DENNY'S CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
March 27, 2013
Commission File Number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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13-3487402
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization
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Identification No.)
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203 East Main Street
Spartanburg, South Carolina 29319-0001
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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þ
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Non-accelerated filer
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o
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Smaller reporting company
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o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
þ
As of
April 25, 2013
,
91,773,875
shares of the registrant’s common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
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Page
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2
Denny’s Corporation and Subsidiaries
(Unaudited)
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March 27, 2013
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December 26, 2012
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|||||
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(In thousands)
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||||||
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Assets
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|||||
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Current assets:
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|||||
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Cash and cash equivalents
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$
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10,263
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$
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13,565
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Receivables
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16,762
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19,947
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Inventories
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2,925
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2,890
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Current deferred tax asset
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20,238
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19,807
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Prepaid and other current assets
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6,184
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8,401
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Total current assets
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56,372
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64,610
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Property, net of accumulated depreciation of $252,687 and $250,173 respectively
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105,426
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107,004
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Goodwill
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31,430
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31,430
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Intangible assets, net
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48,369
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48,920
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Deferred financing costs, net
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1,917
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2,041
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Noncurrent deferred tax asset
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42,305
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45,776
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Other noncurrent assets
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25,474
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25,104
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Total assets
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$
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311,293
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$
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324,885
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Liabilities
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Current liabilities:
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Current maturities of long-term debt
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$
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9,250
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$
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8,500
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Current maturities of capital lease obligations
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4,135
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4,181
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Accounts payable
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19,336
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24,461
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Other current liabilities
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46,529
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54,682
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Total current liabilities
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79,250
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91,824
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Long-term liabilities:
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Long-term debt, less current maturities
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156,750
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161,500
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Capital lease obligations, less current maturities
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16,012
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15,953
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Liability for insurance claims, less current portion
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16,845
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18,045
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Other noncurrent liabilities and deferred credits
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40,617
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42,023
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Total long-term liabilities
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230,224
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237,521
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Total liabilities
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309,474
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329,345
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Commitments and contingencies
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Shareholders' equity
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Common stock $0.01 par value; authorized - 135,000; March 27, 2013: 104,341 shares issued and 92,465 shares outstanding; December 26, 2012: 103,764 shares issued and 92,229 shares outstanding
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$
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1,044
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$
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1,038
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Paid-in capital
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563,483
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562,657
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Deficit
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(488,437
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)
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(495,518
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)
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Accumulated other comprehensive loss, net of tax
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(24,745
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)
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(24,999
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)
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Shareholders’ equity before treasury stock
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51,345
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43,178
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Treasury stock, at cost, 11,876 and 11,535 shares, respectively
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(49,526
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)
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(47,638
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)
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Total shareholders' equity (deficit)
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1,819
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(4,460
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)
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Total liabilities and shareholders' equity
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$
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311,293
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$
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324,885
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See accompanying notes
3
Denny’s Corporation and Subsidiaries
(Unaudited)
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Quarter Ended
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March 27, 2013
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March 28, 2012
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(In thousands, except per share amounts)
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Revenue:
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Company restaurant sales
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$
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81,030
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$
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94,163
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Franchise and license revenue
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33,460
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32,575
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Total operating revenue
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114,490
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126,738
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Costs of company restaurant sales:
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Product costs
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21,146
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23,533
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Payroll and benefits
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31,546
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37,753
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Occupancy
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5,228
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5,774
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Other operating expenses
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11,200
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12,895
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Total costs of company restaurant sales
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69,120
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79,955
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Costs of franchise and license revenue
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11,402
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11,312
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General and administrative expenses
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15,159
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15,663
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Depreciation and amortization
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5,224
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6,060
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Operating (gains), losses and other charges, net
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134
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(165
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)
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Total operating costs and expenses, net
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101,039
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112,825
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Operating income
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13,451
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13,913
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Interest expense, net
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2,800
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4,456
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Other nonoperating expense (income), net
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1
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(295
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)
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Net income before income taxes
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10,650
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9,752
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Provision for income taxes
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3,569
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3,887
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Net income
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$
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7,081
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$
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5,865
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Basic net income per share
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$
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0.08
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$
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0.06
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Diluted net income per share
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$
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0.07
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$
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0.06
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Basic weighted average shares outstanding
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92,350
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96,075
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Diluted weighted average shares outstanding
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94,461
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97,878
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Comprehensive income
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$
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7,335
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$
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6,133
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See accompanying notes
4
Denny’s Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
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Common Stock
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Treasury Stock
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Paid-in
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Accumulated
Other
Comprehensive
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Total
Shareholders’ Equity /
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|||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Capital
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(Deficit)
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Loss, Net
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(Deficit)
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|||||||||||||||||||||
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(In thousands)
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Balance, December 26, 2012
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103,764
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$
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1,038
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(11,535
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)
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$
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(47,638
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)
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$
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562,657
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$
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(495,518
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)
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$
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(24,999
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$
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(4,460
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)
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Net income
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—
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—
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—
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—
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—
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7,081
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—
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7,081
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Minimum pension liability adjustment, net of tax expense of $165
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—
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—
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—
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—
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—
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—
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254
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254
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Share-based compensation on equity classified awards
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—
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—
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—
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—
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241
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—
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—
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241
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Purchase of treasury stock
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—
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—
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(341
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(1,888
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—
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—
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—
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(1,888
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Issuance of common stock for share-based compensation
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300
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3
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—
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—
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(3
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—
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—
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—
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Exercise of common stock options
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277
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3
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—
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—
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685
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—
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—
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688
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Tax benefit (expense) from stock options exercised
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—
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—
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—
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—
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(97
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)
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—
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—
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(97
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)
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Balance, March 27, 2013
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104,341
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$
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1,044
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(11,876
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)
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$
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(49,526
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)
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$
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563,483
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$
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(488,437
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)
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$
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(24,745
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$
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1,819
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See accompanying notes
5
Denny’s Corporation and Subsidiaries
(Unaudited)
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Quarter Ended
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March 27, 2013
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March 28, 2012
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(In thousands)
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Cash flows from operating activities:
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Net income
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$
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7,081
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$
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5,865
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Adjustments to reconcile net income to cash flows provided by operating activities:
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Depreciation and amortization
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5,224
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6,060
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Operating (gains), losses and other charges, net
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134
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(165
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)
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Amortization of deferred financing costs
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133
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339
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Amortization of debt discount
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—
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121
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Loss on early extinguishment of debt
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349
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217
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Loss on change in the fair value of interest rate cap
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2
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—
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Deferred income tax expense
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2,875
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3,055
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Share-based compensation
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1,175
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790
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Changes in assets and liabilities:
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Decrease (increase) in assets:
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|||||
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Receivables
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2,398
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1,998
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Inventories
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(35
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)
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99
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|||
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Other current assets
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2,218
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3,037
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Other assets
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(1,036
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)
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(1,064
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)
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Increase (decrease) in liabilities:
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|||||
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Accounts payable
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(2,658
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)
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(5,389
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)
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Accrued salaries and vacations
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(5,574
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)
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(638
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)
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Accrued taxes
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(117
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)
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(55
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)
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Other accrued liabilities
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(2,679
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)
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(4,414
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)
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Other noncurrent liabilities and deferred credits
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(2,135
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)
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(1,370
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)
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Net cash flows provided by operating activities
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7,355
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8,486
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Cash flows from investing activities:
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Purchase of property
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(3,006
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)
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(1,836
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)
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Proceeds from disposition of property
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22
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3,594
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Collections on notes receivable
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1,234
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1,367
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Issuance of notes receivable
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(404
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)
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(649
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)
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Net cash flows (used in) provided by investing activities
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(2,154
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)
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2,476
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Cash flows from financing activities:
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|||||
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Long-term debt payments
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(5,072
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)
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(9,137
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)
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Proceeds from exercise of stock options
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688
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334
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Tax withholding on share-based payments
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(464
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)
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(145
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)
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|||
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Tax (expense) benefit of stock options exercised
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(97
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)
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138
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Purchase of treasury stock
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(2,272
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)
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—
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|||
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Net bank overdrafts
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(1,286
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)
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(2,352
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)
|
|||
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Net cash flows used in financing activities
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(8,503
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)
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(11,162
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)
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Decrease in cash and cash equivalents
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(3,302
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)
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(200
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)
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Cash and cash equivalents at beginning of period
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13,565
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13,740
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Cash and cash equivalents at end of period
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$
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10,263
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$
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13,540
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See accompanying notes
6
Denny’s Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Denny’s Corporation, or Denny’s, is one of America’s largest full-service restaurant chains based on number of restaurants. The following table shows the unit activity for the quarters ended
March 27, 2013
and
March 28, 2012
, respectively:
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Quarter Ended
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||||
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March 27, 2013
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March 28, 2012
|
|||
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Company restaurants, beginning of period
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164
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206
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Units opened
|
—
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—
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Units sold to franchisees
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—
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(6
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)
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Units closed
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—
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(3
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)
|
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End of period
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164
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|
197
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|
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Franchised and licensed restaurants, beginning of period
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1,524
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|
1,479
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|
|
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Units opened
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7
|
|
6
|
|
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Units purchased from Company
|
—
|
|
6
|
|
|
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Units closed
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(6
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)
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(8
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)
|
|
|
End of period
|
1,525
|
|
1,483
|
|
|
|
Total restaurants, end of period
|
1,689
|
|
1,680
|
|
|
Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended
December 26, 2012
and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended
December 26, 2012
. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending
December 25, 2013
.
Newly Adopted Accounting Standards
Intangibles
ASU No. 2012-02, "Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”
Effective December 27, 2012, we adopted ASU 2012-02, which modifies the impairment test for indefinite-lived intangible assets. Under the new guidance, an entity is permitted to make a qualitative assessment of whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined through the qualitative assessment that the indefinite-lived intangible asset's fair value is more likely than not greater than its carrying value, the quantitative impairment calculations would not be required. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. The adoption did not have any impact on our Condensed Consolidated Financial Statements.
7
Comprehensive Income
ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income"
Effective December 27, 2012, we adopted ASU 2013-02, which requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, companies are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 is to be applied prospectively. The adoption concerns presentation and disclosure only and did not have an impact on our financial position or results of operations.
Accounting Standards to be Adopted
We reviewed significant newly issued accounting pronouncements and concluded that they are either not applicable to our business or that no material effect is expected on the financial statements as a result of future adoption.
Receivables were comprised of the following:
|
|
March 27, 2013
|
December 26, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Current assets:
|
|
|
|||||
|
Receivables:
|
|
|
|||||
|
Trade accounts receivable from franchisees
|
$
|
10,158
|
|
$
|
10,212
|
|
|
|
Notes receivable from franchisees
|
3,523
|
|
4,310
|
|
|||
|
Vendor receivables
|
942
|
|
2,529
|
|
|||
|
Credit card receivables
|
989
|
|
1,384
|
|
|||
|
Other
|
1,163
|
|
1,524
|
|
|||
|
Allowance for doubtful accounts
|
(13
|
)
|
(12
|
)
|
|||
|
Total current receivables, net
|
$
|
16,762
|
|
$
|
19,947
|
|
|
|
Noncurrent assets (included as a component of other noncurrent assets):
|
|
|
|||||
|
Notes receivable from franchisees
|
$
|
960
|
|
$
|
1,002
|
|
|
For the quarters ended
March 27, 2013
and
March 28, 2012
, we recognized interest income on notes receivable from franchisees of less than
$0.1 million
. These amounts are included as a component of interest expense, net on our Condensed Consolidated Statements of Comprehensive Income.
8
Goodwill and intangible assets were comprised of the following:
|
|
March 27, 2013
|
December 26, 2012
|
|||||||||||||
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Gross Carrying Amount
|
Accumulated Amortization
|
|||||||||||
|
|
(In thousands)
|
||||||||||||||
|
Goodwill
|
$
|
31,430
|
|
$
|
—
|
|
$
|
31,430
|
|
$
|
—
|
|
|||
|
Intangible assets with indefinite lives:
|
|
|
|
|
|||||||||||
|
Trade names
|
$
|
44,050
|
|
$
|
—
|
|
$
|
44,050
|
|
$
|
—
|
|
|||
|
Liquor licenses
|
126
|
|
—
|
|
156
|
|
—
|
|
|||||||
|
Intangible assets with definite lives:
|
|
|
|
|
|||||||||||
|
Franchise and license agreements
|
32,879
|
|
28,736
|
|
37,524
|
|
32,863
|
|
|||||||
|
Foreign license agreements
|
241
|
|
191
|
|
241
|
|
188
|
|
|||||||
|
Intangible assets
|
$
|
77,296
|
|
$
|
28,927
|
|
$
|
81,971
|
|
$
|
33,051
|
|
|||
Operating (gains), losses and other charges, net
are comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
(Gains) losses on sales of assets and other, net
|
$
|
18
|
|
$
|
(1,955
|
)
|
|
|
Restructuring charges and exit costs
|
116
|
|
1,267
|
|
|||
|
Impairment charges
|
—
|
|
523
|
|
|||
|
Operating (gains), losses and other charges, net
|
$
|
134
|
|
$
|
(165
|
)
|
|
Restructuring Charges and Exit Costs
Restructuring charges and exit costs were comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Exit costs
|
$
|
56
|
|
$
|
579
|
|
|
|
Severance and other restructuring charges
|
60
|
|
688
|
|
|||
|
Total restructuring and exit costs
|
$
|
116
|
|
$
|
1,267
|
|
|
9
The components of the change in accrued exit cost liabilities are as follows:
|
|
(In thousands)
|
||
|
Balance, December 26, 2012
|
$
|
4,061
|
|
|
Exit costs (1)
|
56
|
|
|
|
Payments, net of sublease receipts
|
(447
|
)
|
|
|
Interest accretion
|
70
|
|
|
|
Balance, March 27, 2013
|
3,740
|
|
|
|
Less current portion included in other current liabilities
|
1,269
|
|
|
|
Long-term portion included in other noncurrent liabilities
|
$
|
2,471
|
|
|
(1)
|
Included as a component of operating (gains), losses and other charges, net.
|
Estimated net cash payments related to exit cost liabilities are as follows:
|
|
(In thousands)
|
||
|
Remainder of 2013
|
$
|
1,171
|
|
|
2014
|
1,077
|
|
|
|
2015
|
379
|
|
|
|
2016
|
321
|
|
|
|
2017
|
323
|
|
|
|
Thereafter
|
1,328
|
|
|
|
Total
|
4,599
|
|
|
|
Less imputed interest
|
859
|
|
|
|
Present value of exit cost liabilities
|
$
|
3,740
|
|
As of
March 27, 2013
and
December 26, 2012
, we had accrued severance and other restructuring charges of
$0.3 million
and
$0.5 million
, respectively. The balance as of
March 27, 2013
is expected to be paid during the next
12
months.
Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
Fair Value Measurements as of March 27, 2013
|
||||||||||||||||
|
|
Total
|
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Valuation Technique
|
||||||||||||
|
|
(In thousands
)
|
|
|||||||||||||||
|
Deferred compensation plan investments
|
$
|
7,331
|
|
$
|
7,331
|
|
$
|
—
|
|
$
|
—
|
|
market approach
|
||||
|
Interest rate caps
|
$
|
6
|
|
$
|
—
|
|
$
|
6
|
|
$
|
—
|
|
income approach
|
||||
|
Total
|
$
|
7,337
|
|
$
|
7,331
|
|
$
|
6
|
|
$
|
—
|
|
|
||||
10
|
|
Fair Value Measurements as of December 26, 2012
|
||||||||||||||||
|
|
Total
|
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Valuation Technique
|
||||||||||||
|
|
(In thousands
)
|
|
|||||||||||||||
|
Deferred compensation plan investments
|
$
|
6,371
|
|
$
|
6,371
|
|
$
|
—
|
|
$
|
—
|
|
market approach
|
||||
|
Interest rate caps
|
$
|
8
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
income approach
|
||||
|
Total
|
$
|
6,379
|
|
$
|
6,371
|
|
$
|
8
|
|
$
|
—
|
|
|
||||
In addition to the financial assets and liabilities that are measured at fair value on a recurring basis, we measure certain assets
and liabilities at fair value on a nonrecurring basis. As of
March 27, 2013
, there were no such nonrecurring measurements. As of
December 26, 2012
, impaired assets related to underperforming units were written down to a fair value of
$0.2 million
based on the
income approach
.
Disclosures of Fair Value of Other Assets and Liabilities
The liabilities under our credit facility are carried at historical cost in our Condensed Consolidated Balance Sheets. As of
March 27, 2013
and
December 26, 2012
, the estimated fair value (L
evel 2) of our senior secured term loan approximated its carrying value. The fair value of our long-term debt is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at market rates.
As of
March 27, 2013
, Denny’s Corporation and certain of its subsidiaries had a credit facility comprised of a senior secured term loan in an original principal amount of
$190 million
and a senior secured revolver of
$60 million
(with a
$30 million
letter of credit sublimit). As of
March 27, 2013
, we had outstanding term loan borrowings under the credit facility of
$166.0 million
and outstanding letters of credit under the senior secured revolver of
$25.2 million
. There were
no
revolving loans outstanding at
March 27, 2013
. These balances resulted in availability of
$34.8 million
under the revolving facility. The weighted-average interest rate under the term loan was
2.96%
and
2.97%
as of
March 27, 2013
and
December 26, 2012
, respectively.
A commitment fee of
0.375%
was paid on the unused portion of the revolving credit facility. Interest on the credit facility was
payable at per annum rates equal to LIBOR plus
275
basis points. The maturity date for the credit facility was
April 12, 2017
. The term loan under the credit facility amortized
$19.0 million
annually, payable in quarterly installments, with all remaining amounts due on the maturity date. We were required to make certain mandatory prepayments under certain circumstances and had the option to make certain prepayments under the credit facility. The optional prepayments were applied against future amortization. The credit facility included events of default (and related remedies, including acceleration and increased interest rates following an event of default) that were usual for facilities and transactions of this type.
The credit facility was guaranteed by the Company and its material subsidiaries and was secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It included negative covenants that are usual for facilities and transactions of this type. The credit facility also included certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charged coverage ratio and maximum capital expenditures.
During the
quarter ended March 27, 2013
, we made
$4.0 million
of principal payments on the term loan under the credit facility.
On April 13, 2012, we entered into interest rate hedges that cap the
LIBOR
rate on borrowings under the credit facility for a two year period. The
200
basis point LIBOR cap applies to
$150 million
of borrowings during the first year and
$125 million
of borrowings during the second year.
Subsequent to the end of the quarter, we refinanced our credit facility and entered into additional interest rate hedges. See Note 15.
11
We believe that our estimated cash flows from operations for
2013
, combined with our capacity for additional borrowings under our credit facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months.
The components of net periodic benefit cost were as follows:
|
|
Pension Plan
|
Other Defined Benefit Plans
|
|||||||||||||
|
|
Quarter Ended
|
Quarter Ended
|
|||||||||||||
|
|
March 27, 2013
|
March 28, 2012
|
March 27, 2013
|
March 28, 2012
|
|||||||||||
|
|
(In thousands)
|
||||||||||||||
|
Service cost
|
$
|
100
|
|
$
|
84
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Interest cost
|
754
|
|
789
|
|
28
|
|
29
|
|
|||||||
|
Expected return on plan assets
|
(1,124
|
)
|
(1,012
|
)
|
—
|
|
—
|
|
|||||||
|
Amortization of net loss
|
419
|
|
428
|
|
18
|
|
13
|
|
|||||||
|
Net periodic benefit cost
|
$
|
149
|
|
$
|
289
|
|
$
|
46
|
|
$
|
42
|
|
|||
We made contributions of
$1.4 million
and
$0.3 million
to our qualified pension plan during the quarters ended
March 27, 2013
and
March 28, 2012
, respectively. We made contributions of less than
$0.1 million
to our other defined benefit plans during both quarters ended
March 27, 2013
and
March 28, 2012
. We expect to contribute an additional
$1.4 million
to our qualified pension plan and an additional
$0.1 million
to our other defined benefit plans over the remainder of fiscal
2013
.
During the
quarter ended March 27, 2013
, we amortized
$0.3 million
of actuarial losses, net of tax, out of accumulated other comprehensive loss into net periodic benefit cost, which is reported as a component of general and administrative expenses in the Condensed Consolidated Statement of Comprehensive Income. Additional minimum pension liability of
$24.7 million
and
$25.0 million
is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Equity as of
March 27, 2013
and
December 26, 2012
.
Total share-based compensation cost included as a component of net income was as follows:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Stock options
|
$
|
164
|
|
$
|
328
|
|
|
|
Restricted stock units
|
831
|
|
443
|
|
|||
|
Board deferred stock units
|
180
|
|
19
|
|
|||
|
Total share-based compensation
|
$
|
1,175
|
|
$
|
790
|
|
|
Stock Options
We did not grant any stock options during the
quarter ended March 27, 2013
. As of
March 27, 2013
, we had approximately
$0.4 million
of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of
0.8 years
.
12
Restricted Stock Units
In January 2013, we granted approximately
0.3 million
performance shares and related performance-based target cash awards of
$2.1 million
to certain employees. As these awards contain a market condition, a Monte Carlo valuation was used to determine the performance shares' grant date fair value of
$8.05
per share and the payout probability of the target cash awards. In addition, the awards granted to our named executive officers also contain a performance condition based on certain operating measures for the fiscal year ended December 25, 2013. The performance period is the
three
year fiscal period beginning December 27, 2012 and ending December 30, 2015. The performance shares and cash awards will vest and be earned (from
0%
to
200%
of the target award for each such increment) at the end of the performance period based on the Total Shareholder Return of our stock compared to the Total Shareholder Returns of a group of peer companies.
During the
quarter ended March 27, 2013
, we made payments of
$0.9 million
in cash and issued
0.3 million
shares of common stock related to restricted stock unit awards.
As of
March 27, 2013
, we had approximately
$6.6 million
of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of
1.9 years
.
Board Deferred Stock Units
During the
quarter ended March 27, 2013
, we granted less than
0.1 million
deferred stock units (which are equity classified) with a weighted average grant date fair value of
$5.06
per unit to non-employee members of our Board of Directors. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of the Board of Directors) or upon termination as a member of the Board of Directors. During the
quarter ended March 27, 2013
, less than
0.1 million
deferred stock units were converted into shares of common stock. As of
March 27, 2013
, we had approximately
$0.1 million
of unrecognized compensation cost related to all unvested deferred stock unit awards outstanding, which is expected to be recognized over a weighted average of
0.1 years
.
The provision for income taxes was
$3.6 million
and
$3.9 million
for the quarters ended
March 27, 2013
and
March 28, 2012
, respectively. For the 2013 period, the difference in the overall effective rate from the U.S. Statutory rate was due to a discrete tax item. The passage of the American Tax Payer Relief Act of 2012, enacted in January 2013, resulted in a deferred tax benefit of
$0.5 million
related to work opportunity credits generated in 2012, which were allowed retroactively. The provision for income taxes for the first quarter of 2012 was determined using our effective rate estimated for the entire fiscal year.
13
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands, except for per share amounts)
|
||||||
|
Numerator:
|
|
|
|||||
|
Net income
|
$
|
7,081
|
|
$
|
5,865
|
|
|
|
Denominator:
|
|
|
|||||
|
Weighted average shares - basic
|
92,350
|
|
96,075
|
|
|||
|
Effect of dilutive securities:
|
|
|
|||||
|
Options
|
1,023
|
|
904
|
|
|||
|
Restricted stock units and awards
|
1,088
|
|
899
|
|
|||
|
Weighted average shares - diluted
|
94,461
|
|
97,878
|
|
|||
|
Basic net income per share
|
$
|
0.08
|
|
$
|
0.06
|
|
|
|
Diluted net income per share
|
$
|
0.07
|
|
$
|
0.06
|
|
|
|
Stock options excluded (1)
|
—
|
|
1,730
|
|
|||
|
Restricted stock units and awards excluded (1)
|
331
|
|
715
|
|
|||
|
(1)
|
Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.
|
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Income taxes paid, net
|
$
|
343
|
|
$
|
213
|
|
|
|
Interest paid
|
$
|
2,526
|
|
$
|
4,887
|
|
|
|
Noncash investing and financing activities:
|
|
|
|||||
|
Issuance of common stock, pursuant to share-based compensation plans
|
$
|
1,586
|
|
$
|
296
|
|
|
|
Execution of capital leases
|
$
|
1,313
|
|
$
|
1,010
|
|
|
|
Treasury stock payable
|
$
|
177
|
|
$
|
—
|
|
|
Our Old Credit Facility (as defined below in Note 15) permitted and our New Credit Facility (as defined below in Note 15) permits the payment of cash dividends and the purchase of Denny’s stock subject to certain limitations. In May 2012, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to an additional
6.0 million
shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of
March 27, 2013
, we had repurchased
2.9 million
shares of Common Stock for approximately
$14.1 million
and there were
3.1 million
shares remaining to be repurchased under this share repurchase program.
Subsequent to the end of the quarter, we announced that our Board of Directors approved a new share repurchase program. See Note 15.
14
There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company's consolidated results of operations or financial position. We record legal settlement costs as other operating expenses in our Condensed Consolidated Statements of Comprehensive Income as those costs are incurred.
Refinancing of Credit Facility
On April 24, 2013, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new senior secured credit agreement in an aggregate principal amount of
$250 million
(the “New Credit Facility”). The New Credit Facility is comprised of a
$60 million
senior secured term loan and a
$190 million
senior secured revolver (with a
$30 million
letter of credit sublimit). As of the closing, there were
$105 million
of borrowings outstanding under the new revolver. Borrowings under the New Credit Facility bear a tiered interest rate based on the Company's consolidated leverage ratio and is initially set at LIBOR plus
200
basis points. The New Credit Facility includes an accordion feature that would allow us to increase the size of the facility to
$300 million
. The maturity date for the New Credit Facility is April 24, 2018.
The New Credit Facility is being used to refinance the Old Credit Facility (described in Note 7) and will also be available for working capital, capital expenditures and other general corporate purposes. The New Credit Facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The New Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and maximum capital expenditures.
The term loan under the New Credit Facility requires amortization of the original term loan balance of
5%
per year in the first two years,
7.5%
in the subsequent two years and
10%
in the fifth year with the balance due at maturity. We will be required to make certain mandatory prepayments under certain circumstances and will have the option to make certain prepayments under the New Credit Facility. The New Credit Facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are usual for facilities and transactions of this type. We estimate that the refinancing will result in a one-time charge to other nonoperating expense of approximately
$1.2 million
in the second quarter of 2013, as a result of charges for the unamortized portion of deferred financing costs related to the Old Credit Facility, and a portion of the fees related to the New Credit Facility.
Share Repurchase Authorization
On April 25, 2013, we announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to an additional
10.0 million
shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of April 24, 2013, there were approximately
2.4 million
shares remaining available to be repurchased under our previous share repurchase program (as described above in Note 13).
Interest Rate Hedges
Our existing interest rate hedges remain in effect under the New Credit Facility until April 13, 2014 (see Note 7). In addition, on April 30, 2013, we entered into interest rate hedges that cap the
LIBOR
rate on borrowings under the New Credit Facility. The 200 basis point LIBOR cap applies to
$150 million
of borrowings from April 14, 2014 through March 31, 2015.
Also, on April 30, 2013, we entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 through March 29, 2018. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on a related
$150 million
notional debt obligation from March 31, 2015 through March 31, 2017 and a related
$140 million
notional debt obligation from April 1, 2017 through March 29, 2018. Under the terms of the swaps, we will pay an average fixed rate of 3.12% on the notional amounts and receive payments from a counterparty based on the 30-day LIBOR rate.
15
Forward-Looking Statements
The following discussion is intended to highlight significant changes in our financial position as of
March 27, 2013
and results of operations for the
quarter ended March 27, 2013
compared to the
quarter ended March 28, 2012
. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflect our best judgment based on factors currently known and are intended to speak only as of the date such statements are made, involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors included in the discussion below, or in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors, contained in our Annual Report on Form 10-K for the year ended
December 26, 2012
.
16
Statements of Income
The following table contains information derived from our Condensed Consolidated Statements of Comprehensive Income expressed as a percentage of total operating revenues, except as noted below. Percentages may not add due to rounding.
|
|
Quarter Ended
|
||||||||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||||||||
|
|
(Dollars in thousands)
|
||||||||||||
|
Revenue:
|
|
|
|
|
|||||||||
|
Company restaurant sales
|
$
|
81,030
|
|
70.8
|
%
|
$
|
94,163
|
|
74.3
|
%
|
|||
|
Franchise and license revenue
|
33,460
|
|
29.2
|
%
|
32,575
|
|
25.7
|
%
|
|||||
|
Total operating revenue
|
114,490
|
|
100.0
|
%
|
126,738
|
|
100.0
|
%
|
|||||
|
Costs of company restaurant sales (a):
|
|
|
|
|
|||||||||
|
Product costs
|
21,146
|
|
26.1
|
%
|
23,533
|
|
25.0
|
%
|
|||||
|
Payroll and benefits
|
31,546
|
|
38.9
|
%
|
37,753
|
|
40.1
|
%
|
|||||
|
Occupancy
|
5,228
|
|
6.5
|
%
|
5,774
|
|
6.1
|
%
|
|||||
|
Other operating expenses
|
11,200
|
|
13.8
|
%
|
12,895
|
|
13.7
|
%
|
|||||
|
Total costs of company restaurant sales
|
69,120
|
|
85.3
|
%
|
79,955
|
|
84.9
|
%
|
|||||
|
Costs of franchise and license revenue (a)
|
11,402
|
|
34.1
|
%
|
11,312
|
|
34.7
|
%
|
|||||
|
General and administrative expenses
|
15,159
|
|
13.2
|
%
|
15,663
|
|
12.4
|
%
|
|||||
|
Depreciation and amortization
|
5,224
|
|
4.6
|
%
|
6,060
|
|
4.8
|
%
|
|||||
|
Operating (gains), losses and other charges, net
|
134
|
|
0.1
|
%
|
(165
|
)
|
(0.1
|
)%
|
|||||
|
Total operating costs and expenses
|
101,039
|
|
88.3
|
%
|
112,825
|
|
89.0
|
%
|
|||||
|
Operating income
|
13,451
|
|
11.7
|
%
|
13,913
|
|
11.0
|
%
|
|||||
|
Interest expense, net
|
2,800
|
|
2.4
|
%
|
4,456
|
|
3.5
|
%
|
|||||
|
Other nonoperating expense (income), net
|
1
|
|
0.0
|
%
|
(295
|
)
|
(0.2
|
)%
|
|||||
|
Net income before income taxes
|
10,650
|
|
9.3
|
%
|
9,752
|
|
7.7
|
%
|
|||||
|
Provision for income taxes
|
3,569
|
|
3.1
|
%
|
3,887
|
|
3.1
|
%
|
|||||
|
Net income
|
$
|
7,081
|
|
6.2
|
%
|
$
|
5,865
|
|
4.6
|
%
|
|||
|
Other Data:
|
|
|
|
|
|
|
|
|
|||||
|
Company average unit sales
|
$
|
494
|
|
|
|
$
|
470
|
|
|
|
|||
|
Franchise average unit sales
|
$
|
349
|
|
|
|
$
|
349
|
|
|
|
|||
|
Company equivalent units (b)
|
164
|
|
|
|
200
|
|
|
|
|||||
|
Franchise equivalent units (b)
|
1,526
|
|
|
|
1,481
|
|
|
|
|||||
|
Company same-store sales increase (decrease) (c)(d)
|
(1.5
|
)
|
%
|
|
|
0.8
|
|
%
|
|
|
|||
|
Domestic franchise same-store sales increase (decrease) (c)(e)
|
(0.5
|
)
|
%
|
|
|
2.8
|
|
%
|
|
|
|||
|
(a)
|
Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.
|
|
(b)
|
Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.
|
|
(c)
|
Same-store sales include sales from restaurants that were open the same period in the prior year.
|
|
(d)
|
Prior year amounts have not been restated for
2013
comparable units.
|
|
(e)
|
Prior year amounts have been restated to represent domestic franchise units only.
|
17
Quarter Ended March 27, 2013
Compared with
Quarter Ended March 28, 2012
Unit Activity
|
|
Quarter Ended
|
||||
|
|
March 27, 2013
|
March 28, 2012
|
|||
|
Company restaurants, beginning of period
|
164
|
|
206
|
|
|
|
Units opened
|
—
|
|
—
|
|
|
|
Units sold to franchisees
|
—
|
|
(6
|
)
|
|
|
Units closed
|
—
|
|
(3
|
)
|
|
|
End of period
|
164
|
|
197
|
|
|
|
Franchised and licensed restaurants, beginning of period
|
1,524
|
|
1,479
|
|
|
|
Units opened
|
7
|
|
6
|
|
|
|
Units purchased from Company
|
—
|
|
6
|
|
|
|
Units closed
|
(6
|
)
|
(8
|
)
|
|
|
End of period
|
1,525
|
|
1,483
|
|
|
|
Total restaurants, end of period
|
1,689
|
|
1,680
|
|
|
Company Restaurant Operations
During the
quarter ended March 27, 2013
, we realized a
1.5%
decrease
in same-store sales. Company restaurant sales
decreased
$13.1 million
, or
13.9%
, primarily resulting from a
36
equivalent-unit
decrease
in company restaurants. The
decrease
in equivalent-units resulted primarily from the sale of company restaurants to franchisees during the prior year.
Total costs of company restaurant sales as a percentage of company restaurant sales
increased
to
85.3%
from
84.9%
. Product costs
increased
to
26.1%
from
25.0%
primarily due to the unfavorable impact of product mix as well as increased commodity costs. Payroll and benefits
decreased
to
38.9%
from
40.1%
primarily as a result of a decrease in incentive compensation and lower medical costs. Occupancy costs
increased
to
6.5%
from
6.1%
resulting from the positive development of certain general liability claims in the prior year period. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:
|
|
Quarter Ended
|
||||||||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||||||||
|
|
(Dollars in thousands)
|
||||||||||||
|
Utilities
|
$
|
3,127
|
|
3.9
|
%
|
$
|
3,714
|
|
3.9
|
%
|
|||
|
Repairs and maintenance
|
1,349
|
|
1.7
|
%
|
1,688
|
|
1.8
|
%
|
|||||
|
Marketing
|
3,016
|
|
3.7
|
%
|
3,535
|
|
3.8
|
%
|
|||||
|
Legal
|
276
|
|
0.3
|
%
|
98
|
|
0.1
|
%
|
|||||
|
Other direct costs
|
3,432
|
|
4.2
|
%
|
3,860
|
|
4.1
|
%
|
|||||
|
Other operating expenses
|
$
|
11,200
|
|
13.8
|
%
|
$
|
12,895
|
|
13.7
|
%
|
|||
18
Franchise Operations
Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:
|
|
Quarter Ended
|
||||||||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||||||||
|
|
(Dollars in thousands)
|
||||||||||||
|
Royalties
|
$
|
21,027
|
|
62.9
|
%
|
$
|
20,527
|
|
63.0
|
%
|
|||
|
Initial fees
|
280
|
|
0.8
|
%
|
436
|
|
1.3
|
%
|
|||||
|
Occupancy revenue
|
12,153
|
|
36.3
|
%
|
11,612
|
|
35.7
|
%
|
|||||
|
Franchise and license revenue
|
$
|
33,460
|
|
100.0
|
%
|
$
|
32,575
|
|
100.0
|
%
|
|||
|
Occupancy costs
|
8,853
|
|
26.5
|
%
|
8,723
|
|
26.8
|
%
|
|||||
|
Other direct costs
|
2,549
|
|
7.6
|
%
|
2,589
|
|
7.9
|
%
|
|||||
|
Costs of franchise and license revenue
|
$
|
11,402
|
|
34.1
|
%
|
$
|
11,312
|
|
34.7
|
%
|
|||
Royalties
increase
d by
$0.5 million
, or
2.4%
, primarily resulting from a
45
equivalent unit
increase
in franchised and licensed units, partially offset by a
0.5%
decrease
in domestic same-store sales, as compared to the prior year. The
increase
in equivalent units resulted primarily from the sale of company restaurants to franchisees during the prior year. Initial fees
decrease
d by
$0.2 million
, or
35.8%
, as no restaurants were sold to franchisees during the current year period. The
increase
in occupancy revenue of
$0.5 million
, or
4.7%
, is primarily the result of the sale of restaurants to franchisees during 2012.
Costs of franchise and license revenue
increase
d by
$0.1 million
, or
0.8%
. The
increase
in occupancy costs of
$0.1 million
, or
1.5%
, is primarily the result of the sale of restaurants to franchisees during the prior year, partially offset by lease expirations. Other direct costs remained flat. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue
decrease
d to
34.1%
for the
quarter ended March 27, 2013
from
34.7%
for the
quarter ended March 28, 2012
.
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 are comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Share-based compensation
|
$
|
1,175
|
|
$
|
790
|
|
|
|
Other general and administrative expenses
|
13,984
|
|
14,873
|
|
|||
|
Total general and administrative expenses
|
$
|
15,159
|
|
$
|
15,663
|
|
|
The
$0.5 million
decrease
in general and administrative expenses is the result of $0.9 million in reductions related to
payroll and benefits costs, travel and professional fees
, partially offset by a $0.4 million increase in share-based compensation resulting from the increased payout probability of certain awards.
19
Depreciation and amortization
is comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Depreciation of property and equipment
|
$
|
3,693
|
|
$
|
4,437
|
|
|
|
Amortization of capital lease assets
|
798
|
|
818
|
|
|||
|
Amortization of intangible assets
|
733
|
|
805
|
|
|||
|
Total depreciation and amortization expense
|
$
|
5,224
|
|
$
|
6,060
|
|
|
The overall decrease in depreciation and amortization expense is due primarily to the sale of company restaurants to franchisees during fiscal 2012.
Operating (gains), losses and other charges, net
are comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Losses (gains) on sales of assets and other, net
|
$
|
18
|
|
$
|
(1,955
|
)
|
|
|
Restructuring charges and exit costs
|
116
|
|
1,267
|
|
|||
|
Impairment charges
|
—
|
|
523
|
|
|||
|
Operating (gains), losses and other charges, net
|
$
|
134
|
|
$
|
(165
|
)
|
|
During the
quarter ended March 28, 2012
, we recognized gains of
$2.0 million
, primarily resulting from the sale of restaurant operations to franchisees and the sale of real estate.
Restructuring charges and exit costs were comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Exit costs
|
$
|
56
|
|
$
|
579
|
|
|
|
Severance and other restructuring charges
|
60
|
|
688
|
|
|||
|
Total restructuring and exit costs
|
$
|
116
|
|
$
|
1,267
|
|
|
Impairment charges of
$0.5 million
for the
quarter ended March 28, 2012
resulted primarily from the impairment of an underperforming unit and a unit identified as assets held for sale.
Operating income
was
$13.5 million
for the
quarter ended March 27, 2013
and
$13.9 million
for the
quarter ended March 28, 2012
.
20
Interest expense, net
is comprised of the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Interest on credit facilities
|
$
|
1,269
|
|
$
|
2,628
|
|
|
|
Interest on capital lease liabilities
|
900
|
|
969
|
|
|||
|
Letters of credit and other fees
|
337
|
|
461
|
|
|||
|
Other interest income
|
(21
|
)
|
(308
|
)
|
|||
|
Total cash interest
|
2,485
|
|
3,750
|
|
|||
|
Amortization of deferred financing costs
|
133
|
|
340
|
|
|||
|
Amortization of debt discount
|
—
|
|
121
|
|
|||
|
Interest accretion on other liabilities
|
182
|
|
245
|
|
|||
|
Total interest expense, net
|
$
|
2,800
|
|
$
|
4,456
|
|
|
The decrease in interest expense resulted from a decrease in interest rates related to the 2012 refinancing of our credit facility, as well as debt reductions during 2012.
The
provision for income taxes
was
$3.6 million
for the
quarter ended March 27, 2013
compared to
$3.9 million
the
quarter ended March 28, 2012
. For the 2013 period, the difference in the overall effective rate from the U.S. Statutory rate was due to a discrete tax item. The passage of the American Tax Payer Relief Act of 2012, enacted in January 2013, resulted in a deferred tax benefit of $0.5 million related to work opportunity credits generated in 2012 which were allowed retroactively. The provision for income taxes for the first quarter of 2012 was determined using our effective rate estimated for the entire fiscal year.
Net income
was
$7.1 million
for the
quarter ended March 27, 2013
compared with
$5.9 million
for the
quarter ended March 28, 2012
due to the factors noted above.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility (as described below). Principal uses of cash are operating expenses, capital expenditures, debt repayments and the repurchase of shares of our Common Stock.
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Net cash provided by operating activities
|
$
|
7,355
|
|
$
|
8,486
|
|
|
|
Net cash provided by (used in) investing activities
|
(2,154
|
)
|
2,476
|
|
|||
|
Net cash used in financing activities
|
(8,503
|
)
|
(11,162
|
)
|
|||
|
Decrease in cash and cash equivalents
|
$
|
(3,302
|
)
|
$
|
(200
|
)
|
|
We believe that our estimated cash flows from operations for
2013
, combined with our capacity for additional borrowings under our credit facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months.
21
Net cash flows
used in
investing activities were
$2.2 million
for the
quarter ended March 27, 2013
. These cash flows include capital expenditures of
$3.0 million
and issuances of notes receivable of
$0.4 million
, partially offset by
$1.2 million
in collections of notes receivable. Our principal capital requirements have been largely associated with the following:
|
|
Quarter Ended
|
||||||
|
|
March 27, 2013
|
March 28, 2012
|
|||||
|
|
(In thousands)
|
||||||
|
Facilities
|
$
|
1,199
|
|
$
|
962
|
|
|
|
New construction
|
400
|
|
407
|
|
|||
|
Remodeling
|
1,030
|
|
11
|
|
|||
|
Information technology
|
96
|
|
18
|
|
|||
|
Other
|
281
|
|
438
|
|
|||
|
Capital expenditures
|
$
|
3,006
|
|
$
|
1,836
|
|
|
Capital expenditures for fiscal
2013
are expected to be approximately $19-$21 million, comprised primarily of costs related to remodels and facilities.
Cash flows
used in
financing activities were
$8.5 million
for the
quarter ended March 27, 2013
, which included long-term debt payments of
$5.1 million
and stock repurchases of
$2.3 million
.
Our working capital deficit was
$22.9 million
at
March 27, 2013
compared with
$27.2 million
at
December 26, 2012
. The decrease in working capital deficit is primarily related to the timing of payments impacting prepaid and payable balances. We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually become due after the receipt of cash from the related sales.
Credit Facility
As of
March 27, 2013
, we had outstanding term loan borrowings under the credit facility of
$166.0 million
and outstanding letters of credit under the senior secured revolver of
$25.2 million
. There were
no
revolving loans outstanding at
March 27, 2013
. These balances resulted in availability of
$34.8 million
under the revolving facility. The weighted-average interest rate under the term loan was
2.96%
as of
March 27, 2013
.
A commitment fee of 0.375% was paid on the unused portion of the revolving credit facility. Interest on the credit facility was
payable at per annum rates equal to LIBOR plus 275 basis points. The maturity date for the credit facility was April 12, 2017. The term loan under the credit facility amortized $19.0 million annually, payable in quarterly installments, with all remaining amounts due on the maturity date. We were required to make certain mandatory prepayments under certain circumstances and had the option to make certain prepayments under the credit facility. The optional prepayments were applied against future amortization. The credit facility included events of default (and related remedies, including acceleration and increased interest rates following an event of default) that were usual for facilities and transactions of this type.
The credit facility was guaranteed by the Company and its material subsidiaries and was secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It included negative covenants that are usual for facilities and transactions of this type. The credit facility also included certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charged coverage ratio and maximum capital expenditures.
On April 13, 2012, we entered into interest rate hedges that cap the LIBOR rate on borrowings under the credit facility for a two year period. The 200 basis point LIBOR cap applies to $150 million of borrowings during the first year and $125 million of borrowings during the second year.
22
Refinancing of Credit Facility
On April 24, 2013, Denny's Corporation and certain of its subsidiaries refinanced our credit facility (the "Old Credit Facility") and entered into a new senior secured credit agreement in an aggregate principal amount of $250 million (the “New Credit Facility”). The New Credit Facility is comprised of a $60 million senior secured term loan and a $190 million senior secured revolver (with a $30 million letter of credit sublimit). As of the closing, there were $108 million of borrowings outstanding under the new revolver. Borrowings under the New Credit Facility bear a tiered interest rate based on the Company's consolidated leverage ratio and is initially set at LIBOR plus 200 basis points. The New Credit Facility includes an accordion feature that would allow us to increase the size of the facility to $300 million. The maturity date for the New Credit Facility is April 24, 2018.
The New Credit Facility is being used to refinance the Old Credit Facility and will also be available for working capital, capital expenditures and other general corporate purposes. The New Credit Facility is guaranteed by the Company and its material subsidiaries and is secured by substantially all of the assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The New Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and maximum capital expenditures.
The term loan under the New Credit Facility requires amortization of 5% per year in the first two years, 7.5% in the subsequent two years and 10% in the fifth year with the balance due at maturity. We will be required to make certain mandatory prepayments under certain circumstances and will have the option to make certain prepayments under the New Credit Facility. The New Credit Facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are usual for facilities and transactions of this type. We estimate that the refinancing will result in a one-time charge to other nonoperating expense of approximately $1.2 million in the second quarter of 2013, as a result of charges for the unamortized portion of deferred financing costs related to the Old Credit Facility, and a portion of the fees related to the New Credit Facility.
Interest Rate Hedges
Our existing interest rate hedges remain in effect under the New Credit Facility until April 13, 2014. In addition, on April 30, 2013, we entered into interest rate hedges that cap the LIBOR rate on borrowings under the New Credit Facility. The 200 basis point LIBOR cap applies to $150 million of borrowings from April 14, 2014 through March 31, 2015.
Also, on April 30, 2013, we entered into interest rate swaps to hedge a portion of the cash flows of our floating rate debt from March 31, 2015 through March 29, 2018. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on a related $150 million notional debt obligation from March 31, 2015 through March 31, 2017 and a related $140 million notional debt obligation from April 1, 2017 through March 29, 2018. Under the terms of the swaps, we will pay an average fixed rate of 3.12% on the notional amounts and receive payments from a counterparty based on the 30-day LIBOR rate.
Implementation of New Accounting Standards
See Note 2 to our Condensed Consolidated Financial Statements.
Interest Rate Risk
We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, as of
March 27, 2013
, borrowings under our term loan and revolver bore interest at variable rates based on LIBOR plus a spread of 275 basis points per annum. Through April 13, 2013, up to $150 million of the term loan borrowings had a 200 basis point LIBOR point cap. As of April 13, 2013, up to $125 million of the term loan borrowing has a 200 basis point LIBOR point cap.
23
Based on the levels of borrowings under the Old Credit Facility at
March 27, 2013
, if interest rates changed by 100 basis points, our annual cash flow and income before taxes would change by approximately $1.7 million. This computation is determined by considering the impact of hypothetical interest rates on the Old Credit Facility at
March 27, 2013
, taking into consideration the interest rate cap. Based on the levels of borrowings under the New Credit Facility at April 24, 2013, if interest rates changed by 100 basis points, our annual cash flow and income before taxes would change by approximately $1.7 million. This computation is determined by considering the impact of hypothetical interest rates on the New Credit Facility at April 24, 2013, taking into consideration the interest rate cap. However, the nature and amount of our borrowings may vary as a result of future business requirements, market conditions and other factors.
We also have exposure to interest rate risk related to our pension plan, other defined benefit plans and self-insurance liabilities. A 25 basis point increase or decrease in discount rate would increase or decrease our projected benefit obligation related to our pension plan by approximately $2.6 million and would impact the pension plan's net periodic benefit cost by approximately $0.3 million. The impact of a 25 basis point increase or decrease in discount rate would decrease or increase our projected benefit obligation related to our other defined benefit plans by less than $0.1 million while the plans' net periodic benefit cost would remain flat. A 25 basis point increase or decrease in discount rate related to our self-insurance liabilities would result in a decrease or increase of $0.2 million, respectively.
Commodity Price Risk
We purchase certain food products, such as beef, poultry, pork, eggs and coffee, and utilities such as gas and electricity, which are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control and which are generally unpredictable. Changes in commodity prices affect us and our competitors generally and often simultaneously. In general, we purchase food products and utilities based upon market prices established with vendors. Although many of the items purchased are subject to changes in commodity prices, the majority of our purchasing arrangements are structured to contain features that minimize price volatility by establishing fixed pricing and/or price ceilings and floors. We use these types of purchase arrangements to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting our menu pricing or changing our product delivery strategy. However, competitive circumstances could limit such actions and, in those circumstances, increases in commodity prices could lower our margins. Because of the often short-term nature of commodity pricing aberrations and our ability to change menu pricing or product delivery strategies in response to commodity price increases, we believe that the impact of commodity price risk is not significant.
We have established a policy to identify, control and manage market risks which may arise from changes in interest rates, commodity prices and other relevant rates and prices. We do not use derivative instruments for trading purposes.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our management conducted an evaluation (under the supervision and with the participation of our President and Chief Executive Officer, John C. Miller, and our Executive Vice President, Chief Administrative Officer and Chief Financial Officer, F. Mark Wolfinger) as of the end of the period covered by this Quarterly report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Messrs. Miller and Wolfinger each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Messrs. Miller and Wolfinger, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company's consolidated results of operations or financial position.
Purchases of Equity Securities by the Issuer
The table below provides information concerning repurchases of shares of our Common Stock during the quarter ended
March 27, 2013
.
|
Period
|
Total Number of Shares Purchased
|
Average Price Paid Per Share (1)
|
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)
|
Maximum Number of Shares that May Yet be Purchased Under the Programs (2)
|
||||||||
|
|
(In thousands, except per share amounts)
|
|
||||||||||
|
December 27, 2012 - January 23, 2013
|
75
|
|
$
|
4.85
|
|
75
|
|
3,390
|
|
|||
|
January 24, 2013 - February 20, 2013
|
—
|
|
—
|
|
—
|
|
3,390
|
|
||||
|
February 21, 2013 - March 27, 2013
|
266
|
|
5.70
|
|
266
|
|
3,124
|
|
||||
|
Total
|
341
|
|
$
|
5.52
|
|
341
|
|
|
||||
|
(1)
|
Average price paid per share excludes commissions.
|
|
(2)
|
May 18, 2012 we announced that our Board of Directors had approved the repurchase of up to 6 million shares of Common Stock. Such repurchases may take place from time to time on the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended
March 27, 2013
, we purchased
341,100
shares of Common Stock for an aggregate consideration of approximately
$1.9 million
, pursuant to the share repurchase program.
|
On April 25, 2013, we announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to an additional
10.0 million
shares of our Common Stock. Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934) or in privately negotiated transactions, subject to market and business conditions. As of April 24, 2013, there were approximately 2.4 million shares remaining available to be repurchased under our previous share repurchase program.
25
The following are included as exhibits to this report:
|
Exhibit No.
|
Description
|
|
|
10.1
|
|
Form of the 2013 Long-Term Performance Incentive Program Performance Shares and Target Cash Opportunity Award Certificate
|
|
|
|
|
|
10.2
|
|
Written Description of the Denny's 2013 Long-Term Performance Incentive Program
|
|
10.3
|
|
Amended and Restated Credit Agreement dated as of April 24, 2013 among Denny's, Inc., as the Borrower, Denny's Corporation, as Parent, and Certain Subsidiaries of Parent, as Guarantors, Wells Fargo Bank, National Association, as Administrative Agent and L/C Issuer, Regions Bank and General Electric Capital Corporation, as Co-Syndication Agents, Cadence Bank N.A., Fifth Third Bank and RBS Citizens, N.A., as Co-Documentation Agents, and The Other Lenders Party Hereto, Wells Fargo Securities, LLC, Regions Capital Markets and GE Capital Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners.
|
|
|
|
|
|
10.4
|
|
Amended and Restated Guarantee and Collateral Agreement dated as of April 24, 2013 among Denny's, Inc., Denny's Realty, LLC, Denny's Corporation, DFO, LLC,
the other Subsidiaries of Parent from time to time party hereto, and
Wells Fargo Bank, N.A., as Administrative Agent.
|
|
31.1
|
Certification of John C. Miller, President and Chief Executive Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
31.2
|
Certification of F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
32.1
|
Certification of John C. Miller, President and Chief Executive Officer of Denny’s Corporation and F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
101.INS*
|
XBRL Instance Document
|
|
|
|
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed."
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
DENNY'S CORPORATION
|
|
||
|
|
|
|
|
|
|
Date:
|
May 1, 2013
|
By:
|
/s/ F. Mark Wolfinger
|
|
|
|
|
F. Mark Wolfinger
|
|
|
|
|
|
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
Date:
|
May 1, 2013
|
By:
|
/s/ Jay C. Gilmore
|
|
|
|
|
Jay C. Gilmore
|
|
|
|
|
|
Vice President,
Chief Accounting Officer and
Corporate Controller
|
|
|
27
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 1. Introduction and Basis Of PresentationNote 2. Summary Of Significant Accounting PoliciesNote 3. ReceivablesNote 4. Goodwill and Other Intangible AssetsNote 5. Operating (gains), Losses and Other Charges, NetNote 6. Fair Value Of Financial InstrumentsNote 7. Long-term DebtNote 8. Defined Benefit PlansNote 9. Share-based CompensationNote 10. Income TaxesNote 11. Net Income Per ShareNote 12. Supplemental Cash Flow InformationNote 13. Share RepurchaseNote 14. Commitments and ContingenciesNote 15. Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits