 9.1 million shares were held in treasury stock.
Accumulated Other Comprehensive Loss, Net
The components of the change in accumulated other comprehensive loss, net were as follows:
| | | | | | | | | | | | | | | | | |
| Defined Benefit Plans | | Derivatives | | Accumulated Other Comprehensive Loss, Net |
| (In thousands) |
Balance as of December 29, 2021 | $ | (900) | | | $ | (53,570) | | | $ | (54,470) | |
| | | | | |
Amortization of net loss (1) | 61 | | | — | | | 61 | |
| | | | | |
Changes in the fair value of cash flow hedges | — | | | 9,141 | | | 9,141 | |
Reclassification of cash flow hedges to interest expense, net (2) | — | | | 1,711 | | | 1,711 | |
| | | | | |
Amortization of unrealized losses related to dedesignated swaps to interest expense, net | — | | | 6 | | | 6 | |
Income tax expense related to items of other comprehensive income | (15) | | | (2,715) | | | (2,730) | |
Balance as of June 29, 2022 | $ | (854) | | | $ | (45,427) | | | $ | (46,281) | |
| | | | | | | | | | | | | | | | | |
| Defined Benefit Plans | | Derivatives | | Accumulated Other Comprehensive Loss, Net |
| (In thousands) |
Balance as of December 28, 2022 | $ | (555) | | | $ | (42,142) | | | $ | (42,697) | |
| | | | | |
Amortization of net loss (1) | 89 | | | — | | | 89 | |
| | | | | |
Changes in the fair value of cash flow hedges | — | | | 1,263 | | | 1,263 | |
Reclassification of cash flow hedges to interest expense, net (2) | — | | | (930) | | | (930) | |
| | | | | |
Amortization of unrealized losses related to interest rate swaps to interest expense, net | — | | | 56 | | | 56 | |
Income tax expense related to items of other comprehensive income (loss) | (22) | | | (99) | | | (121) | |
Balance as of March 29, 2023 | $ | (488) | | | $ | (41,852) | | | $ | (42,340) | |
(1) Before-tax amount related to our defined benefit plans that was reclassified from accumulated other comprehensive loss, net and included as a component of pension expense within general and administrative expenses in our Consolidated StatementsStatement of Operations during the two quartersquarter ended JuneMarch 29, 2022.2023.
(2) Amounts reclassified from accumulated other comprehensive loss, net into interest expense, net in our Consolidated StatementsStatement of Operations represent payments either received from(received from) or made to the counterparty for the interest rate hedges. See Note 7 for additional details.
Note 14. Commitments and Contingencies
Legal Proceedings
There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect our consolidated results of operations or financial position.
Note 15. Supplemental Cash Flow Information
| | | Two Quarters Ended | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | (In thousands) |
Income taxes paid, net | Income taxes paid, net | $ | 4,644 | | | $ | 1,942 | | Income taxes paid, net | $ | 489 | | | $ | 449 | |
Interest paid | Interest paid | $ | 5,617 | | | $ | 8,478 | | Interest paid | $ | 4,253 | | | $ | 2,849 | |
| Noncash investing and financing activities: | Noncash investing and financing activities: | | | | Noncash investing and financing activities: | | | |
| | Issuance of common stock, pursuant to share-based compensation plans | Issuance of common stock, pursuant to share-based compensation plans | $ | 9,547 | | | $ | 3,087 | | Issuance of common stock, pursuant to share-based compensation plans | $ | 5,257 | | | $ | 4,081 | |
Receipt of real estate receivable | $ | 3,000 | | | $ | — | | |
| Execution of finance leases | Execution of finance leases | $ | 311 | | | $ | 464 | | Execution of finance leases | $ | 14 | | | $ | 133 | |
Treasury stock payable | Treasury stock payable | $ | 3,633 | | | $ | — | | Treasury stock payable | $ | 468 | | | $ | — | |
|
Note 16. Segment Information
We manage our business by brand and as a result have identified two operating segments, Denny’s and Keke’s. In addition, we have identified Denny’s as a reportable segment. The Denny’s reportable segment includes the results of all company and franchised and licensed Denny’s restaurants. Our Keke’s operating segment, which includes the results of all company and franchise restaurants, is included in Other.
The primary sources of revenues for all operating segments are the sale of food and beverages at our company restaurants and the collection of royalties, advertising revenue, initial and other fees, including occupancy revenue, from restaurants operated by our franchisees. We do not rely on any major customer as a source of sales and the customers and assets of all operating segments are located predominantly in the United States. There are no material transactions between segments.
Management’s measure of segment income is restaurant-level operating margin. The Company defines restaurant-level operating margin as operating income excluding the following three items: general and administrative expenses, depreciation and amortization, and operating (gains), losses and other charges, net. The Company excludes general and administrative expenses, which include primarily non restaurant-level costs associated with support of company and franchised restaurants and other activities at their corporate office. The Company excludes depreciation and amortization expense, substantially all of which is related to company restaurant-level assets, because such expenses represent historical sunk costs which do not reflect current cash outlays for the restaurants. The Company excludes operating (gains), losses and other charges, net, to provide a clearer perspective of its ongoing operating performance. Restaurant-level operating margin is used by our chief operating decision maker (“CODM”) to evaluate restaurant-level operating efficiency and performance.
The following tables present revenues by segment and a reconciliation of restaurant-level operating margin to operating income:
| | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
Revenues by operating segment: | | | | | (In thousands) |
Denny’s | | | | | $ | 112,230 | | | $ | 103,107 | |
Other | | | | | 5,241 | | | — | |
Total operating revenue | | | | | $ | 117,471 | | | $ | 103,107 | |
| | | | | | | |
Segment income: | | | | | | | |
Denny’s | | | | | $ | 36,640 | | | $ | 33,813 | |
Other | | | | | 1,952 | | | — | |
Total restaurant-level operating margin | | | | | $ | 38,592 | | | $ | 33,813 | |
| | | | | | | |
General and administrative expenses | | | | | $ | 20,118 | | | $ | 16,958 | |
Depreciation and amortization | | | | | 3,656 | | | 3,548 | |
Operating (gains), losses and other charges, net | | | | | (1,329) | | | — | |
Total other operating expenses | | | | | 22,445 | | | 20,506 | |
Operating income | | | | | 16,147 | | | 13,307 | |
Interest expense, net | | | | | 4,505 | | | 2,960 | |
Other nonoperating expense (income), net | | | | | 10,093 | | | (19,615) | |
Net income before income taxes | | | | | 1,549 | | | 29,962 | |
Provision for income taxes | | | | | 952 | | | 8,107 | |
Net income | | | | | $ | 597 | | | $ | 21,855 | |
| | | | | | | | | | | |
| March 29, 2023 | | December 28, 2022 |
Segment assets: | (In thousands) |
Denny’s | $ | 377,616 | | | $ | 394,051 | |
Other | 102,831 | | | 104,284 | |
Total assets | $ | 480,447 | | | $ | 498,335 | |
Note 16.17. Subsequent EventsEvent
On July 20, 2022,March 31, 2023, the Company completedentered into an amendment of its previously announced acquisitioncredit facility. The amendment transitions our credit facility benchmark interest rate from LIBOR to Adjusted Daily Simple SOFR. The conversion to Adjusted Daily Simple SOFR is not expected to have a material impact on the Company's consolidated financial position or results of Keke's Breakfast Cafe ("Keke's") pursuant to the Asset Purchase Agreement (the "Purchase Agreement"), dated May 3, 2022, which was subsequently amended by the First Amendment to Asset Purchase Agreement (the "First Amendment"), dated July 11, 2022, by and between the Company, as purchaser, and K2 Restaurants, Inc. together with the other sellers and principals party thereto for the acquisition of certain assets and assumption of certain liabilities of the franchise business, Keke's, and 8 Keke’s restaurants owned and operated by the sellers.operations.
Keke’s is the franchisor and operator of a full-service A.M. eatery concept, currently consisting of 52 domestic restaurants in Florida, including 44 franchised locations. We believe Keke’s is a brand with attractive unit economics and strong potential. This acquisition provides an opportunity to participate in the fast-growing A.M. eatery segment through a complementary concept we believe our experienced team can develop across multiple states with the goal of becoming the A.M. eatery franchisor of choice. We believe this acquisition will also enhance value for our shareholders.
Pursuant to the Purchase Agreement, we agreed to purchase Keke's for an aggregate purchase price of $82.5 million. Of the aggregate purchase price, $81.5 million was funded by utilizing cash on hand as well as funds from the Company's revolving credit facility, with the remaining $1.0 million to be paid as part of the post closing adjustments.
We estimate that approximately $2.0 million of the purchase price will be allocated to fixed assets and leasehold improvements, $0.7 million to deferred franchise revenue, with the balance allocated to intangible assets as follows: $34.9 million to trade names, $9.3 million to franchise rights and $37.0 million to goodwill. In addition, we recorded approximately $8.6 million of operating lease right-of-use assets and liabilities. These amounts are subject to subsequent adjustment as we continue to gather information during the measurement period.
The Company’s Consolidated Balance Sheet as of June 29, 2022 and the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the periods ended June 29, 2022 do not reflect the impacts of Keke’s as the acquisition was completed after the balance sheet date.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act.Act of 1934, as amended (the "Exchange Act"). The Company urges caution in considering its current trends and any outlook on its operations and financial results disclosed in this report. In addition, certain matters discussed in this report may constitute forward-looking statements. These forward-looking statements, which reflect management's best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny’s Corporation, its subsidiaries, and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as “expect”, “anticipate”, “believe”, “intend”, “plan”, “hope”, "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the evolving COVID-19 pandemic and related containment measures, including the potential for further operational disruption from government mandates affecting restaurants; economic, public health and political conditions that impact consumer confidence and spending, including COVID-19; commodity and labor inflation; the ability to effectively staff restaurants; our ability to maintain adequate levels of liquidity for our cash needs, including debt obligations, payment of dividends, planned share repurchases and capital expenditures as well as the ability of our customers, suppliers, franchisees and lenders to access sources of liquidity to provide for their own cash needs; competitive pressures from within the restaurant industry; our ability to integrate and derive the expected benefits from our acquisition of Keke's; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment and geopolitical events (including acts of war and terrorism); and other factors from time to time set forth in the Company’s SEC reports and other filings, including but not limited to the discussion in Management’s Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2021,28, 2022, this report on Form 10-Q and in the Company's subsequent quarterly reports on Form 10-Q.
Acquisition of Keke's
On July 20, 2022, the Company completed its acquisition of Keke's. At March 29, 2023, the Keke's brand consisted of 54 restaurants, 46 of which were franchised restaurants and eight of which were company operated. For further details, refer to Note 3 to our Consolidated Financial Statements in Part IV, Item 15 of our Form 10-K for the fiscal year ended December 28, 2022.
Statements of Operations
The following table contains information derived from our Consolidated Statements of Operations expressed as a percentage of total operating revenue, except as noted below. Percentages may not add due to rounding.
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Revenue: | Revenue: | | | | | | | | | | | | | | | | Revenue: | | | | | | | | |
Company restaurant sales | Company restaurant sales | $ | 49,167 | | | 42.7 | % | | $ | 47,572 | | | 44.8 | % | | $ | 93,143 | | | 42.7 | % | | $ | 81,141 | | | 43.5 | % | Company restaurant sales | | $ | 53,452 | | | 45.5 | % | | $ | 43,976 | | | 42.7 | % |
Franchise and license revenue | Franchise and license revenue | 65,850 | | | 57.3 | % | | 58,593 | | | 55.2 | % | | 124,981 | | | 57.3 | % | | 105,600 | | | 56.5 | % | Franchise and license revenue | | 64,019 | | | 54.5 | % | | 59,131 | | | 57.3 | % |
Total operating revenue | Total operating revenue | 115,017 | | | 100.0 | % | | 106,165 | | | 100.0 | % | | 218,124 | | | 100.0 | % | | 186,741 | | | 100.0 | % | Total operating revenue | | 117,471 | | | 100.0 | % | | 103,107 | | | 100.0 | % |
Costs of company restaurant sales, excluding depreciation and amortization (a): | Costs of company restaurant sales, excluding depreciation and amortization (a): | | | | | | | | | | | | | | | | Costs of company restaurant sales, excluding depreciation and amortization (a): | | | | | | | | |
Product costs | Product costs | 13,168 | | | 26.8 | % | | 11,447 | | | 24.1 | % | | 24,412 | | | 26.2 | % | | 19,719 | | | 24.3 | % | Product costs | | 14,039 | | | 26.3 | % | | 11,244 | | | 25.6 | % |
Payroll and benefits | Payroll and benefits | 18,336 | | | 37.3 | % | | 16,970 | | | 35.7 | % | | 35,422 | | | 38.0 | % | | 29,935 | | | 36.9 | % | Payroll and benefits | | 20,240 | | | 37.9 | % | | 17,086 | | | 38.9 | % |
Occupancy | Occupancy | 3,782 | | | 7.7 | % | | 2,844 | | | 6.0 | % | | 7,022 | | | 7.5 | % | | 5,694 | | | 7.0 | % | Occupancy | | 4,094 | | | 7.7 | % | | 3,240 | | | 7.4 | % |
Other operating expenses | Other operating expenses | 9,542 | | | 19.4 | % | | 6,552 | | | 13.8 | % | | 16,597 | | | 17.8 | % | | 12,629 | | | 15.6 | % | Other operating expenses | | 8,119 | | | 15.2 | % | | 7,055 | | | 16.0 | % |
Total costs of company restaurant sales, excluding depreciation and amortization | Total costs of company restaurant sales, excluding depreciation and amortization | 44,828 | | | 91.2 | % | | 37,813 | | | 79.5 | % | | 83,453 | | | 89.6 | % | | 67,977 | | | 83.8 | % | Total costs of company restaurant sales, excluding depreciation and amortization | | 46,492 | | | 87.0 | % | | 38,625 | | | 87.8 | % |
Costs of franchise and license revenue, excluding depreciation and amortization (a) | Costs of franchise and license revenue, excluding depreciation and amortization (a) | 35,265 | | | 53.6 | % | | 28,735 | | | 49.0 | % | | 65,934 | | | 52.8 | % | | 52,493 | | | 49.7 | % | Costs of franchise and license revenue, excluding depreciation and amortization (a) | | 32,387 | | | 50.6 | % | | 30,669 | | | 51.9 | % |
General and administrative expenses | General and administrative expenses | 16,623 | | | 14.5 | % | | 17,548 | | | 16.5 | % | | 33,581 | | | 15.4 | % | | 34,495 | | | 18.5 | % | General and administrative expenses | | 20,118 | | | 17.1 | % | | 16,958 | | | 16.4 | % |
Depreciation and amortization | Depreciation and amortization | 3,590 | | | 3.1 | % | | 3,897 | | | 3.7 | % | | 7,138 | | | 3.3 | % | | 7,558 | | | 4.0 | % | Depreciation and amortization | | 3,656 | | | 3.1 | % | | 3,548 | | | 3.4 | % |
Operating (gains), losses and other charges, net | Operating (gains), losses and other charges, net | 846 | | | 0.7 | % | | (113) | | | (0.1) | % | | 846 | | | 0.4 | % | | 419 | | | 0.2 | % | Operating (gains), losses and other charges, net | | (1,329) | | | (1.1) | % | | — | | | — | % |
Total operating costs and expenses, net | Total operating costs and expenses, net | 101,152 | | | 87.9 | % | | 87,880 | | | 82.8 | % | | 190,952 | | | 87.5 | % | | 162,942 | | | 87.3 | % | Total operating costs and expenses, net | | 101,324 | | | 86.3 | % | | 89,800 | | | 87.1 | % |
Operating income | Operating income | 13,865 | | | 12.1 | % | | 18,285 | | | 17.2 | % | | 27,172 | | | 12.5 | % | | 23,799 | | | 12.7 | % | Operating income | | 16,147 | | | 13.7 | % | | 13,307 | | | 12.9 | % |
Interest expense, net | Interest expense, net | 2,878 | | | 2.5 | % | | 4,066 | | | 3.8 | % | | 5,838 | | | 2.7 | % | | 8,343 | | | 4.5 | % | Interest expense, net | | 4,505 | | | 3.8 | % | | 2,960 | | | 2.9 | % |
Other nonoperating expense (income), net | Other nonoperating expense (income), net | (19,795) | | | (17.2) | % | | 16,251 | | | 15.3 | % | | (39,410) | | | (18.1) | % | | (13,797) | | | (7.4) | % | Other nonoperating expense (income), net | | 10,093 | | | 8.6 | % | | (19,615) | | | (19.0) | % |
Income (loss) before income taxes | 30,782 | | | 26.8 | % | | (2,032) | | | (1.9) | % | | 60,744 | | | 27.8 | % | | 29,253 | | | 15.7 | % | |
Provision for (benefit from) income taxes | 7,779 | | | 6.8 | % | | (1,204) | | | (1.1) | % | | 15,886 | | | 7.3 | % | | 6,900 | | | 3.7 | % | |
Net income (loss) | $ | 23,003 | | | 20.0 | % | | $ | (828) | | | (0.8) | % | | $ | 44,858 | | | 20.6 | % | | $ | 22,353 | | | 12.0 | % | |
| Other Data: | | | | | | | | | | | | | | | | |
Company average unit sales | $ | 761 | | | | | $ | 732 | | | | | $ | 1,443 | | | | | $ | 1,257 | | | | |
Franchise average unit sales | $ | 442 | | | | | $ | 416 | | | | | $ | 846 | | | | | $ | 742 | | | | |
Company equivalent units (b) | 64 | | | | | 65 | | | | | 64 | | | | | 65 | | | | |
Franchise equivalent units (b) | 1,567 | | | | | 1,582 | | | | | 1,570 | | | | | 1,583 | | | | |
Company same-store sales increase vs. prior year (c)(d) | 3.8 | % | | | | 172.1 | % | | | | 14.9 | % | | | | 46.8 | % | | | |
Domestic franchise same-store sales increase vs. prior year (c)(d) | 2.4 | % | | | | 113.2 | % | | | | 11.2 | % | | | | 30.8 | % | | | |
Income before income taxes | | Income before income taxes | | 1,549 | | | 1.3 | % | | 29,962 | | | 29.1 | % |
Provision for income taxes | | Provision for income taxes | | 952 | | | 0.8 | % | | 8,107 | | | 7.9 | % |
Net income | | Net income | | $ | 597 | | | 0.5 | % | | $ | 21,855 | | | 21.2 | % |
(a)Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.
| | | | | | | | | | | | | |
Statistical Data | | | Quarter Ended |
| | | | March 29, 2023 | March 30, 2022 |
| | | (Dollars in thousands) |
Denny's | | | | | |
Company average unit sales | | | | $ | 762 | | $ | 682 | |
Franchise average unit sales | | | | $ | 452 | | $ | 404 | |
Company equivalent units (a) | | | | 65 | | 64 | |
Franchise equivalent units (a) | | | | 1,529 | | 1,572 | |
Company same-store sales increase vs. prior year (b)(c) | | | | 11.4 | % | 30.6 | % |
Domestic franchise same-store sales increase vs. prior year (b)(c) | | | | 8.1 | % | 22.8 | % |
| | | | | |
Keke's (d) | | | | | |
Company average unit sales | | | | $ | 466 | | $ | — | |
Franchise average unit sales | | | | $ | 491 | | $ | — | |
Company equivalent units (a) | | | | 8 | | — | |
Franchise equivalent units (a) | | | | 46 | | — | |
(a)Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.
(c)(b)Same-store sales include sales from company restaurants or non-consolidated franchised and licensed restaurants that were open during the comparable periods noted.
(d)(c)Prior year amounts have not been restated for 20222023 comparable units.
(d)Same-store sales data for Keke's is not reported due to the acquisition being completed during the quarter ended September 28, 2022.
| | | | | | | | | | | | | | | |
Unit Activity | | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
Denny's | | | | | | | |
Company restaurants, beginning of period | | | | | 66 | | | 65 | |
Units opened | | | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Units closed | | | | | — | | | — | |
End of period | | | | | 66 | | | 65 | |
| | | | | | | |
Franchised and licensed restaurants, beginning of period | | | | | 1,536 | | | 1,575 | |
Units opened | | | | | 5 | | | 5 | |
| | | | | | | |
| | | | | | | |
Units closed | | | | | (13) | | | (11) | |
End of period | | | | | 1,528 | | | 1,569 | |
Total restaurants, end of period | | | | | 1,594 | | | 1,634 | |
| | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
Keke's | | | | | | | |
Company restaurants, beginning of period | | | | | 8 | | | — | |
Units opened | | | | | — | | | — | |
| | | | | | | |
Units closed | | | | | — | | | — | |
End of period | | | | | 8 | | | — | |
| | | | | | | |
Franchised restaurants, beginning of period | | | | | 46 | | | — | |
Units opened | | | | | — | | | — | |
| | | | | | | |
Units closed | | | | | — | | | — | |
End of period | | | | | 46 | | | — | |
Total restaurants, end of period | | | | | 54 | | | — | |
Unit Activity
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
Company restaurants, beginning of period | 65 | | | 65 | | | 65 | | | 65 | |
Units opened | — | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Units closed | — | | | — | | | — | | | — | |
End of period | 65 | | | 65 | | | 65 | | | 65 | |
| | | | | | | |
Franchised and licensed restaurants, beginning of period | 1,569 | | | 1,584 | | | 1,575 | | | 1,585 | |
Units opened | 4 | | | 3 | | | 9 | | | 6 | |
| | | | | | | |
| | | | | | | |
Units closed | (7) | | | (7) | | | (18) | | | (11) | |
End of period | 1,566 | | | 1,580 | | | 1,566 | | | 1,580 | |
Total restaurants, end of period | 1,631 | | | 1,645 | | | 1,631 | | | 1,645 | |
Company Restaurant Operations
Company restaurant sales increased $1.6$9.5 million, or 3.4%21.5%, for the quarter ended JuneMarch 29, 2022 and $12.0 million, or 14.8%, year-to-date2023 compared to the prior year periods.period. The increase in sales was primarily driven by increases in sales were primarily due to increases inDenny's guest check average resulting from price increases to partially offset inflationary costs. Sales also benefited from changes in product mix. CompanyDenny's company same-store sales increased 3.8%11.4% for the current year quarter and 14.9% year-to-date as compared to the prior year periods.period. The increase in sales also includes $3.7 million in sales from Keke's during the quarter ended March 29, 2023.
Total costs of company restaurant sales as a percentage of company restaurant sales were 91.2%87.0% for the quarter ended JuneMarch 29, 2022 and 89.6% year-to-date2023 compared to 79.5% and 83.8%, respectively,87.8% for the prior year periods.period.
Product costs as a percentage of company restaurant sales were 26.8%26.3% for the quarter ended JuneMarch 29, 2022 and 26.2% year-to-date2023 compared to 24.1% and 24.3%, respectively,25.6% for the prior year periods,period, primarily due to increased commodity costs.
Payroll and benefits as a percentage of company restaurant sales were 37.3%37.9% for the quarter ended JuneMarch 29, 2022 and 38.0% year-to-date2023 compared to 35.7% and 36.9%, respectively,38.9% in the prior year periods.period. The current quarter increasedecrease as a percentage of sales was primarily due to a 2.4 percentage point increase in managementthe leveraging effect of higher sales and staff payroll, including payroll taxes, partially offset by a 0.6 percentage point decrease in workers' compensation costs related to claims development. The year-to-date increase was primarily due toincentive compensation. These decreases were offset by a 1.81.2 percentage point increase in staff payroll, partially offset by a 0.5 percentage point decrease in management labor as a result of the leveraging effect of higher salesworkers’ compensation costs primarily resulting from positive claims development in the current year-to-dateprior year period.
Occupancy costs as a percentage of company restaurant sales were 7.7% for the quarter ended JuneMarch 29, 2022 and 7.5% year-to-date2023 compared to 6.0% and 7.0%, respectively,7.4% in the prior year periods.period. The quarter and year-to-date increasesincrease as a percentage of sales werewas primarily due to increasesa 0.4 percentage point increase in general liability insurance costs primarily resulting from negativepositive claims development in the current periods and positive developments in the prior year periods.period.
Other operating expenses consist of the following amounts and percentages of company restaurant sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
| (In thousands) |
Utilities | $ | 1,650 | | | 3.4 | % | | $ | 1,390 | | | 2.9 | % | | $ | 3,227 | | | 3.5 | % | | $ | 2,615 | | | 3.2 | % |
Repairs and maintenance | 889 | | | 1.8 | % | | 635 | | | 1.3 | % | | 1,714 | | | 1.8 | % | | 1,168 | | | 1.4 | % |
Marketing | 1,330 | | | 2.7 | % | | 1,365 | | | 2.9 | % | | 2,537 | | | 2.7 | % | | 2,332 | | | 2.9 | % |
| | | | | | | | | | | | | | | |
Other direct costs | 5,673 | | | 11.5 | % | | 3,162 | | | 6.6 | % | | 9,119 | | | 9.8 | % | | 6,514 | | | 8.0 | % |
Other operating expenses | $ | 9,542 | | | 19.4 | % | | $ | 6,552 | | | 13.8 | % | | $ | 16,597 | | | 17.8 | % | | $ | 12,629 | | | 15.6 | % |
Other direct costs were higher as a percentage of sales as compared to the prior year primarily due to unfavorable developments in certain legal claims of 4.5 percentage points for the quarter and 1.7 percentage points for the year-to-date period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
| | | | | | | | | (In thousands) |
Utilities | | | | | | | | | $ | 2,057 | | | 3.8 | % | | $ | 1,577 | | | 3.6 | % |
Repairs and maintenance | | | | | | | | | 889 | | | 1.7 | % | | 825 | | | 1.9 | % |
Marketing | | | | | | | | | 1,395 | | | 2.6 | % | | 1,207 | | | 2.7 | % |
Legal settlements | | | | | | | | | 109 | | | 0.2 | % | | 277 | | | 0.6 | % |
Other direct costs | | | | | | | | | 3,669 | | | 6.9 | % | | 3,169 | | | 7.2 | % |
Other operating expenses | | | | | | | | | $ | 8,119 | | | 15.2 | % | | $ | 7,055 | | | 16.0 | % |
Franchise Operations
Franchise and license revenue and costs of franchise and license revenue consisted of the following amounts and percentages of franchise and license revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
| (In thousands) |
Royalties | $ | 28,759 | | | 43.7 | % | | $ | 27,117 | | | 46.3 | % | | $ | 55,284 | | | 44.2 | % | | $ | 47,961 | | | 45.4 | % |
Advertising revenue | 19,486 | | | 29.6 | % | | 18,600 | | | 31.7 | % | | 37,692 | | | 30.2 | % | | 32,711 | | | 31.0 | % |
Initial and other fees | 7,779 | | | 11.8 | % | | 2,066 | | | 3.5 | % | | 12,286 | | | 9.8 | % | | 3,904 | | | 3.7 | % |
Occupancy revenue | 9,826 | | | 14.9 | % | | 10,810 | | | 18.4 | % | | 19,719 | | | 15.8 | % | | 21,024 | | | 19.9 | % |
Franchise and license revenue | $ | 65,850 | | | 100.0 | % | | $ | 58,593 | | | 100.0 | % | | $ | 124,981 | | | 100.0 | % | | $ | 105,600 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
Advertising costs | $ | 19,486 | | | 29.6 | % | | $ | 18,600 | | | 31.7 | % | | $ | 37,692 | | | 30.2 | % | | $ | 32,711 | | | 31.0 | % |
Occupancy costs | 6,064 | | | 9.2 | % | | 6,879 | | | 11.7 | % | | 12,441 | | | 10.0 | % | | 13,418 | | | 12.7 | % |
Other direct costs | 9,715 | | | 14.8 | % | | 3,256 | | | 5.6 | % | | 15,801 | | | 12.6 | % | | 6,364 | | | 6.0 | % |
Costs of franchise and license revenue | $ | 35,265 | | | 53.6 | % | | $ | 28,735 | | | 49.0 | % | | $ | 65,934 | | | 52.8 | % | | $ | 52,493 | | | 49.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
| | | | | | | | | (In thousands) |
Royalties | | | | | | | | | $ | 30,027 | | | 46.9 | % | | $ | 26,525 | | | 44.9 | % |
Advertising revenue | | | | | | | | | 19,668 | | | 30.7 | % | | 18,206 | | | 30.8 | % |
Initial and other fees | | | | | | | | | 4,990 | | | 7.8 | % | | 4,507 | | | 7.6 | % |
Occupancy revenue | | | | | | | | | 9,334 | | | 14.6 | % | | 9,893 | | | 16.7 | % |
Franchise and license revenue | | | | | | | | | $ | 64,019 | | | 100.0 | % | | $ | 59,131 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
Advertising costs | | | | | | | | | $ | 19,668 | | | 30.7 | % | | $ | 18,206 | | | 30.8 | % |
Occupancy costs | | | | | | | | | 5,672 | | | 8.9 | % | | 6,377 | | | 10.8 | % |
Other direct costs | | | | | | | | | 7,047 | | | 11.0 | % | | 6,086 | | | 10.3 | % |
Costs of franchise and license revenue | | | | | | | | | $ | 32,387 | | | 50.6 | % | | $ | 30,669 | | | 51.9 | % |
Franchise and license revenue increased $7.3$4.9 million, or 12.4%8.3%, for the quarter ended JuneMarch 29, 2022 and $19.4 million, or 18.4%, year-to-date2023 compared to the prior year periods.period. Royalties increased $1.6$3.5 million, or 6.1%, and $7.3 million, or 15.3%13.2%, for the current quarter and year-to-date period, respectively, compared to the prior year periods. Advertising revenueperiod. Denny's domestic franchise same-store sales increased $0.9 million, or 4.8%,8.1% for the current year quarter and $5.0 million, or 15.2%, year-to-dateas compared to the prior year periods.period. The increasesincrease in royalty and advertising revenue primarily resultedroyalties also includes $1.3 million from 2.4% and 11.2% increases in domestic same-store salesKeke's 46 franchised restaurants for the respective periods.quarter ended March 29, 2023. These increases were partially offset by the impacts of fewera 43 unit reduction in Denny's franchise equivalent units during the current quarter.
Advertising revenue increased $1.5 million, or 8.0%, for the current quarter compared to the prior year period. The increase in royalty and advertising revenue was supported by the 8.1% increase in Denny's franchise domestic same-store sales for the quarter and year-to-datecompared to the prior year period. This increase was partially offset by the impact of fewer Denny's franchise equivalent units during the current quarter.
Initial and other fees increased $5.7$0.5 million, or 276.5%10.7%, for the quarter ended JuneMarch 29, 2022 and $8.4 million, or 214.7%, year-to-date2023 compared to the prior year periods.period. The increase in initial and other fees primarily resulted from the recognition of $5.7 million and $7.9 million ofan increase in revenue for the quarter and year-to-date period, respectively, from the sale of equipment and installation of kitchen equipment purchased bymenus to franchisees. The revenue recorded related to the sale of equipment and menus has an equal and offsetting expense recorded in other direct costs as described below. Occupancy revenue decreased $1.0$0.6 million, or 9.1%5.7%, for the current quarter and decreased $1.3 million, or 6.2%, year-to-date compared to the prior year periods. The decreases in occupancy revenueperiod, primarily resulted fromdue to lease terminations.
Costs of franchise and license revenue increased $6.5$1.7 million, or 22.7%5.6%, for the quarter ended JuneMarch 29, 2022 and $13.4 million, or 25.6%, year-to-date2023 compared to the prior year periods.period. Advertising costs increased $0.9$1.5 million, or 4.8%8.0%, for the current quarter, and $5.0 million, or 15.2%, year-to-date, which corresponds to the related advertising revenue increasesincrease noted above. Occupancy costs decreased $0.8$0.7 million, or 11.8%11.1%, for the current quarter and $1.0 million, or 7.3%, year-to-date compared to the prior year periods. The decreases in occupancy costs for the current quarter and year-to-date period, primarily resulted fromdue to lease terminations, which corresponds to the related occupancy revenue decreasesdecrease noted above. Other direct franchise costs increased $6.5$1.0 million, or 198.4%15.8%, for the current quarter and $9.4 million, or 148.3%, year-to-date compared to the prior year periods.period. The increasesincrease in other direct franchise costs were primarilywas partially due to $5.7an increase of $0.6 million of expense forrelated to the quartercosts of equipment and $7.9 million of expense year-to-date as part of the sale and installation of kitchen equipment purchased bymenus sold to franchisees as mentioned above. Additionally, other direct franchise costs included an increase of $0.3 million in franchise administrative costs for the quarter. As a result of the increases in franchise and license revenue discussed above, costs of franchise and license revenue increaseddecreased to 53.6%50.6% of franchise and 52.8%license revenue for the respective quarter and year-to-date period ended JuneMarch 29, 20222023 from 49.0% and 49.7%51.9% for the respective prior year periodsperiod.
Other Operating Costs and Expenses
Other operating costs and expenses such as general and administrative expenses and depreciation and amortization expense relate to both company and franchise operations.
General and administrative expenses consisted of the following:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Corporate administrative expenses | Corporate administrative expenses | $ | 13,162 | | | $ | 10,345 | | | $ | 24,545 | | | $ | 21,217 | | Corporate administrative expenses | | $ | 14,179 | | | $ | 11,383 | |
Share-based compensation | Share-based compensation | 3,505 | | | 3,388 | | | 7,520 | | | 6,860 | | Share-based compensation | | 3,094 | | | 4,015 | |
Incentive compensation | Incentive compensation | 1,639 | | | 3,032 | | | 3,758 | | | 5,118 | | Incentive compensation | | 2,387 | | | 2,119 | |
Deferred compensation valuation adjustments | Deferred compensation valuation adjustments | (1,683) | | | 783 | | | (2,242) | | | 1,300 | | Deferred compensation valuation adjustments | | 458 | | | (559) | |
Total general and administrative expenses | Total general and administrative expenses | $ | 16,623 | | | $ | 17,548 | | | $ | 33,581 | | | $ | 34,495 | | Total general and administrative expenses | | $ | 20,118 | | | $ | 16,958 | |
Corporate administrative expenses increased $2.8 million for the quarter ended JuneMarch 29, 2022 and increased $3.3 million year-to-date.2023. The increases areincrease was primarily due to compensation increases in the current year and temporary cost reductions in the prior yearadministrative costs related to the COVID-19 pandemic.Keke's. Share-based compensation increased $0.1decreased $0.9 million for the current quarter and $0.7 million year-to-date.primarily due to forfeitures. Incentive compensation decreased $1.4increased $0.3 million for the current quarter, and year-to-date period primarily resulting from our performance against plan metrics.related to the addition of Keke's. Changes in deferred compensation valuation adjustments have offsetting gains or losses on the underlying nonqualified deferred plan investments included as a component of other non-operating expense (income), net, for the corresponding periods.
Depreciation and amortization consisted of the following:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Depreciation of property and equipment | Depreciation of property and equipment | $ | 2,702 | | | $ | 2,938 | | | $ | 5,349 | | | $ | 5,653 | | Depreciation of property and equipment | | $ | 2,699 | | | $ | 2,647 | |
Amortization of financing lease right-of-use assets | 437 | | | 428 | | | 879 | | | 856 | | |
Amortization of finance lease ROU assets | | Amortization of finance lease ROU assets | | 395 | | | 442 | |
Amortization of intangible and other assets | Amortization of intangible and other assets | 451 | | | 531 | | | 910 | | | 1,049 | | Amortization of intangible and other assets | | 562 | | | 459 | |
Total depreciation and amortization expense | Total depreciation and amortization expense | $ | 3,590 | | | $ | 3,897 | | | $ | 7,138 | | | $ | 7,558 | | Total depreciation and amortization expense | | $ | 3,656 | | | $ | 3,548 | |
The decreases in depreciationDepreciation and amortization expense increased during the quarter and year-to-date period ended JuneMarch 29, 2022 are primarily due to certain assets becoming fully depreciated.2023 resulting from the acquisition of Keke's.
Operating (gains), losses and other charges, net consisted of the following:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Gains on sales of assets and other, net | Gains on sales of assets and other, net | $ | (99) | | | $ | (65) | | | $ | (245) | | | $ | (1,007) | | Gains on sales of assets and other, net | | $ | (1,522) | | | $ | (146) | |
Restructuring charges and exit costs | Restructuring charges and exit costs | 679 | | | (48) | | | 825 | | | 1,426 | | Restructuring charges and exit costs | | 64 | | | 146 | |
Impairment charges | Impairment charges | 266 | | | — | | | 266 | | | — | Impairment charges | | 129 | | | — | |
Operating (gains), losses and other charges, net | Operating (gains), losses and other charges, net | $ | 846 | | | $ | (113) | | | $ | 846 | | | $ | 419 | | Operating (gains), losses and other charges, net | | $ | (1,329) | | | $ | — | |
24Gains on sales of assets and other, net for the quarter ended March 29, 2023 were primarily related to the sale of one parcel of real estate.
Impairment charges for the quarter ended March 29, 2023 were related to a unit which is expected to be sold in the next twelve months.
Restructuring charges and exit costs consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
| (In thousands) |
Exit costs | $ | 38 | | | $ | 141 | | | $ | 50 | | | $ | 223 | |
Severance and other restructuring charges | 641 | | | (189) | | | 775 | | | 1,203 | |
Total restructuring and exit costs | $ | 679 | | | $ | (48) | | | $ | 825 | | | $ | 1,426 | |
Restructuring and exit costs increased $0.7 million for the current quarter and decreased $0.6 million year-to-date compared to the prior year periods. The current quarter increase was primarily due to severance costs and the year-to-date decrease was primarily due to prior period relocation costs.
We recorded impairment charges of $0.3 million (consisting of property and right-of-use assets) during the quarter and year-to-date period ended June 29, 2022 resulting from our assessment of underperforming restaurants. | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | | | March 29, 2023 | | March 30, 2022 |
| | | | | (In thousands) |
Exit costs | | | | | $ | — | | | $ | 12 | |
Severance and other restructuring charges | | | | | 64 | | | 134 | |
Total restructuring and exit costs | | | | | $ | 64 | | | $ | 146 | |
Operating income was $13.9$16.1 million for the current quarter and $27.2 million year-to-date compared to $18.3$13.3 million and $23.8 million, respectively, for the prior year periods.period.
Interest expense, net consisted of the following:
| | | Quarter Ended | | Two Quarters Ended | | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 | | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | | (In thousands) |
Interest on credit facility | Interest on credit facility | $ | 1,130 | | | $ | 1,554 | | | $ | 2,029 | | | $ | 3,255 | | Interest on credit facility | | $ | 4,513 | | | $ | 899 | |
Interest on interest rate swaps | 721 | | | 1,006 | | | 1,711 | | | 2,001 | | |
Interest on financing lease liabilities | 595 | | | 746 | | | 1,202 | | | 1,514 | | |
Interest (income) expense on interest rate swaps | | Interest (income) expense on interest rate swaps | | (930) | | | 990 | |
Interest on finance lease liabilities | | Interest on finance lease liabilities | | 551 | | | 607 | |
Letters of credit and other fees | Letters of credit and other fees | 279 | | | 377 | | | 588 | | | 732 | | Letters of credit and other fees | | 196 | | | 309 | |
Interest income | Interest income | (12) | | | (7) | | | (16) | | | (15) | | Interest income | | (40) | | | (4) | |
Total cash interest, net | Total cash interest, net | 2,713 | | | 3,676 | | | 5,514 | | | 7,487 | | Total cash interest, net | | 4,290 | | | 2,801 | |
Amortization of deferred financing costs | Amortization of deferred financing costs | 159 | | | 344 | | | 317 | | | 688 | | Amortization of deferred financing costs | | 159 | | | 158 | |
Amortization of interest rate swap losses | Amortization of interest rate swap losses | 6 | | | 46 | | | 6 | | | 167 | | Amortization of interest rate swap losses | | 56 | | | — | |
Interest accretion on other liabilities | Interest accretion on other liabilities | — | | | — | | | 1 | | | 1 | | Interest accretion on other liabilities | | — | | | 1 | |
Total interest expense, net | Total interest expense, net | $ | 2,878 | | | $ | 4,066 | | | $ | 5,838 | | | $ | 8,343 | | Total interest expense, net | | $ | 4,505 | | | $ | 2,960 | |
Total cash interest expense, net decreasedincreased by $1.0$1.5 million for the current quarter and $2.0 million year-to-date compared to the prior year periods. Interest on credit facility borrowings decreased by $0.4 million for the current quarter and $1.2 million year-to-date compared to the prior year periods. These decreases primarily resulted from decreased average borrowings and lower average interest rates in the current quarter compared to the respective prior year period. InterestThe current quarter increase was primarily due to increased average borrowings and higher average interest rates, onpartially offset by our borrowings primarily decreased as a result of our credit facility refinancing on August 26, 2021.effective interest rate swaps.
Other nonoperating expense (income), net was incomean expense of $19.8$10.1 million for the current quarter and $39.4 million year-to-date, compared to expense of $16.3 million and income of $13.8$19.6 million respectively, for the prior year periods.period. Other nonoperating income, netexpense for the current quarter primarily consisted of $21.7$10.6 million of gainslosses related to valuation adjustments for dedesignated interest rate hedges, partly offset by lossesgains of $1.7$0.5 million on deferred compensation plan investments. The year-to-date period primarily consisted of $41.9 million of gains on interest rate swap valuation adjustments, partially offset by $2.3 million of losses on deferred compensation plan investments. Prior year other nonoperating expense, netincome for the quarter primarily consisted of $17.2$20.3 million of lossesgains related to dedesignated interest rate swap valuation adjustments, partially offset by $0.8losses of $0.6 million of gains on deferred compensation plan investments. The prior year-to-date period primarily consisted of $12.7 million of gains on interest rate swap valuation adjustments in addition to $1.4 million of gains on deferred compensation plan investments.
25During the quarter ended March 29, 2023, we terminated a portion of our hedging relationship entered into in 2018 (“2018 Swaps”), reducing the previous maximum notional amount of $425 million on August 31, 2033 to $335 million. As a result, we expect our total swaps to approximate 80% of our outstanding debt prospectively. In addition, during the quarter, we designated the remaining 2018 Swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable rate interest payments due on forecasted notional amounts. As a result, subsequent to the designation of the 2018 Swaps, gains and losses related to these cash flow hedges have been and will be recorded as a component of accumulated other comprehensive loss, net.
Provision for (benefit from) income taxes was a provision of $7.8$1.0 million for the quarter ended JuneMarch 29, 2022 and provision of $15.9 million year-to-date,2023 compared to a benefit of $1.2 million and a provision of $6.9$8.1 million for the prior year periods, respectively.period. The effective tax rate was 25.3%61.5% for the current quarter and 26.2% year-to-date, compared to 59.3% and 23.6%, respectively,27.1% for the prior year periods.period. The 2021 quarterly and year-to-date rateseffective income tax rate for the quarter ended March 29, 2023 included the impact of excess tax benefitsa 36.6% discrete item relating to share-based compensationcompensation. We expect the 2023 fiscal year effective tax rate to be between 26% and 30%. The annual effective tax rate cannot be determined until the end of 13.4% and (1.2%), respectively.the fiscal year; therefore, the actual rate could differ from our current estimates.
Net income (loss) was net income of $23.0$0.6 million for the quarter ended JuneMarch 29, 2022 and net income of $44.9 million year-to-date2023 compared to a net loss of $0.8$21.9 million and net income of $22.4 million, respectively, for the prior year periods.period.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility (as described below). Principal uses of cash are operating expenses, acquisitions and capital expenditures and the repurchase of shares of our common stock.
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:
| | | Two Quarters Ended | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | (In thousands) |
Net cash provided by operating activities | $ | 9,609 | | | $ | 43,371 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | $ | 16,153 | | | $ | (7,064) | |
Net cash used in investing activities | Net cash used in investing activities | (6,675) | | | (1,007) | | Net cash used in investing activities | (569) | | | (3,803) | |
Net cash used in financing activities | Net cash used in financing activities | (32,198) | | | (35,374) | | Net cash used in financing activities | (10,212) | | | (13,666) | |
Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | $ | (29,264) | | | $ | 6,990 | | Increase (decrease) in cash and cash equivalents | $ | 5,372 | | | $ | (24,533) | |
Net cash flows provided by operating activities were $9.6$16.2 million for the two quartersquarter ended JuneMarch 29, 20222023 compared to $43.4a usage of $7.1 million for the two quartersquarter ended JuneMarch 30, 2021.2022. The decreaseincrease in cash flows provided by operating activities was primarily due to the timing of prior yearinventory purchases, receivable collections, and accrual payments collections of receivables and purchases of inventory forrelated to our franchise kitchen equipment project.project over the past two years. We believe that our estimated cash flows from operations for 2022,2023, combined with our capacity for additional borrowings under our credit facility and cash on hand, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next 12 months.
Net cash flows used in investing activities were $6.7$0.6 million for the two quartersquarter ended JuneMarch 29, 2023. These cash flows included capital expenditures of $1.3 million and investment purchases of $1.3 million, partially offset by net proceeds from the sale of a parcel of real estate for $1.7 million. Net cash flows used in investing activities were $3.8 million for the quarter ended March 30, 2022. These cash flows primarily consisted of capital expenditures of $5.8$2.8 million and investmentsinvestment purchases of $1.2 million.Net cash flows used in investing activities were $1.0 million for the two quarters ended June 30, 2021. These cash flows primarily consisted of capital expenditures of $3.1 million, partially offset by proceeds from sales of restaurants, real estate and other assets of $1.6 million, collections on notes receivable of $0.4 million, and proceeds from sales of investments of $0.2 million.
Our principal capital requirements have been largely associated with the following:
| | | Two Quarters Ended | | Quarter Ended |
| | June 29, 2022 | | June 30, 2021 | | March 29, 2023 | | March 30, 2022 |
| | (In thousands) | | (In thousands) |
Facilities | Facilities | $ | 2,004 | | | $ | 1,626 | | Facilities | $ | 1,009 | | | $ | 913 | |
| New construction | | New construction | 16 | | | — | |
Remodeling | Remodeling | 2,524 | | | 356 | | Remodeling | 138 | | | 1,310 | |
Information technology | Information technology | 824 | | | 842 | | Information technology | 50 | | | 214 | |
Other | Other | 419 | | | 284 | | Other | 91 | | | 341 | |
Capital expenditures | Capital expenditures | $ | 5,771 | | | $ | 3,108 | | Capital expenditures | $ | 1,304 | | | $ | 2,778 | |
Net cash flows used in financing activities were $32.2$10.2 million for the two quartersquarter ended JuneMarch 29, 2022, which included2023, including cash payments for stock repurchases of $46.2$9.0 million and payments of tax withholding on share-based compensation of $4.8$2.8 million, partially offset by net long-term debt borrowings of $16.0 million and net bank overdrafts payments of $2.9$2.0 million. Net cash flows used in financing activities were $35.4$13.7 million for the two quartersquarter ended JuneMarch 30, 2021,2022, which included net long-term debt repaymentscash payments for stock repurchases of $31.0 million, in addition to net bank overdraft payments of $3.1$12.5 million and payments of tax withholdingswithholding on share-based compensation of $1.4$2.2 million, partially offset by net long-term borrowings of $1.0 million.
Our working capital deficit was $40.9$34.6 million at JuneMarch 29, 20222023 compared to $28.3$43.3 million at December 28, 2022, primarily due to an increase in cash and cash equivalents at the end of the quarter ended March 29, 2021.2023. We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows for a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually becomes due after the receipt of cash from the related sales.
Credit Facility
Denny'sThe Company and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $25 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the facility to $450 million. Borrowings bear a tiered interest rate, which is based on the Company's consolidated leverage ratio. The maturity date for the credit facility is August 26, 2026.
The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny'sthe Company and its material subsidiaries and is secured by assets of Denny'sthe Company and its subsidiaries, including the stock of its subsidiaries (other than its insurance captive subsidiary). 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 JuneMarch 29, 2022.2023.
As of JuneMarch 29, 2022,2023, we had outstanding revolver loans of $187.0$264.0 million and outstanding letters of credit under the credit facility of $14.2$12.3 million. These balances resulted in unused commitments of $198.8$123.7 million as of JuneMarch 29, 20222023 under the credit facility.
As of JuneMarch 29, 2022,2023, borrowings under the credit facility bore interest at a rate of LIBOR plus 1.75%2.25% and the commitment fee, paid on the unused portion of the credit facility, was set to 0.25%0.35%. Subsequent to March 29, 2023, the credit facility was amended to change the benchmark interest rate from LIBOR to Adjusted Daily Simple SOFR. The conversion to Adjusted Daily Simple SOFR is not expected to have a material impact on the Company's consolidated financial position or results of operations. For additional information, see the First Amendment to Fourth Amended and Restated Credit Agreement, dated as of March 31, 2023 (attached hereto as Exhibit 10.1), which is hereby incorporated by reference.
Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.91%6.90% and 2.09%6.37% as of JuneMarch 29, 20222023 and December 29, 2021,28, 2022, respectively. Taking into consideration our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 4.17%5.34% and 4.44%5.31% as of JuneMarch 29, 20222023 and December 29, 2021,28, 2022, respectively.
Kitchen Modernization and Technology Transformation Initiatives
The Company is currently in the process of upgrading and improving its kitchen equipment throughout the domestic system. The rollout began during the first quarter of 2022 and is expected to be substantially complete by the end of 2022. This investment is expected to yield long-term benefits through menu enhancements across all dayparts, but especially the dinner daypart, with new and improved food offerings. The new equipment is also expected to provide immediate benefits through increased kitchen efficiency and productivity while also reducing food waste.
The Company has entered into equipment purchase contracts of approximately $19.3 million related to the rollout of kitchen equipment for franchise restaurants, which will be billed to the franchisee and recognized as revenue as the equipment is installed, less approximately $5.7 million in commitments from the Company. Amounts committed from the Company are contract assets that have been netted against deferred revenue and will be recognized as a component of franchise and license revenue over the remaining term of the related franchise agreements. As of June 29, 2022, our remaining obligation under these contracts was approximately $2.5 million, $0.7 million of which is included in accounts payable. As of June 29, 2022, we had approximately $10.7 million in inventory and $1.6 million in contract assets related to the kitchen equipment rollout.
The Company intends to initiate the rollout ofrolling out a new cloud-based restaurant technology platform throughout the domestic system which will lay the foundation for future technology initiatives to further enhance the guest experience. The rollout is expected to begin during the second half of 2022 and continue throughout 2023.
into 2024. The Company has committed to investing approximately $10$4 million towards the cost and installation of the kitchen equipment package (approximately $5.7 million) andtoward the new cloud-based restaurant technology platform (approximately $4.3 million) in domestic franchise restaurants. Additionally,
Contractual Obligations
Our future contractual obligations relating to long-term debt and related interest obligations as of March 29, 2023 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less than 1 Year | | 1-2 Years | | 3-4 Years | | 5 Years and Thereafter |
| (In thousands) |
Long-term debt | $ | 264,000 | | | $ | — | | | $ | — | | | $ | 264,000 | | | $ | — | |
Interest obligations (a) | 47,954 | | | 10,529 | | | 27,854 | | | 9,571 | | | — | |
Total | $ | 311,954 | | | $ | 10,529 | | | $ | 27,854 | | | $ | 273,571 | | | $ | — | |
| | | | | | | | | |
(a)Interest obligations represent payments related to our long-term debt outstanding at March 29, 2023. For long-term debt with variable rates, we have used the Company has negotiated favorable financing terms on behalfrate applicable at March 29, 2023 to project interest over the periods presented in the table above, taking into consideration the impact of its franchiseesthe interest rate swaps that are designated as cash flow hedges for the remaining cost.applicable periods.
See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 28, 2022 for information concerning other future contractual obligations and commitments.
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 29, 2021.28, 2022.
Implementation of New Accounting Standards
Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our unaudited Consolidated Financial Statements set forth in Part I, Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, as of JuneMarch 29, 2022,2023, borrowings under our credit facility bore interest at variable rates based on LIBOR plus 1.75%2.25% per annum. Subsequent to March 29, 2023, the credit facility was amended to change the benchmark interest rate from LIBOR to Adjusted Daily Simple SOFR. The conversion to Adjusted Daily Simple SOFR is not expected to have a material impact on the credit facility's interest rate.
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt.
A summary of our interest rate swaps as of JuneMarch 29, 20222023 is as follows:
| Trade Date | Trade Date | | Effective Date | | Maturity Date | | Notional Amount | | Fair Value | | Fixed Rate | Trade Date | | Effective Date | | Maturity Date | | Notional Amount | | Fair Value | | Fixed Rate |
| | | | | | | (In thousands) | | | | | | | | | (In thousands) | | |
Swaps designated as cash flow hedges | Swaps designated as cash flow hedges | | Swaps designated as cash flow hedges | |
March 20, 2015 | March 20, 2015 | | March 29, 2018 | | March 31, 2025 | | $ | 120,000 | | | $ | 2,165 | | | 2.44 | % | March 20, 2015 | | March 29, 2018 | | March 31, 2025 | | $ | 120,000 | | | $ | 3,969 | | | 2.44 | % |
October 1, 2015 | October 1, 2015 | | March 29, 2018 | | March 31, 2026 | | $ | 50,000 | | | $ | 1,055 | | | 2.46 | % | October 1, 2015 | | March 29, 2018 | | March 31, 2026 | | $ | 50,000 | | | $ | 1,926 | | | 2.46 | % |
Dedesignated swaps | | |
February 15, 2018 | February 15, 2018 | | March 31, 2020 | | December 31, 2033 | | $ | 120,000 | | (1) | $ | (801) | | | 3.19 | % | February 15, 2018 | | March 31, 2020 | | December 31, 2033 | | $ | 26,000 | | (1) | $ | 2,093 | | | 3.19 | % |
Total | Total | | $ | 290,000 | | | $ | 2,419 | | | Total | | $ | 196,000 | | | $ | 7,988 | | |
(1) The notional amounts of the swaps entered into on February 15, 2018 increase periodically until they reach the maximum notional amount of $425.0$335 million on September 28, 2029.August 31, 2033.
As of JuneMarch 29, 2022, the2023, our swaps effectively increased our ratio of fixed rate debt from 4% of total notional amountdebt to 75% of our interest rate swaps was in excess of 100% of our floating ratetotal debt. Based on the portionlevels of borrowings under the swaps in excess of our floating rate debt as of Junecredit facility at March 29, 2022, a hypothetical change of2023, if interest rates changed by 100 basis points, in LIBOR would change our annual cash flow and income before taxes would change by approximately $1.0$0.6 million. This computation is determined by considering the impact of hypothetical interest rates on the credit facility at March 29, 2023, taking into consideration the interest rate swaps that will be in effect during the next twelve months. However, the nature and amount of our borrowings may vary as a result of future business requirements, market conditions and other factors.
Depending on market considerations, fluctuations in the fair values of our interest rate swaps could be significant. With the exception of these changes in the fair value of our interest rate swaps and in the levels of borrowings under our credit facility, there have been no material changes in our quantitative and qualitative market risks since the prior reporting period. For additional information related to our interest rate swaps, including changes in the fair value, refer to NotesNote 6, Note 7 and Note 13 to our unaudited Consolidated Financial Statements in Part I, Item 1 of this report.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management conducted an evaluation (under the supervision and with the participation of our Chief Executive Officer, and President, Kelli A.F. Valade, and our Executive Vice President and Chief Financial Officer, Robert P. Verostek) as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Ms. Valade and Mr. Verostek each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Ms. Valade and Mr. Verostek, as appropriate to allow timely decisions regarding required disclosure.
28On July 20, 2022, we closed on the acquisition of substantially all of the assets of Keke’s. We are in the process of integrating Keke's into our internal control structure and expect that this effort will be completed in fiscal 2023.
ThereOther than as discussed above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our fiscal quarter ended JuneMarch 29, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference from Note 14 to our unaudited Consolidated Financial Statements set forth in Part I, Item 1 of this report.
Item 1A. Risk Factors
The Company is supplementingThere have been no material changes in the Risk Factors previously disclosedrisk factors set forth in Part I, Item 1A, of the“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2021, (the “Annual Report”) and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 30,28, 2022. The following risk factors should be read in conjunction with the Risk Factors disclosed in the Annual Report.
The failure to successfully integrate the business and operations of Keke's Breakfast Cafe in the expected time frame may adversely affect our future results.
We believe that the acquisition of Keke's Breakfast Café, or Keke’s, will result in certain benefits, including expansion opportunities through a complementary concept, the opportunity to participate in the fast-growing A.M. eatery segment, and enhance value for our shareholders.
The success of the acquisition will depend on our ability to realize these anticipated benefits. We may fail to realize the anticipated benefits of the acquisition of Keke’s for a variety of reasons, including the following:
•failure to grow the brand in a timely manner through current and new franchisees;
•failure of customers to accept any changes that we may implement at Keke’s or to continue as customers of Keke’s following the acquisition; and
•failure to leverage the increased scale of our company quickly and effectively.
If we are not able to successfully integrate Keke’s business and operations, or if there are delays in combining the businesses, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The table below provides information concerning repurchases of shares of our common stock during the quarter ended JuneMarch 29, 2022.2023.
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Programs (2) | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs (2) |
| (In thousands, except per share amounts) |
March 31, 2022 - April 27, 2022 | — | | | $ | — | | | — | | | $ | 205,547 | |
April 28, 2022 - May 25, 2022 | 1,414 | | | 9.88 | | | 1,414 | | | $ | 191,549 | |
May 26, 2022 - June 29, 2022 | 2,496 | | | 9.35 | | | 2,496 | | | $ | 168,162 | |
Total | 3,910 | | | $ | 9.54 | | | 3,910 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Programs (2) | | Dollar Value of Shares that May Yet be Purchased Under the Programs (2) |
| (In thousands, except per share amounts) |
December 29, 2022 - January 25, 2023 | 282 | | | $ | 10.49 | | | 282 | | | $ | 149,562 | |
January 26, 2023 - February 22, 2023 | 120 | | | 12.21 | | | 120 | | | $ | 148,090 | |
February 23, 2023 - March 29, 2023 | 404 | | | 11.13 | | | 404 | | | $ | 143,561 | |
Total | 806 | | | $ | 11.07 | | | 806 | | | |
(1)Average price paid per share excludes commissions.commissions and any excise taxes paid.
(2)On December 2, 2019, we announced that our Board of Directors approved a share repurchase program, authorizing us to repurchase up to an additional $250 million of our common stock (in addition to prior authorizations). Such repurchases may take place from time to time in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended JuneMarch 29, 2022,2023, we purchased 3.90.8 million shares of our common stock for an aggregate consideration of approximately $37.4$9.0 million pursuant to the share repurchase program.
Item 6. Exhibits
The following are included as exhibits to this report:
| | | | | | | | |
Exhibit No. | | Description |
2.1*10.1 | | Asset PurchaseFirst Amendment to Fourth Amended and Restated Credit Agreement, dated as of May 3, 2022, by and betweenMarch 31, 2023, among Denny's, Inc., as the Borrower, Denny's Corporation, as purchaser,Parent, and Certain Subsidiaries of Parent, as Guarantors, Wells Fargo Bank, National Association, as Administrative Agent on behalf of the Lenders under the Credit Agreement, and the sellers and principals party thereto (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Denny's Corporation filed with the Securities and Exchange Commission on May 3, 2022).Lenders. |
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2.210.2 | | |
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10.110.3 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The omitted schedules and exhibits will be furnished to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | DENNY'S CORPORATION | |
| | | | |
Date: | AugustMay 2, 20222023 | By: | /s/ Robert P. Verostek | |
| | | Robert P. Verostek | |
| | | Executive Vice President and Chief Financial Officer | |
| | | | |
Date: | AugustMay 2, 20222023 | By: | /s/ Jay C. Gilmore | |
| | | Jay C. Gilmore | |
| | | Senior Vice President, Chief Accounting Officer and Corporate Controller | |