2020 ANNUAL REPORT
“WE LOVE
to FEED
PEOPLE.”
To our shareholders,
This has been a historic and unprecedented year for our
country, industry and the Denny’s brand. While we started
2020 with solid results in our fiscal January and February
periods, things changed quickly in the latter weeks of March as
COVID-19 was declared a pandemic and stay-at-home
directives were implemented along with mandates requiring
dining room closures. Since then, I have witnessed the
steadfast
resolve and unwavering
commitment of our leadership teams
and franchise partners to this brand
and to our founding purpose: We love
to feed people. In fact, Denny’s donated
almost 3 million eggs and over
10,000 lbs. of apples to multiple food
local
banks and donated meals to
hospitals and first responders across
the country.
Despite this dynamically changing environment, we have
remained focused on our four strategic revitalization pillars
which are supported by investments in technology and training
along with close collaboration with our franchise partners:
REVITaLIZaTION PILLaRS
I & II. Deliver a differentiated and relevant brand
around our diner positioning & Operate great
restaurants with consistent, reliable service.
The ongoing revitalization of our brand provided a firm
foundation as we navigated through the COVID-19 pandemic.
Entering the year with more than 80% of our core menu
entrées changed or improved since 2011, and nearly 90% of
our system on the upgraded Heritage image, we were able to
focus our attention around four guest-centric themes:
Reassurance, Value, Comfort and Convenience.
Reassuring our guests of a safe dining experience was of the
utmost importance as we consistently upheld our commitment
to enhanced cleanliness and sanitation procedures at all
customer touchpoints.
Our second area of focus was value. While Denny’s is known
for its everyday value, we understand that value comes in
different forms for our guests, such as our price-driven value
like our well-known $2 $4 $6 $8 Value Menu®, convenience-
based value of free delivery, abundant value like our Super
Slam™ or our new line of bundled value shareable family meal
packs.
Our third area of focus was providing a comfortable dining
experience by ensuring that Denny’s is a place where our
guests feel welcomed and valued. Continued enhancement of
our differentiated and craveable products yielded a new line
of comfort food including bowls and melts. Additionally,
our Heritage remodel program has
consistently received positive guest
feedback, largely due to its welcoming
and relaxed feel. Despite the COVID-19
pandemic, our system completed 22
remodels, including two at company
restaurants.
fourth
Our
focus was
area of
convenience, and our well-established
Denny’s On Demand platform was
essential to providing guests with options as dining rooms
were closed. We also quickly implemented curbside pickup,
contactless delivery, drive-up ordering, outdoor dining and
Apple Pay for our Denny’s On Demand iOS mobile app. These
collective options led to off-premise sales more than doubling
from the beginning of the pandemic.
The success of our brand initiatives is supported by an
environment of strong collaboration with our franchise
partners. The ingenuity and collaboration experienced during
the pandemic brought ideas to market at a rapid pace and was
paramount in navigating through the year. In partnership with
our franchise system, we began testing two new virtual
concepts.
The first concept is called The Burger Den and allows us to
focus on one of our core strengths – great burgers – with new
varieties using ingredients already in our pantry. The second
concept is called The Meltdown and features handcrafted
melts with fresh ingredients. These two virtual concepts,
which will launch in 2021 to over half of our domestic system,
are expected to drive incremental transactions at the dinner
and late-night dayparts. We are thrilled to be working with
such a talented and passionate group of 227 franchisees,
and we will continue to partner with and invite participation
from our franchisees
in virtually all brand strategies
and initiatives.
$554
MIL LIO N
HAS BEEN ALLOCATED TO THE SHARE
REPURCHASE PROGRAM SINCE
LAUNCHING IN 2010.
O V ER
$15MIL LIO N
PROVIDED IN ROYALTY,
ADVERTISING & RENT RELIEF.
positions, adjusted our company restaurant staffing,
temporarily reduced compensation for our Board and
multiple levels of management, furloughed approximately
25% of our restaurant support team members and
ultimately separated half of those.
We set forth to further fortify one of the strongest
balance sheets in the industry by raising approximately
$70 million in proceeds from a public offering of common
stock. We also secured amendments to our credit facility
which provided waivers for certain covenants
and favorable terms as we navigate the
economic recovery.
Over the last nine years, we have generated
over $418 million in Adjusted Free Cash Flow*
after capital expenditures, cash interest and
share
cash
repurchase program in late 2010, we have
allocated approximately $554 million to share
repurchases, reducing our total share count by
launching our
taxes. Since
approximately 44%.
The strength of our brand is derived from the diversity of
our guests, employees, franchisees, suppliers and other
partners. Denny’s is committed to embracing the unique
qualities of each person and valuing differences in
thought, culture and experiences. Our internal and
external culture promotes our openness to all people,
ideas and perspectives, and highlights our commitment
to diversity while aligning with our corporate
strategy and core values. This commitment
involves taking action to advance diversity and
foster inclusion such that all members of the
Denny’s family can bring their best selves to
work and unleash their full potential.
In closing, this historic year has provided many
challenges to our brand; however, it is during
those times that I have witnessed the most
innovation, dedication and drive toward success under
any circumstances. With a reinvigorated passion for
feeding people, our brand
is better positioned to
successfully navigate the anticipated economic recovery.
While we are just entering the middle stages of our
revitalization, we remain focused on continuing the
transformation of the Denny’s brand and to grow around
the world. I want to personally thank our guests,
franchisees, shareholders, suppliers and team members
for their continued support as we build upon the
current momentum taking place at Denny’s.
John C. Miller
Chief Executive Officer
March 2021
III. Expand Denny’s geographic reach throughout
the U.S. and international markets.
Our growth initiatives have led to approximately 400
new restaurant openings since 2011, with 95% opened by
franchisees. Even in the midst of a global pandemic, our
well-established and ongoing revitalization strategies
gave our franchisees confidence to open 20 new
restaurants, including eight international openings. We
have opened 82
locations since 2011,
leading to a current international footprint of
146 restaurants in 11 countries and two U.S.
territories.
international
In 2018, we announced enhanced develop-
ment agreements with franchisees in both
Canada and the Philippines. Our refranchising
strategy from 2018 to 2019 has yielded
commitments to develop 78 new domestic
restaurants, successfully achieving one of our
primary objectives – to stimulate domestic
restaurant growth. These domestic commitments,
along with our enhanced international development
agreements, have expanded our global development
pipeline by nearly 130 restaurants.
suffer
industry will
Although we have provided franchisees with additional
time to complete these commitments due to the
pandemic, we fully expect to have those restaurants
open in due course as economic conditions improve. In
addition to these commitments, we believe
an
our overbuilt
unfortunate and meaningful rationalization of
seats through the pandemic – largely at the
expense of small, independent full-service
operators. While we do not celebrate this
prediction, we believe this will provide
additional market share opportunities for our
brand. With a proven record of converting
existing spaces into Denny’s locations, these
less capital-intensive opportunities provide
enhanced ROIs for franchisees to grow the brand.
IV. Drive profitable growth with a disciplined focus
on costs and capital allocation, for the benefit
of our franchisees, employees and shareholders.
During these unprecedented times, we continually
assessed how to best support our franchisees, employees
and shareholders. To support our franchise system, we
provided over $15 million of royalty, advertising and rent
relief, nearly half of which was forgiven through
scheduled
abatements. Additionally, we deferred
remodels,
development
new
commitments and secured relief from key vendors and
primary third-party lenders. Finally, we encouraged our
franchisees to secure critical stimulus support through
the Paycheck Protection Program, and 99% of all
domestic franchise restaurants were successful.
extended
store
From a cost-savings perspective, we suspended non-
essential travel and field meetings, placed holds on open
*Please refer to the historical reconciliation of Net Income (Loss) and Net Cash Provided by (Used in)
Operating Activities to Non-GAAP Financial Measures set forth on the last page of this report.
GROC E R I E S
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3487402
(I.R.S. Employer Identification No.)
203 East Main Street
Spartanburg, South Carolina
(Address of principal executive offices)
29319-9966
(Zip Code)
Registrant’s telephone number, including area code (864) 597-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
$.01 Par Value, Common Stock
Trading Symbol(s)
DENN
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☑ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. Yes ☑ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $434,684,492 as of June 24,
2020, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of the registrant’s common stock
on that date of $10.42 per share and, for purposes of this computation only, the assumption that all of the registrant’s directors, executive officers and beneficial
owners of 10% or more of the registrant’s common stock are affiliates.
As of February 25, 2021, 64,144,845 shares of the registrant’s common stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Index to Consolidated Financial Statements
Signatures
Page
1
11
18
18
20
20
21
22
24
37
38
38
38
40
40
40
40
41
41
41
44
F-1
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the “Business,” “Risk Factors,” “Legal Proceedings,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures
About Market Risk” sections and elsewhere herein, which reflect our best judgment based on factors currently known, involve
risks and uncertainties. Words such as “expect,” “anticipate,” “believe,” “intend,” “plan,” “hope,” and variations of such words
and similar expressions are intended to identify such forward-looking statements. Such statements speak only as to the date
thereof. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to
reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. Actual
results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors
including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements
contained in “Risk Factors.” The forward-looking information we have provided in this Form 10-K pursuant to the safe harbor
established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
PART I
Item 1. Business
Description of Business
Denny’s Corporation (Denny’s), a Delaware corporation, is one of America’s largest franchised full-service restaurant chains
based on the number of restaurants. Denny’s, through its wholly-owned subsidiary, Denny’s, Inc., owns and operates the
Denny’s brand. At December 30, 2020, the Denny’s brand consisted of 1,650 franchised, licensed and company restaurants
around the world, including 1,504 restaurants in the United States and 146 international restaurant locations. As of
December 30, 2020, 1,585 of our restaurants were franchised or licensed, representing 96% of the total restaurants, and 65 were
company restaurants.
Denny’s is known as America’s Diner, or in the case of our international locations, “the local diner.” Open 24/7 in most
locations, we provide our guests quality food that emphasizes everyday value and new products through our compelling limited
time only offerings, delivered in a warm, friendly “come as you are” atmosphere. Denny’s has been serving guests for over 65
years and is best known for its breakfast fare, which is available around the clock. The Build Your Own Grand Slam, one of our
most popular menu items, traces its origin back to the Original Grand Slam which was first introduced in 1977. In addition to
our breakfast-all-day items, Denny’s offers a wide selection of lunch and dinner items including burgers, sandwiches, salads
and skillet entrées, along with an assortment of beverages, appetizers and desserts. We have four dayparts, breakfast, lunch,
dinner and late night, accounting for 28%, 37%, 23% and 12%, respectively, of average daily sales. Weekends have
traditionally been the most popular time for guests to visit our restaurants. In 2020, 37% of an average week of sales occurred
from Friday late night through Sunday lunch.
References to “Denny’s,” the “Company,” “we,” “us,” and “our” in this Form 10-K are references to Denny’s Corporation and
its subsidiaries. Financial information about our operations, including our revenues and net income (loss) for the fiscal years
ended December 30, 2020, December 25, 2019, and December 26, 2018, and our total assets as of December 30, 2020 and
December 25, 2019, is included in our Consolidated Financial Statements.
COVID-19 Pandemic
In 2020 and continuing into 2021, the global crisis resulting from the spread of coronavirus (“COVID-19”), along with
government and consumer responses to the pandemic, had, and continue to have, a substantial impact on our restaurant
operations. During 2020, many of our company and franchised and licensed restaurants were temporarily closed and most of the
restaurants that remained open had limited operations. This has continued into 2021. Our operating results substantially depend
upon the sales volumes, restaurant profitability, and financial stability of our company and franchised and licensed restaurants.
We cannot currently estimate the duration or future negative financial impact of the COVID-19 pandemic on our business;
however, we expect that the COVID-19 pandemic will continue to impact our results of operations for at least the balance of
2021. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for
additional information relating to the impact of the COVID-19 pandemic on our business and financial results.
Franchising and Development
Franchising
Our criteria to become a Denny’s franchisee include minimum liquidity and net worth requirements and appropriate operational
experience. We believe that Denny’s is an attractive financial proposition for current and potential franchisees and that our fee
structure is competitive with other full-service brands. Our current traditional twenty-year Denny’s franchise agreements have
an initial fee of up to $30,000 and a royalty payment of up to 4.5% of gross sales. Additionally, our franchisees are required to
contribute up to 3.25% of gross sales for marketing and may make additional advertising contributions as part of a local
marketing co-operative. Approximately 75% of our franchised restaurants were operating under this traditional agreement as of
December 30, 2020. Franchise agreements for nontraditional locations, such as university campuses, may contain higher royalty
and lower advertising contribution rates than the traditional franchise agreements. Our domestic contractual royalty rate
averaged approximately 4.30% during 2020 before considering any relief provided during the COVID-19 pandemic.
1
We work closely with our franchisees to plan and execute many aspects of the business. The Denny’s Franchisee Association
(“DFA”) was created to promote communication among our franchisees and between the Company and our franchise
community. Members of the DFA’s board and Company management primarily work together through Brand Advisory
Councils relating to Development, Marketing, Operations and Technology matters, as well as through a Supply Chain
Oversight Committee for procurement and distribution matters.
Site Selection
The success of any restaurant is significantly influenced by its location. Our development team works closely with franchisees
and real estate brokers to identify sites that meet specific standards. Sites are evaluated on the basis of a variety of factors,
including but not limited to:
•
•
•
•
•
•
•
demographics;
traffic patterns;
visibility;
building constraints;
competition;
environmental restrictions; and
proximity to high-traffic consumer activities.
Domestic Development
To accelerate the growth of the brand in specific under-penetrated markets, we offer certain incentive programs. These
programs provide incentives for franchisees to develop locations in areas where Denny’s has opportunities to grow market
share. The benefits to franchisees can include reduced franchise fees, lower royalties and advertising contributions for a limited
time period and credits toward certain development services, such as training fees.
In addition to these incentive programs, we increased our domestic development commitments by over 75 restaurants through
our refranchising and development strategy implemented during 2018 and 2019. These commitments were attached to the sale
of 113 company restaurants during 2018 and 2019.
International Development
In addition to the development agreements signed for domestic restaurants, as of December 30, 2020, we had the potential to
develop approximately 109 international franchised restaurants with our current development partners in various locations
including Canada, Central America, Indonesia, Mexico, the Philippines, the United Arab Emirates and the United Kingdom.
The majority of these restaurants are expected to open over the next ten years. During 2020, we opened eight international
franchised locations, including four in Canada, two in Mexico, and one each in Indonesia and Central America.
While we anticipate the majority of the restaurants related to various domestic and international development agreements will
be opened generally as scheduled, from time to time some of our franchisees’ ability to grow and meet their development
commitments may be hampered by the economy, the lending environment or other circumstances. As a result of the COVID-19
pandemic, we have deferred most of our domestic and international development commitments for one year from their original
due date.
Franchise Focused Business Model
Through our development and refranchising efforts during 2018 and 2019, we have achieved a restaurant portfolio mix of 96%
franchised and 4% company restaurants. We expect the majority of our future restaurant openings and growth of the brand to
come primarily from the development of franchised restaurants. The following table summarizes the changes in the number of
company restaurants and franchised and licensed restaurants during the past five years (excluding relocations):
2
Company restaurants, beginning of period
Units opened
Units acquired from franchisees
Units sold to franchisees
Units closed
End of period
2020
2019
2018
2017
2016
68
—
—
—
(3)
65
173
—
—
(105)
—
68
178
169
164
1
6
(8)
(4)
3
10
(4)
—
1
10
(6)
—
173
178
169
Franchised and licensed restaurants, beginning of period
1,635
1,536
1,557
1,564
1,546
Units opened
Units purchased from Company
Units acquired by Company
Units closed
End of period
Total restaurants, end of period
20
—
—
(70)
1,585
1,650
30
105
—
(36)
1,635
1,703
29
8
(6)
(52)
36
4
(10)
(37)
49
6
(10)
(27)
1,536
1,709
1,557
1,735
1,564
1,733
The table below sets forth information regarding the distribution of single-store and multi-store franchisees as of December 30,
2020:
Number of Restaurants Owned
Franchisees
Percentage of
Franchisees
Restaurants
Percentage of
Restaurants
One
Two to five
Six to ten
Eleven to fifteen
Sixteen to thirty
Thirty-one and over
Total
79
81
31
14
10
12
34.8 %
35.7 %
13.6 %
6.2 %
4.4 %
5.3 %
79
232
245
169
211
649
5.0 %
14.6 %
15.5 %
10.7 %
13.3 %
40.9 %
227
100.0 %
1,585
100.0 %
During the COVID-19 pandemic, we have increased communications with our DFA board and our franchisees to better
understand and respond to the needs of our franchisees. In response to the COVID-19 pandemic, direct financial relief to
Denny’s franchise partners has included:
•
•
•
•
•
•
deferral of remodels until 2022, and deferral of most of our domestic development commitments for one year from
their original due date, both of which will be reviewed to determine if an additional extension is appropriate;
deferral of royalty and advertising fees for week 11 of the 2020 fiscal year;
abatement of royalty and advertising fees for weeks 12 and 13 of the 2020 fiscal year;
additional royalty abatements in the second fiscal quarter of 2020;
royalty incentive for those restaurants open during the late night daypart in the fourth quarter; and
a 12-week lease deferral for franchisees operating in properties owned by the Company.
Fiscal weeks 11, 12 and 13 were all within the Company’s first quarter ended March 25, 2020. Additionally, the Company
secured rent relief in the form of deferrals for over 78% of the leases in which the Company is a lessee, including those
instances in which the Company subleases to franchisees and has passed the same relief on to the franchisees.
Furthermore, the Company has worked closely with key vendors and primary third-party franchise lenders to help secure
additional relief on behalf of franchisees. Substantially all of Denny’s franchisees pursued available forms of relief under
federal stimulus programs, and franchisees representing approximately 99% of total domestic franchised restaurants received
funding under the initial Paycheck Protection Program.
3
Restaurant Operations
Management & Operations
We believe that the consistent and reliable execution of basic restaurant operations in each Denny’s restaurant, whether it is
company or franchised, is critical to our success. To meet and exceed our guests’ expectations, we require both our company
and franchised restaurants to maintain the same strict brand standards. These standards relate to the preparation and efficient
serving of quality food and the maintenance, repair and cleanliness of each restaurant.
We devote significant effort to ensuring all restaurants offer quality food served by friendly, knowledgeable and attentive
employees in a clean and well-maintained environment. The staff for a typical restaurant consists of one General Manager, two
or three Restaurant Managers and approximately 45 hourly employees. The Chief Operating Officer, along with the three Sr.
Directors of Franchise Operations, the VP of Training, the VP of Operations Services and the Sr. Director of Company
Operations, establish the strategic direction and key initiatives for the Operations Teams. We seek to ensure that our company
restaurants meet our high standards through a network of Company District Managers and restaurant level managers, overseen
by our Senior Director of Company Operations. A network of Regional Directors of Franchise Operations and Franchise
Business Coaches provide oversight of our franchised restaurants to ensure compliance with brand standards, promote
operational excellence and provide general support to our franchisees. The duties of the Directors of Operations, District
Managers and Franchise Business Coaches include regular restaurant visits and inspections, as well as frequent interactions
with our franchisees, employees and guests, which ensure the ongoing adherence to our standards of quality, service,
cleanliness, value and hospitality.
A principal feature of our restaurant operations is the consistent focus on improving operations at the restaurant level. Our Pride
Review Program, executed by the Franchise Business Coaches and District Managers, is designed to continuously improve the
execution of our brand standards and shift management at each company and franchised restaurant. In addition, Denny’s
maintains training programs for hourly employees and restaurant management. Hourly employee training programs (including
online learning) are position-specific and focus on skills and tasks necessary to successfully fulfill the responsibilities assigned
to them, while continually enhancing guest satisfaction. Denny’s Manager In Training (“MIT”) program provides managers
with the knowledge and leadership skills needed to successfully operate a Denny’s restaurant. The MIT program is required for
all new managers of company restaurants and is also available to Denny’s franchisees to train their managers.
In response to various government orders restricting dine-in restaurant food service related to the COVID-19 pandemic, the
Company implemented a number of initiatives to support Denny’s restaurants including: free delivery when guests place orders
through the Company’s website or mobile app, a contactless delivery option, streamlined menus to facilitate greater operational
efficiency, a platform of shareable family meal packs, a curb-side ordering and pick up option, selling grocery items where
permitted, highlighting value products, and evolving our dining service to include outdoor seating options.
Brand Protection, Quality & Regulatory Compliance
Denny’s will only serve our guests food that is safe, wholesome and meets our quality standards. Our systems are based on
Hazard Analysis and Critical Control Points (“HACCP”), whereby we prevent, eliminate or reduce hazards to a safe level to
protect the health of our employees and guests. To ensure this basic expectation of our guests, Denny’s also has systems in
place to ensure only approved vendors and distributors which can meet and follow our product specifications and food handling
procedures are used. Vendors, distributors and restaurant employees follow regulatory requirements (federal, state and local),
industry “best practices” and Denny’s Brand Standards.
The Current Good Manufacturing Practice, Hazard Analysis, and Critical Control Point Plan, and Food Safety Modernization
Act (“FSMA”) are intended to ensure safe manufacturing/processing, packing and holding of food products for human
consumption in the United States. The regulation requires that certain activities must be completed by trained individuals. One
of these trained individuals, as identified by FSMA, is a “preventive controls qualified individual” who has “successfully
completed training in the development and application of risk-based preventive controls.” Our Chief Food Safety Officer and
select members of our Food Safety and Quality Assurance teams have all been certified.
We use multiple approaches to ensure food safety and quality generally including quarterly third-party unannounced restaurant
inspections (utilizing Denny’s Brand Protection Reviews), health department reviews, guest complaints and employee/manager
training in their respective roles. It is a brand standard that all regulatory reviews/inspections be submitted to the Brand
Protection, Quality & Regulatory Compliance department within 24 hours. We follow-up on all inspections received and assist
operations personnel, facilities personnel and franchisees, where applicable, to bring resolution to regulatory issues or concerns.
If operational brand standard expectations are not met, a remediation process is immediately initiated. Our Food Safety/HACCP
4
program uses nationally recognized food safety training courses and American National Standards Institute accredited
certification programs.
All Denny’s restaurants are required to have a person certified in food protection on duty for all hours of operation. Our Food
Safety/HACCP program has been recognized nationally by regulatory departments, the restaurant industry and our peers. We
continuously work toward improving our processes and procedures. We are advocates for the advancement of food safety
within the industry’s organizations, such as the National Council of Chain Restaurants (“NCCR”) (Board Member), NCCR
Food Safety Task Force, the National Restaurant Association (“NRA”) (member of the Steering Committee for the October
2018 - October 2020 term), NRA’s Quality Assurance Executive Study Group, and the National Retail Federation (NRF).
In addition, our commitment to safety and high operating standards remains unwavering. We have implemented a
comprehensive recovery plan focused on the safety and wellbeing of our guests, restaurant teams, franchisees, employees,
vendors, and suppliers. Retraining materials and communications have been distributed to the entire system of restaurants,
reinforcing strict food safety procedures, safety procedures, handwashing, personal hygiene standards, and enhanced daily deep
cleaning protocols. Restaurant teams are subject to daily health screening and temperature checks, are required to wear face
coverings, socially distance as much as possible, keep high touch surfaces disinfected regularly, and must wash their hands and
apply alcohol-based sanitizer at regular intervals throughout their shift. Employees and Managers are encouraged to stay home
if they are not feeling well. We have a written response plan for employees with symptoms of, exposure to, or diagnosis of
COVID-19. The Company has remained in close contact with public health officials and government agencies to ensure all
public health standards are followed and concerns are appropriately addressed. The current restrictions and the Company's
related enhanced safety protocols are expected largely to continue and may have an adverse impact on our operating costs.
Human Capital
At December 30, 2020, we had approximately 3,100 employees, of whom approximately 2,800 were restaurant employees,
approximately 100 were field support employees and approximately 200 were corporate personnel. None of our employees are
subject to collective bargaining agreements. Many of our restaurant employees work part-time, and all are paid at or above
minimum wage levels. As is characteristic of the restaurant industry, we experience a high level of turnover among our
restaurant employees. We have experienced no significant work stoppages, and we consider relations with our employees to be
satisfactory.
Denny's franchisees and team members are at the heart and soul of what we do. We invest in each of our team member’s growth
and future, giving them opportunities to reach their full potential.
Breakthrough Leadership
At Denny's, we invest in pathways to opportunity through employment, education and training. Our Breakthrough Leadership
Training and Development program provides Denny's team members with exclusive access to numerous creative and
interactive employee engagement curricula, leadership workshops, simulations, games and mobile learning and educational
training videos. This unique program helps develop a wide range of skills, including leadership and people management,
financial acumen, guest service, inventory management, food preparation and food safety—skills that help workers successfully
operate in the restaurant industry.
Diversity, Equity & Inclusion
We have a culture that embraces openness for all people, ideas and perspectives. Denny's commitment to advancing diversity,
equity and inclusion starts at the highest levels with our Board of Directors and franchisees and is carried through our team of
cooks, servers, hosts, managers and suppliers. At Denny's, our commitment to diversity, equity and inclusion does not end here:
we are invested in diverse causes that our communities care about - from education initiatives through our Denny’s Hungry for
EducationTM Scholarship program, helping fight childhood hunger and supporting diverse and disadvantaged businesses.
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We strive for our Denny's team to be as diverse and inclusive as the guests we serve every day.
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Approximately 75% of our team members at company restaurants are people of color
Over 50% of our domestic franchised restaurants are minority owned
Approximately 5% of our franchised restaurants are owned by LGBTQ community members
44% of our Board of Directors are people of color
33% of our Board of Directors are women.
Recently launched, our Diversity, Equity and Inclusion (“DEI”) Council will collaborate on initiatives designed to renew our
workplace and create business results that will increase and strengthen our brand reputation, guest satisfaction and market share.
The council consists of 10 cross-functional members representing various positions throughout the Denny's organization, who
serve as ambassadors, bridge builders, data collectors, educators, accountability partners and champions of DEI within the
Denny's brand.
Denny's also invests in diversity, equity and inclusion training for our team members and has hosted unconscious bias
workshops throughout the year.
Business Resource Leadership Groups
We have established six business resource leadership groups for Denny's employees to provide encouragement and an enhanced
sense of belonging through informal mentoring, participation in professional and community events and access to personal and
professional development and growth opportunities. Additionally, they help foster a more inclusive work environment, improve
communication and trust among employees and enhance understanding of all employees about the value of diversity.
Product Development and Marketing
The Denny’s name has been associated with high-quality, reasonably priced food, appetizers and beverages that has appealed to
all types of guests for more than 65 years. As a leading hospitality brand and “America’s Diner,” we’ve developed a craveable,
indulgent menu that forges brand loyalty, attracts new guests to Denny’s and establishes the framework for our primary
marketing strategies.
Menu Offerings
As “America’s Diner,” Denny’s has created a menu that offers a large selection of craveable, indulgent products served in a
friendly and welcoming atmosphere for all guests. We offer a wide variety of entrées for breakfast, lunch, dinner and late-night
dining as well as appetizers, desserts and beverages. Most Denny’s restaurants also offer special menu items for children and
seniors at reduced prices. We consistently optimize our product offering to further align with consumer needs, which includes
enhancing our core “breakfast all day” platform while providing everyday affordability, primarily through our $2 $4 $6 $8
Value Menu®, abundant value menu and platforms such as Super Slam, and delivering compelling core menu and limited-time-
only products. Our menu items are conveniently enjoyed by guests either in our restaurants, via pick-up, or delivery through our
Denny’s on Demand platform and third-party delivery providers.
Denny’s on Demand is our internal digital ordering platform that enables our guests to order whatever they want, whenever
they want and wherever they want, 24 hours a day and seven days a week. Guests simply have to log onto the new Denny’s
mobile app or online for takeout or delivery to wherever they want to enjoy their favorite Denny’s items.
Product Development
Denny’s is a consumer-driven brand focusing on hospitality, menu choices and the overall guest experience. Our Product
Development team creates menu items that delight our guests during each visit. This team works to understand the most up-to-
date trends through consumer insights from primary and secondary qualitative and quantitative studies and ideas from our
franchisees, vendors and operators. These insights come together to form the strategic foundation for menu architecture,
pricing, promotion and advertising.
Our guests are the center of all menu innovations at Denny’s. Before introducing a new menu item to market, we rigorously test
it against consumer expectations, standards of culinary discipline, food science and technology, nutritional analysis, financial
benefit and operational execution. This testing process ensures that new menu items are not only appealing, competitive,
profitable and marketable, but can be prepared and delivered with excellence in our restaurants.
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We continually evolve our menu through new additions, deletions or improvements to meet the needs of ever-changing
consumer and marketplace.
Product Sources and Availability
Our Purchasing department administers programs for the procurement of food and non-food products. Our franchisees also
purchase food and non-food products directly from our vendors under these programs. Our centralized purchasing program is
designed to ensure uniform product quality as well as to minimize food, beverage and supply costs. The size of our brand
provides significant purchasing power, which often enables us to obtain products at favorable prices from nationally recognized
suppliers.
While our Purchasing department negotiates contracts for nearly all products used in our restaurants, the majority of such
products are purchased and distributed through McLane Company, Inc. (“McLane”) under a long-term distribution contract.
McLane distributes restaurant products and supplies to the Denny’s system from approximately 200 vendors, representing
approximately 90% of our restaurant product and supply purchases. We believe that satisfactory alternative sources of supplies
are generally available for all of the items regularly used by our restaurants. We have not experienced any material shortages of
food, equipment, or other products which are necessary to our restaurant operations.
From the start of the COVID-19 pandemic, the Company has worked closely with its suppliers to address contingency plans
and has not experienced any significant supply chain disruptions.
Marketing and Advertising
We deploy national, local and co-operative marketing strategies to promote and amplify Denny’s brand strengths as “America’s
Diner.” Through integrated marketing strategies, we promote our various breakfast, lunch, dinner, and late-night menu offerings
and premium limited-time-only offerings as well as the convenience of online ordering and payment for pick up or delivery.
Through our Marketing team, Denny’s anticipates consumer and market trends and fully leverages consumer insights to
determine strategies for brand communication and demand generation. We participate in comprehensive, integrated marketing
activities, including print, broadcast, radio, digital and social advertising; multicultural marketing; public relations and brand
reputation; customer relationship management, field marketing; and national and local promotions.
Information Technology
The mission of our Information Technology department is to align our technology strategy in support of our business
strategies. We focus on leveraging technology to drive efficiencies, simplify and standardize operations, and streamline the
guest experience. We also deliver solutions that support financial and regulatory needs in addition to necessary business
improvements.
We rely on information technology systems in all aspects of our operations. At the restaurant level, systems include point-of-
sale platforms along with systems and tools for kitchen operations, labor scheduling, inventory management, cash
management and credit card transaction processing. Our technology platform includes industry-standard market solutions as
well as proprietary software and integration, yielding tools and information managers need to run efficient and effective
restaurants. We invest in new technologies and R&D efforts to improve operations and enhance the guest experience through
innovative solutions like online ordering and payment for pick-up and delivery.
At the corporate level, we have a robust Enterprise Resource Planning (ERP) platform that supports finance, accounting, human
resources and payroll functions. Our ERP is a cloud-based market solution, enabling us to take advantage of continual software
improvements aligned with industry best practices. We also have and are continuing to develop systems that consolidate and
report on data from our franchised and company restaurants, including transaction-level detail. These systems are collectively
supported by an enterprise network that facilitates seamless connectivity for applications and data throughout our business
infrastructure.
Our information technology systems have been designed to protect against unauthorized access and data loss. We are
continuously focused on enhancing our cybersecurity capabilities. We are required to maintain the highest level of Payment
Card Industry (PCI) Data Security Standard (DSS) compliance. We are also required to protect critical and sensitive data for
our employees, customers, and the Company. These standards are set by a consortium of major credit card companies and
require certain levels of system security and procedures to protect our customers’ credit card and other personal
information. We have deployed payment technologies that are EMV (Europay, Mastercard, Visa) certified, and we employ
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point-to-point encryption to ensure no credit card data is stored within our restaurants. Further, we monitor franchisees’
compliance with PCI standards.
In 2020, as a direct response to the COVID-19 pandemic and the resulting impact on our business and industry, we augmented
our technology infrastructure, primarily within digital and in-restaurant systems. These enhancements were introduced through
our standard change control mechanisms and followed prescribed standards for testing and introduction into our environment.
There were no material changes introduced into the core of our technology operating systems, and all PCI—DSS compliance
standards were followed.
In addition to technology changes in direct response to the COVID-19 pandemic, we benefited from our prior focus and
investments in various technology platforms over the past few years. These investments include our ERP platform and
enterprise communication and collaboration tools, which prepared us to make a quick transition from a centralized to a remote
workforce with no negative impact to business processing and continuity.
See “Risk Factors” for further information regarding Information Technology.
Seasonality
Restaurant sales are generally higher in the second and third calendar quarters (April through September) than in the fourth and
first calendar quarters (October through March). Additionally, severe weather, storms and similar conditions may impact sales
volumes seasonally in some operating regions.
Trademarks and Service Marks
Through our wholly-owned subsidiaries, we have certain trademarks and service marks registered with the United States Patent
and Trademark Office and in international jurisdictions, including “Denny’s®,” “Grand Slam®,” and “$2 $4 $6 $8 Value
Menu®.” We consider our trademarks and service marks important to the identification of our company and franchised
restaurants and believe they are of material importance to the conduct of our business. In addition, we have registered various
domain names on the internet that incorporate certain of our trademarks and service marks. We believe these domain name
registrations are an integral part of our identity. From time to time, we may resort to legal measures to defend and protect the
use of our intellectual property. Generally, with appropriate renewal and use, the registration of our service marks and
trademarks will continue indefinitely.
Competition
The restaurant industry is highly competitive. Restaurants compete on the basis of name recognition and advertising; the price,
quality, variety and perceived value of their food offerings; the quality and speed of their guest service; the location and
attractiveness of their facilities; and the convenience of to-go ordering and delivery options.
Denny’s direct competition in the full-service category includes a collection of national and regional chains, as well as
thousands of independent operators. We also compete with quick service restaurants as they attempt to upgrade their menus
with premium sandwiches, entrée salads, new breakfast offerings and extended hours.
We believe that Denny’s has a number of competitive strengths, including strong brand recognition, well-located restaurants
and market penetration. We benefit from economies of scale in a variety of areas, including advertising, purchasing and
distribution. Additionally, we believe that Denny’s has competitive strengths in the value, variety and quality of our food
products, and in the quality and training of our employees. See “Risk Factors” for additional factors relating to our competition
in the restaurant industry.
Economic, Market and Other Conditions
The restaurant industry is affected by many factors, including changes in national, regional and local economic conditions
affecting consumer spending; the political environment (including acts of war and terrorism); changes in customer travel
patterns including changes in the price of gasoline; changes in socio-demographic characteristics of areas where restaurants are
located; changes in consumer tastes and preferences; food safety and health concerns; outbreaks of flu or other viruses (such as
the coronavirus) or other diseases; increases in the number of restaurants; and unfavorable trends affecting restaurant
operations, such as rising wage rates, health care costs, utility expenses and unfavorable weather. See “Risk Factors” for
additional information.
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Government Regulations
We and our franchisees are subject to local, state, federal and international laws and regulations governing various aspects of
the restaurant business, such as compliance with various minimum wage, overtime, health care, sanitation, food safety,
citizenship, and fair labor standards, as well as laws and regulations relating to sanitation, safety, fire, zoning, building,
consumer protection and taxation. We are subject to a variety of federal, state, and international laws governing franchise sales
and the franchise relationship, as well as judicial and administrative interpretations of such laws.
Following the World Health Organization’s declaration of the COVID-19 pandemic on March 11, 2020, federal, state and local
governments responded by implementing restrictions on travel, “stay at home” directives, “social distancing” guidance,
limitations of dine-in food service, and mandated dining room closures which collectively had a significant adverse impact on
the Company’s business performance, results of operations and cash flows for the year ended December 30, 2020. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed discussion.
The operation of our franchisee system is also subject to regulations enacted by a number of states and rules promulgated by the
Federal Trade Commission. Such regulations impose registration and disclosure requirements on franchisors in the offer and
sale of franchises and may also apply substantive standards to the relationship between franchisor and franchisee, including
limitations on the ability of franchisors to terminate franchises and alter franchise arrangements. Due to our international
franchising, we are subject to governmental regulations throughout the world impacting the way we do business with our
international franchisees. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and
other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act.
We are subject to certain guidelines under the Americans with Disabilities Act of 1990 and various state codes and regulations,
which require restaurants and our brand to provide full and equal access to persons with physical disabilities.
Our collection or use of personal information about our employees or our guests is regulated at the federal and state levels,
including the California Consumer Privacy Act.
We are also subject to regulations governing the sale of alcoholic beverages, which require licensure by each site (in most
cases, on an annual basis). Such licenses generally may be revoked or suspended for cause at any time. These regulations relate
to many aspects of restaurant operation, including the minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages.
We are subject to anti-corruption laws in the United States and in the international jurisdictions where we do business,
including the Foreign Corrupt Practices Act. We are also subject to a variety of international laws relating to franchising and
licensing of intellectual property in the various countries across the world where we are engaged in franchising our restaurant
brands.
We believe we are in material compliance with applicable laws and regulations, but we cannot predict the effect on operations
of the enactment of additional regulations in the future.
We have implemented various aspects of The Patient Protection and Affordable Care Act and the Health Care and Education
Affordability Reconciliation Act. However, the law or other related requirements may change.
See “Risk Factors” for a discussion of risks related to governmental regulation of our business.
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Information about our Executive Officers
The following table sets forth information with respect to each executive officer of both Denny’s Corporation and Denny’s Inc.
as of the filing date of this report:
Name
Age
Positions
Christopher D. Bode
58 Executive Vice President and Chief Operating Officer
John W. Dillon
49 Executive Vice President and Chief Brand Officer
Stephen C. Dunn
56
Senior Vice President and Chief Global Development Officer
Michael L. Furlow
63
Senior Vice President and Chief Information Officer
Jay C. Gilmore
51
Senior Vice President, Chief Accounting Officer and Corporate Controller
John C. Miller
65 Chief Executive Officer
Gail Sharps Myers
51 Executive Vice President, Chief Legal Officer and Chief People Officer
Robert P. Verostek
49 Executive Vice President and Chief Financial Officer
F. Mark Wolfinger
65
President
Mr. Bode has been Executive Vice President and Chief Operating Officer since February 2021. He previously served as Senior
Vice President and Chief Operating Officer since October 2014, as Senior Vice President, Operations from January 2013 to
October 2014, as Divisional Vice President, Franchise Operations from January 2012 to January 2013 and as Vice President,
Operations Initiatives from March 2011 to January 2012.
Mr. Dillon has been Executive Vice President and Chief Brand Officer since February 2020. He previously served as Senior
Vice President and Chief Brand Officer from December 2018 to February 2020, as Senior Vice President and Chief Marketing
Officer from October 2014 to December 2018, as Vice President, Brand and Field Marketing from June 2013 to October 2014
and as Vice President, Marketing from July 2008 to June 2013.
Mr. Dunn has been Senior Vice President and Chief Global Development Officer since July 2015. He previously served as
Senior Vice President, Global Development from April 2011 to July 2015 and as Vice President, Company and Franchise
Development from September 2005 to April 2011.
Mr. Furlow has been Senior Vice President and Chief Information Officer since April 2017. Prior to joining the Company, he
served as Chief Information Officer and Senior Vice President of IT at Red Robin Gourmet Burgers, Inc. from October 2015 to
April 2017 and as Chief Information Officer and Senior Vice President of IT of CEC Entertainment, Inc. (an operator and
franchisor of Chuck E. Cheese’s and Peter Piper Pizza) from May 2011 to February 2015.
Mr. Gilmore has been Senior Vice President, Chief Accounting Officer and Corporate Controller since February 2021. He
previously served as Vice President, Chief Accounting Officer and Corporate Controller from May 2007 to February 2021.
Mr. Miller has been Chief Executive Officer since February 2020. He previously served as Chief Executive Officer and
President from February 2011 to February 2020. Prior to joining the Company, he served as Chief Executive Officer and
President of Taco Bueno Restaurants, Inc. (an operator and franchisor of quick service Mexican eateries) from 2005 to February
2011.
Ms. Sharps Myers has been Executive Vice President, Chief Legal Officer and Chief People Officer since February 2021. She
previously served as Senior Vice President, General Counsel and Secretary since September 2020 and as Senior Vice President
and General Counsel from June 2020 to September 2020. Prior to joining the Company, she served as Executive Vice President,
General Counsel, Chief Compliance Officer and Secretary of American Tire Distributors, Inc. from May 2018 to May 2020, as
Senior Vice President, General Counsel and Secretary at Snyder’s-Lance, Inc. from January 2015 to March 2018 and as Senior
Vice President, Deputy General Counsel, Chief Compliance Counsel and Assistant Secretary from 2014 to 2015 at US Foods,
Inc. (capping off a 10-year career there).
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Mr. Verostek has been Executive Vice President and Chief Financial Officer since February 2021. He previously served as
Senior Vice President and Chief Financial Officer since February 2020, as Senior Vice President, Finance from October 2016 to
February 2020 and as Vice President, Financial Planning & Analysis and Investor Relations from January 2012 to October
2016.
Mr. Wolfinger has been President since February 2020. He previously served as Executive Vice President and Chief
Administrative Officer from April 2008 to February 2020, as Chief Financial Officer from September 2005 to February 2020,
and as Executive Vice President, Growth Initiatives from October 2006 to April 2008.
Available Information
We make available free of charge through our website at investor.dennys.com (in the SEC Filings section) copies of materials
that we file with, or furnish to, the Securities and Exchange Commission (“SEC”), including our Annual Reports on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably
practicable after we electronically file such materials with, or furnish them to, the SEC. The SEC also maintains an internet
website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC. In addition, we have made available on our website (in the Corporate Governance - Code of
Conduct section) our code of ethics entitled “Denny’s Code of Conduct” which is applicable to the Company’s Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer and Corporate Controller, all other executive officers, key financial
and accounting personnel and each salaried employee of the Company.
We will post on our website any amendments to, or waivers from, a provision of the Denny’s Code of Conduct that applies to
the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Corporate Controller or persons performing
similar functions, and that relates to (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in
reports and documents that we file with, or submit to, the SEC and in other public communications made by us; (iii) compliance
with applicable governmental laws, rules and regulations; (iv) the prompt internal reporting of violations of Denny’s Code of
Conduct to an appropriate person or persons identified in the code; or (v) accountability to adherence to the code.
Item 1A. Risk Factors
Various risks and uncertainties could affect our business. Any of the risk factors described below or elsewhere in this report or
our other filings with the SEC could have a material and adverse impact on our business, financial condition and results of
operations. In any such event, the trading price of our common stock could decline. It is not possible to predict or identify all
risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also
impair our business operations.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has disrupted and is expected to continue to disrupt our business, which could continue to have
a material adverse impact on our business, results of operations, liquidity and financial condition for an extended period of
time.
The outbreak of COVID-19 has had a material adverse effect on our business, results of operations, liquidity and financial
condition. In 2020, the COVID-19 pandemic significantly impacted the economy in general, and our business specifically,
and it could continue to negatively affect our business in a number of ways. These effects could include, but are not limited to:
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disruptions or restrictions on our employees’ ability to work effectively due to travel bans, quarantines, shelter-in-place
orders or other limitations;
temporary restrictions on and closures of our company operated restaurants and our franchised and licensed restaurants
or our suppliers;
failure of third parties on which we rely, including our franchisees and suppliers, to meet their respective obligations to
the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or
operational difficulties or issues with the regional or national supply chain;
volatility of commodity costs due to the COVID-19 outbreak;
disruptions or uncertainties related to the COVID-19 outbreak for a sustained period of time which could hinder our
ability to achieve our strategic goals and our ability to meet financial obligations as they come due; and
customer reluctance to return to in-restaurant dining.
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The extent to which the COVID-19 pandemic, or other outbreaks of disease or similar public health threats, materially and
adversely impacts our business, results of operations, liquidity and financial condition is highly uncertain and will depend on
future developments. Such developments may include the geographic spread and duration of the virus, the severity of the
disease and the actions that may be taken by various governmental authorities and other third parties in response to the
outbreak.
In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and
the resumption of normal business operations may be delayed or constrained by lingering effects of the COVID-19 pandemic
on us or our franchisees, suppliers, third-party service providers, and/or customers. During 2020, many state and local
governments started to ease certain restrictions on our Company operated and franchised restaurants only to later reinstitute
them due to a rise in the number of people contracting and being treated for COVID-19. As dining room restrictions ease, we
expect to incur increased cleaning and supply costs and labor inefficiencies as we adjust to improved sales volumes and
enhanced health and safety protocols. We may not be able to attract customers to our reopened restaurants given the risks, or
perceived risks, of gathering in public places, dining in restaurants and complying with social distancing and/or depressed
consumer sentiment due to adverse economic conditions, including job losses, among other things. We also may be unable to
reinstate, retain and incentivize our employees. Previously terminated or furloughed employees may have found other jobs or
otherwise be unwilling or unable to return to work. Even as restaurants resume operations, a single case of COVID-19 in a
restaurant could result in additional costs and further closures, or recurrences of COVID-19 cases could cause state and local
governments to reinstate restrictions on our restaurants, as we have seen recently, and we may need to temporarily close our
restaurants or otherwise limit operations.
While we currently intend for all Company owned restaurants to reopen, certain Company operated and franchised restaurants
may remain permanently closed or ultimately close as a result of the pandemic. The effects of the pandemic on our business
could be long-lasting and could continue to have adverse effects on our business, results of operations, liquidity, cash flows and
financial condition, some of which may be significant, and may adversely impact our ability to operate our business on the
same terms as we conducted business prior to the pandemic even after our restaurants fully reopen.
Risks Related to Restaurant Operations and the Restaurant Industry
The restaurant business is highly competitive, and if we are unable to compete effectively, our business will be adversely
affected.
Each of our company and franchised restaurants competes with a wide variety of restaurants ranging from national and regional
restaurant chains to locally owned restaurants. The following are important aspects of competition:
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restaurant location;
advantageous commercial real estate suitable for restaurants;
number and location of competing restaurants;
attractiveness and repair and maintenance of facilities;
ability to develop and support evolving technology to deliver a consistent and compelling guest experience;
food quality, new product development and value;
dietary trends, including nutritional content;
training, courtesy and hospitality standards;
ability to attract and retain high quality staff;
quality and speed of service; and
the effectiveness of marketing and advertising programs, including the effective use of social media platforms and digital
marketing initiatives.
Our returns and profitability may be negatively impacted by a number of factors, including those described below.
Food service businesses and the performance of company and franchised restaurants may be materially and adversely affected
by factors such as:
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consumer preferences, including nutritional and dietary concerns;
consumer spending habits;
global, national, regional and local economic conditions;
demographic trends;
traffic patterns;
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the type, number and location of competing restaurants; and
the ability to renew leased properties on commercially acceptable terms, if at all.
Dependence on frequent deliveries of fresh produce and other food products subjects food service businesses to the risk that
shortages or interruptions in supply caused by adverse weather, food safety warnings, animal disease outbreak or other
conditions beyond our control could adversely affect the availability, quality and cost of ingredients. Our inability to effectively
manage supply chain risk could increase our costs and limit the availability of products critical to restaurant operations.
In addition, the food service industry in general, and our results of operations and financial condition in particular, may be
adversely affected by unfavorable trends or developments such as:
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volatility in certain commodity markets;
increased food costs;
health concerns arising from food safety issues and other food-related pandemics, outbreaks of flu or viruses, such as
coronavirus, or other diseases;
increased energy costs;
labor and employee benefits costs (including increases in minimum hourly wage, employment tax rates, health care costs
and workers’ compensation costs);
regional weather conditions;
the availability of experienced management and hourly employees; and
other general inflation impacts.
Operating results that are lower than our current estimates may cause us to incur impairment charges on certain long-lived
assets and potentially close certain restaurants.
The financial performance of our franchisees can negatively impact our business.
As we are heavily franchised, our financial results are contingent upon the operational and financial success of our franchisees.
We receive royalties, advertising contributions and, in some cases, lease payments from our franchisees. While our franchise
agreements are designed to require our franchisees to maintain brand consistency, the significant percentage of franchise-
operated restaurants may expose us to risks not otherwise encountered if we maintained ownership and control of the
restaurants. If our franchisees do not successfully operate their restaurants in a manner consistent with our standards, or if
customers have negative experiences due to issues with food quality or operational execution at our franchised locations, our
brand could be harmed, which in turn could negatively impact our business. Additional risks include:
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franchisee defaults on their obligations to us arising from financial or other difficulties encountered by them, such as the
inability to pay financial obligations including royalties, rent on leases on which we retain contingent liability, and
certain loans;
limitations on enforcement of franchisee obligations due to bankruptcy or insolvency proceedings;
the inability to participate in business strategy changes due to financial constraints;
failure to operate restaurants in accordance with required standards, including food quality and safety;
and impacts of the financial performance of other businesses operated by franchisees on the overall financial
performance and condition of the franchisee.
If a significant number of franchisees become financially distressed, it could harm our operating results. For 2020, our ten
largest franchisees accounted for approximately 39% of our total franchise and license revenue. The balance of our franchise
revenue was derived from the remaining 217 franchisees.
Food safety and quality concerns may negatively impact our business and profitability.
Incidents or reports of foodborne or waterborne illness, or other food safety issues, food contamination or tampering, employee
hygiene and cleanliness failures, improper employee conduct, or presence of communicable disease at our restaurants or
suppliers could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and
reputation, and a decrease in customer traffic resulting from these reports could negatively impact our revenues and profits.
Similar incidents or reports occurring at other restaurant brands unrelated to us could likewise create negative publicity, which
could negatively impact consumer behavior towards us. In addition, if a regional or global health pandemic occurs, depending
upon its location, duration and severity, our business could be severely affected.
We rely on our domestic and international vendors, as do our franchisees, to provide quality ingredients and to comply with
applicable laws and industry standards. A failure of one of our domestic or international vendors to meet our quality standards,
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or meet domestic or international food industry standards, could result in a disruption in our supply chain and negatively impact
our brand and our business and profitability. Our inability to manage an event such as a product recall or product related
litigation could also cause our results to suffer.
Unfavorable publicity, or a failure to respond effectively to adverse publicity, could harm our brand’s reputation.
Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of
any type, including food safety, outbreak of flu or viruses (such as coronavirus) or other health concerns, criminal activity,
guest discrimination, harassment, employee relations or other operating issues. The increasing use of social media platforms has
increased the speed and scope of unfavorable publicity and could hinder our ability to quickly and effectively respond to such
reports. Regardless of whether the allegations or complaints are accurate or valid, negative publicity relating to a particular
restaurant or a limited number of restaurants could adversely affect public perception of the entire brand.
A decline in general economic conditions could adversely affect our financial results.
Consumer spending habits, including discretionary spending on dining at restaurants such as ours, are affected by many factors
including:
•
•
•
•
•
prevailing economic conditions, including interest rates;
energy costs, especially gasoline prices;
levels of employment;
salaries and wage rates, including tax rates; and
consumer confidence.
Weakness or uncertainty regarding the economy, both domestic and international, as a result of reactions to consumer credit
availability, increasing energy prices, inflation, increasing interest rates, unemployment, war, terrorist activity or other
unforeseen events could adversely affect consumer spending habits, which may result in lower operating revenue.
If we fail to recruit, develop and retain talented employees, our business could suffer.
Our future success significantly depends on the continued services and performance of our key management personnel. Our
future performance will depend on our ability to attract, motivate and retain these and other key officers and key team members,
particularly regional and area managers and restaurant general managers. Competition for these employees is intense.
Risks Related to Development Strategies
Our growth strategy depends on our ability and that of our franchisees to open new restaurants. Delays or failures in
opening new restaurants could adversely affect our planned growth and operating results.
The development of new restaurants may be adversely affected by risks such as:
•
•
•
•
•
•
•
•
•
•
inability to identify suitable franchisees;
costs and availability of capital for the Company and/or franchisees;
competition for restaurant sites;
negotiation of favorable purchase or lease terms for restaurant sites;
inability to obtain all required governmental approvals and permits;
delays in completion of construction;
challenge of identifying, recruiting and training qualified restaurant managers;
developed restaurants not achieving the expected revenue or cash flow once opened;
challenges specific to the growth of international operations that are different from domestic development; and
general economic conditions.
The locations of company and franchised restaurants may cease to be attractive as demographic patterns change.
The success of our company and franchised restaurants is significantly influenced by location. Current locations may not
continue to be attractive as demographic patterns change. It is possible that the neighborhood or economic conditions where
restaurants are located could decline in the future, potentially resulting in reduced sales at those locations.
14
Our expansion into international markets may present increased risks due to lower customer awareness of our brand, our
unfamiliarity with those markets and other factors.
The international markets in which our franchisees currently operate, and any additional markets our franchisees may enter
outside of the United States, have many differences compared to our domestic markets. There may be lower consumer
familiarity with the Denny’s brand in these markets, as well as different competitive conditions, consumer tastes and economic,
political and health conditions. Additionally, there are risks associated with sourcing quality ingredients and other commodities
in a cost-effective and timely manner. As a result, franchised international restaurants may take longer to reach expected sales
and profit levels, or may never do so, thereby affecting the brand’s overall growth and profitability. Building brand awareness
may take longer than expected, which could negatively impact our profitability in those markets.
We are subject to governmental regulations in our international markets impacting the way we do business with our
international franchisees. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and
other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Failure to comply with any
such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely impact our results of
operations and financial condition.
Legal, Information Technology and Regulatory Risks
Litigation may adversely affect our business, financial condition and results of operations.
We are subject to the risk of, or are involved in from time to time, complaints or litigation brought by former, current or
prospective employees, customers, franchisees, vendors, landlords, shareholders or others. We assess contingencies to
determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated
loss contingency is accrued if it is probable that a liability has been incurred and the amount of loss can be reasonably
estimated. Because lawsuits are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is
highly subjective and requires judgments about future events. We regularly review contingencies to determine the adequacy of
the accruals and related disclosures. However, the amount of ultimate loss may differ from these estimates. A judgment that is
not covered by insurance or that is significantly in excess of our insurance coverage for any claims could materially adversely
affect our financial condition or results of operations. In addition, regardless of whether any claims against us are valid or
whether we are found to be liable, claims may be expensive to defend, and may divert management’s attention away from
operations and hurt our performance. Further, adverse publicity resulting from claims may harm our business or that of our
franchisees.
Our amended and restated by-laws provide that the Court of Chancery of the State of Delaware will be the exclusive
forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our
stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our amended and restated by-laws provide that consistent with the applicable provisions of the Delaware General Corporation
Law (the “DGCL”), unless our Board of Directors, acting on behalf of the Company, consents in writing to the selection of an
alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any and all internal
corporate claims, including but not limited to:
•
•
•
•
any derivative action or proceeding brought on our behalf;
any action asserting a claim of breach of fiduciary duty owed by any stockholder, director, officer, other employee or
stockholder of the Company to us or our stockholders;
any action arising pursuant to any provision of the DGCL or as to which the DGCL confers jurisdiction on the Court of
Chancery of the State of Delaware; and
any action asserting a claim against us that is governed by the internal affairs doctrine.
These provisions would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) or any claim for which the federal district courts of the United States of America have
exclusive jurisdiction. Furthermore, Section 22 of the Securities Act of 1933, as amended (the “Securities Act”) creates
concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal
courts have jurisdiction to entertain such claims.
Our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person
or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and
consented to, the provisions of our amended and restated by-laws described in the preceding sentences.
15
While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may
nevertheless seek to bring a claim in a venue other than that designated in the exclusive forum provisions. In such instance, we
would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated
by-laws. This may require significant additional costs associated with resolving such action in other jurisdictions, and there can
be no assurance that the provisions will be enforced by a court in those other jurisdictions.
This choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for
disputes with us or our directors, officers, or other employees. If any other court of competent jurisdiction were to find the
exclusive-forum provision in our amended and restated by-laws to be inapplicable or unenforceable, we may incur additional
costs associated with resolving the dispute in other jurisdictions.
Numerous government regulations impact our business, and our failure to comply with them could adversely affect our
business.
We and our franchisees are subject to federal, state, local and international laws and regulations governing, among other things:
•
•
•
•
•
preparation, labeling, advertising and sale of food;
sanitation;
health and fire safety;
land use, sign restrictions and environmental matters;
employee health care requirements, including the implementation and uncertain legal, regulatory and cost implications of
the health care reform law;
• management and protection of the personnel data of our guests, employees and franchisees;
•
•
•
•
payment card regulation and related industry rules;
the sale of alcoholic beverages;
hiring and employment practices, including minimum wage and tip credit laws and fair labor standards; and
Americans with Disabilities Act.
A substantial number of our employees are paid the minimum wage. Accordingly, increases in the minimum wage or decreases
in the allowable tip credit (which reduces wages deemed to be paid to tipped employees in certain states) increase our labor
costs. We have attempted to offset increases in the minimum wage through pricing and various cost control efforts; however,
there can be no assurance that we will be successful in these efforts in the future.
The operation of our franchisee system is also subject to regulations enacted by a number of states and rules promulgated by the
Federal Trade Commission. Due to our international franchising, we are subject to governmental regulations throughout the
world impacting the way we do business with our international franchisees. These include antitrust and tax requirements, anti-
boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act and the Foreign
Corrupt Practices Act. Additionally, given our significant concentration of restaurants in California, changes in regulations in
that state could have a disproportionate impact on our operations. If we or our franchisees fail to comply with these laws and
regulations, we or our franchisees could be subjected to restaurant closure, fines, penalties and litigation, which may be costly
and could adversely affect our results of operations and financial condition. In addition, the future enactment of additional
legislation regulating the franchise relationship could adversely affect our operations.
We have implemented various aspects of The Patient Protection and Affordable Care Act and the Health Care and Education
Affordability Reconciliation Act. However, the law or other related requirements may change.
We are also subject to federal, state, local and international laws regulating the offer and sale of franchises. Such laws impose
registration and disclosure requirements on franchisors in the offer and sale of franchises, and may contain provisions that
supersede the terms of franchise agreements, including limitations on the ability of franchisors to terminate franchises and alter
franchise arrangements.
Failure of computer systems, information technology, or the ability to provide a continuously secure network, or cyber
attacks against our computer systems, could result in material harm to our reputation and business.
We and our franchisees rely heavily on computer systems and information technology to conduct our business and operate
efficiently. We have instituted monitoring controls intended to protect our computer systems, our point-of-sale systems and our
information technology platforms and networks against external threats. Those controls include an annual proactive risk
assessment, advanced comprehensive analysis of data threats, identification of business email compromise and proper security
awareness education. The Audit & Finance Committee of our Board of Directors has oversight responsibility related to our
16
cybersecurity risk management programs and periodically reviews reports on cybersecurity metrics, data privacy and other
information technology risks.
We receive and maintain certain personal information about our guests, employees and franchisees. Our use of this information
is subject to international, federal and state regulations, as well as conditions included in certain third-party contracts. If our
cybersecurity is compromised and this information is obtained by unauthorized persons or used inappropriately, it could
adversely affect our reputation, operations, results of operations and financial condition, and could result in litigation against us
or the imposition of penalties. As privacy and information security laws and regulations change or cyber risks evolve, we may
incur additional costs to ensure we remain compliant.
A material system failure or interruption, a breach in the security of our information technology systems caused by a cyber
attack, or other failure to maintain a secure cyber network could result in reduced efficiency in our operations, loss or
misappropriation of data, business interruptions, or could impact delivery of food to restaurants or financial functions such as
vendor payment or employee payroll. We have disaster recovery and business continuity plans that are designed to anticipate
and mitigate such failures, but it is possible that significant capital investment could be required to rectify these problems, or
more likely that cash flows could be impacted, in the shorter term.
We rely on third parties for certain business processes and services. Failure or inability of such third-party vendors to
perform subjects us to risks, including business disruption and increased costs.
We depend on suppliers and other third parties for the operation of certain aspects of our business. Some third-party business
processes we utilize include information technology, payment processing, gift card authorization and processing, benefits,
delivery and other business services. We conduct third-party due diligence and seek to obtain contractual assurance that our
vendors will maintain adequate controls, such as adequate security against data breaches. However, the failure of our suppliers
to maintain adequate controls or comply with our expectations and standards could have a material adverse effect on our
business, financial condition and operating results.
If our internal controls are ineffective, we may not be able to accurately report our financial results or prevent fraud.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal
control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for
external purposes in accordance with accounting principles generally accepted in the United States. We maintain a documented
system of internal controls which is reviewed and tested by the Company’s full time Internal Audit department. The Internal
Audit department reports directly to the Audit and Finance Committee of the Board of Directors. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or
detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over
financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A
significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of
investor confidence and decline in the market price of our common stock.
A change in accounting standards can have a significant effect on our reported financial results. New pronouncements and
varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing accounting rules or
the questioning of current accounting practices may adversely affect our reported financial results. Additionally, generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations are
highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these principles or their
interpretations or changes in underlying assumptions, estimates and judgments by us could significantly change our reported or
expected financial performance.
Risks Related to Indebtedness
Changes in the method used to determine LIBOR rates and the potential phasing out of LIBOR after 2021 may affect our
financial results.
Borrowings under our credit facility bear interest at variable rates based on LIBOR. In addition, we have interest rate swaps
designated as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on
forecasted notional debt obligations. LIBOR and certain other interest “benchmarks” may be subject to regulatory guidance
and/or reform that could cause interest rates under our current or future debt agreements and interest rate swaps to perform
differently than in the past or cause other unanticipated consequences. The United Kingdom’s Financial Conduct Authority,
which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit rates for the calculation
17
of LIBOR after 2021, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If
LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on our current or
future debt obligations and interest rate swaps may be adversely affected.
Our indebtedness could have an adverse effect on our financial condition and operations.
As of December 30, 2020, we had total indebtedness of $225.4 million, including finance leases. Although we believe that our
existing cash balances, funds from operations and amounts available under our credit facility will be adequate to cover our cash
flow and liquidity needs, we could seek additional sources of funds, including incurring additional debt, to maintain sufficient
cash flow to fund our ongoing operating needs, pay interest and scheduled debt amortization and fund anticipated capital
expenditures. We have no material debt maturities scheduled until October 2022. The credit agreement governing most of our
indebtedness contains various covenants that could have an adverse effect on our business by limiting our ability to take
advantage of financing, merger, acquisition or other corporate opportunities and to fund our operations. Restrictions under our
credit agreement could also restrict our ability to repurchase shares in the future. If we incur additional debt in the future,
covenant limitations on our activities and risks associated with such increased debt levels generally could increase. If we are
unable to satisfy or refinance our current debt as it comes due, we may default on our debt obligations and lenders could elect to
declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. For
additional information concerning our indebtedness see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.”
Risks Related to our Common Stock
Many factors, including those over which we have no control, affect the trading price of our common stock.
Factors such as reports on the economy or the price of commodities, as well as negative or positive announcements by
competitors, regardless of whether the report directly relates to our business, could have an impact on the trading price of our
common stock. In addition to investor expectations about our prospects, trading activity in our common stock can reflect the
portfolio strategies and investment allocation changes of institutional holders, as well as non-operating initiatives such as our
share repurchase programs. Any failure to meet market expectations whether for same-store sales, restaurant unit growth,
earnings per share or other metrics could cause our share price to decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Most Denny’s restaurants are free-standing facilities with property sizes averaging approximately one acre. The restaurant
buildings average between 3,800 - 5,000 square feet, allowing them to accommodate an average of 110-170 guests. The number
and location of our restaurants as of December 30, 2020 are presented below:
18
United States
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total Domestic
Company
Franchised /
Licensed
Total
—
—
1
—
22
—
—
—
9
—
2
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
7
2
—
—
—
—
—
—
—
—
—
—
3
—
—
13
—
2
2
—
—
—
—
65
6
2
82
10
355
19
9
2
117
13
3
10
53
38
3
5
13
5
4
25
4
16
18
4
32
4
3
32
—
7
30
45
27
4
37
13
22
35
4
9
3
7
186
29
—
22
41
4
23
4
1,439
6
2
83
10
377
19
9
2
126
13
5
10
53
38
3
5
13
5
4
25
6
16
18
4
32
4
3
39
2
7
30
45
27
4
37
13
22
35
4
12
3
7
199
29
2
24
41
4
23
4
1,504
19
International
Canada
Costa Rica
El Salvador
Guam
Guatemala
Honduras
Indonesia
Mexico
New Zealand
Philippines
Puerto Rico
United Arab Emirates
United Kingdom
Total International
Total Domestic
Total
Company
Franchised /
Licensed
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
65
65
78
3
2
2
2
6
2
12
7
10
15
6
1
146
1,439
1,585
78
3
2
2
2
6
2
12
7
10
15
6
1
146
1,504
1,650
81
249
330
Of the total 1,650 restaurants in the Denny’s brand, our interest in restaurant properties consists of the following:
Owned properties
Leased properties
Company
Restaurants
Franchised
Restaurants
Total
14
51
65
67
198
265
We have generally been able to renew our restaurant leases as they expire at then-current market rates. The remaining terms of
leases range from less than one to approximately 42 years, including optional renewal periods. In addition to the restaurant
properties, we own an 18-story, 187,000 square foot office building in Spartanburg, South Carolina, which serves as our
corporate headquarters. Our corporate offices currently occupy 17 floors of the building, with a portion of the building leased to
others.
See Note 9 to our Consolidated Financial Statements for information concerning encumbrances on substantially all of our
properties.
Item 3. Legal Proceedings
There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the
ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability
with respect to these proceedings and claims will not materially affect the Company’s consolidated results of operations or
financial position.
Item 4. Mine Safety Disclosures
Not applicable.
20
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed under the symbol “DENN” and trades on the NASDAQ Capital Market (“NASDAQ”). As of
February 25, 2021, there were 64,144,845 shares of our common stock outstanding and approximately 34,271 record and
beneficial holders of our common stock.
Dividends and Share Repurchases
We suspended share repurchases as of February 27, 2020 and terminated our previously approved Rule 10b5-1 Repurchase Plan
effective March 16, 2020 in light of uncertain market conditions arising from the COVID-19 pandemic. Under our amended
credit agreement, we are prohibited, until the date of delivery of our financial statements for the fiscal quarter ending September
29, 2021, from paying dividends and making any stock repurchases. We have not historically paid cash dividends.
Performance Graph
The following graph compares the cumulative total shareholder return on our common stock for the five fiscal years ended
December 30, 2020 (December 30, 2015 to December 30, 2020) against the cumulative total return of the Russell 2000® Index
and a peer group, selected by us, of companies that we believe compose a representative sampling of public companies in our
industry comparable to us in size and composition. We revised this peer group in 2020 as the peer group we utilized in 2019
had diminished in size due primarily to formerly public peer companies ceasing to be publicly traded. As required by SEC
regulations, the following graph also shows the cumulative return of the former peer group. The graph and table assume that
$100 was invested on December 30, 2015 (the last day of fiscal year 2015) in each of the Company’s common stock, the
Russell 2000® Index and the current and former peer groups and that all dividends were reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN
ASSUMES $100 INVESTED ON DECEMBER 30, 2015
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDED DECEMBER 30, 2020
21
Denny’s CorporationRussell 2000 IndexCurrent Peer GroupFormer Peer Group201520162017201820192020050100150200250300
December 30, 2015
December 28, 2016
December 27, 2017
December 26, 2018
December 25, 2019
December 30, 2020
Russell 2000®
Index (1)
Current Peer
Group (2)
Former Peer
Group (3)
Denny’s
Corporation
$
$
$
$
$
$
100.00 $
120.18 $
138.08 $
120.49 $
154.26 $
184.60 $
100.00 $
119.81 $
116.97 $
121.13 $
127.96 $
147.44 $
100.00 $
122.56 $
112.89 $
114.81 $
112.77 $
122.89 $
100.00
128.83
134.13
162.76
202.70
141.24
(1) The Russell 2000 Index is a broad equity market index of 2,000 companies that measures the performance of the
small-cap segment of the U.S. equity universe. As of December 30, 2020, the weighted average market
capitalization of companies within the index was approximately $3.3 billion with the median market capitalization
being approximately $0.9 billion.
(2) The current peer group consists of 16 public companies that operate in the restaurant industry. The peer group
includes the following companies: BJ’s Restaurants, Inc. (BJRI), Bloomin’ Brands, Inc. (BLMN), Brinker
International, Inc. (EAT), Cracker Barrel Old Country Store, Inc. (CBRL), Del Taco Restaurants, Inc. (TACO),
Dine Brands Global, Inc. (DIN), El Pollo Loco Holdings, Inc. (LOCO), Fiesta Restaurant Group, Inc. (FRGI),
Jack in the Box Inc. (JACK), Nathan’s Famous, Inc. (NATH), Red Robin Gourmet Burgers, Inc. (RRGB), Ruth’s
Hospitality Group, Inc. (RUTH), Shake Shack, Inc. (SHAK), Texas Roadhouse, Inc. (TXRH), The Cheesecake
Factory Incorporated (CAKE), and Wingstop Inc. (WING).
(3) The former peer group consists of 12 public companies that operate in the restaurant industry. The peer group
includes the following companies: BJ’s Restaurants, Inc. (BJRI), Brinker International, Inc. (EAT), Cracker Barrel
Old Country Store, Inc. (CBRL), Del Taco Restaurants, Inc. (TACO), Dine Brands Global, Inc. (DIN), El Pollo
Loco Holdings, Inc. (LOCO), Fiesta Restaurant Group, Inc. (FRGI), Jack in the Box Inc. (JACK), Nathan’s
Famous, Inc. (NATH), Red Robin Gourmet Burgers, Inc. (RRGB), Texas Roadhouse, Inc. (TXRH), and The
Cheesecake Factory Incorporated (CAKE).
Item 6. Selected Financial Data
The following table provides selected financial data that was extracted or derived from our audited consolidated financial
statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our Consolidated Financial Statements and related notes included elsewhere in this
report.
December 30,
2020 (a)
December 25,
2019 (b)(c)
Fiscal Year Ended
December 26,
2018 (d)
December 27,
2017
December 28,
2016 (e)
(In millions, except per share amounts)
Statement of Operations Data:
Operating revenue
Operating income
Net income (loss)
Basic net income (loss) per share:
Diluted net income (loss) per share:
Balance Sheet Data (at end of period):
Current assets
Working capital deficit (f)
Property and financing lease right-of-use
assets, net
Total assets
Long-term debt and finance lease
$
$
$
$
$
$
$
$
$
288.6 $
6.7 $
(5.1) $
(0.08) $
(0.08) $
48.7 $
(28.5) $
96.0 $
430.9 $
541.4 $
165.0 $
117.4 $
1.96 $
1.90 $
52.7 $
(42.8) $
109.3 $
460.4 $
630.2 $
529.2 $
506.9
73.6 $
43.7 $
0.69 $
0.67 $
47.6 $
(47.1) $
140.0 $
335.3 $
70.7 $
39.6 $
0.58 $
0.56 $
41.3 $
(53.6) $
139.9 $
323.8 $
47.0
19.4
0.26
0.25
35.9
(57.5)
133.1
306.2
obligations, excluding current portion
$
223.5 $
254.8 $
313.7 $
286.1 $
242.3
22
(a) During 2020, the COVID-19 pandemic had a significant adverse impact on the Company’s business performance, results
of operations and cash flows. For additional information related to the impacts of the COVID-19 pandemic, refer to
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The fiscal year ended
December 30, 2020 includes 53 weeks of operations compared with 52 weeks for all other years presented. We estimate
that the additional operating week added approximately $6.3 million of operating revenue in 2020.
(b) During 2019, the Company migrated from a 90% franchised business model to one that is 96% franchised by selling
company owned restaurants to franchisees which resulted in, among other items, a reduction in revenues and the
recording of approximately $82.9 million of gains. In addition, the Company also recorded an additional $11.9 million of
gains related to the sale of real estate. See Note 13 and Note 14 to our Consolidated Financial Statements for details.
(c) During 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and all subsequent
ASUs that modified Topic 842. Upon adoption, we recorded operating lease liabilities of $101.3 million and right-of-use
assets of $94.2 million related to existing operating leases. See Note 2 and Note 8 to our Consolidated Financial
Statements for details.
(d) During 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” which clarifies the
principles used to recognize revenue. We elected to apply the modified retrospective method of adoption; therefore,
results for reporting periods after December 28, 2017 are presented under the new guidance and prior period amounts
have not been adjusted. The increase in operating revenue was primarily the result of recognizing advertising revenue on
a gross basis versus recording it on a net basis as previously reported.
(e) During 2016, we completed the liquidation of the Advantica Pension Plan (the “Pension Plan”). Accordingly, we made a
final contribution of $9.5 million to the Pension Plan and recognized a settlement loss of $24.3 million, reflecting the
recognition of unamortized actuarial losses that were recorded in accumulated other comprehensive income.
(f) A negative working capital position is not unusual for a restaurant operating company.
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements and the notes thereto.
Overview
Denny’s restaurants are operated in 49 states, the District of Columbia, two U.S. territories and 11 foreign countries with
principal concentrations in California (23% of total restaurants), Texas (12%) and Florida (8%). At December 30, 2020, the
Denny’s brand consisted of 1,650 franchised, licensed and company restaurants. Of this amount, 1,585 of our restaurants were
franchised or licensed, representing 96% of the total restaurants, and 65 were company restaurants.
Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and
franchised and licensed restaurants. The primary sources of revenues are the sale of food and beverages at our company
restaurants and the collection of royalties, advertising revenue, initial and other fees and occupancy revenue from restaurants
operated by our franchisees under the Denny’s name. Sales and customer traffic at both company and franchised restaurants are
affected by the success of our marketing campaigns, new product introductions, product quality enhancements, customer
service, availability of off-premise dining options, and menu pricing, as well as external factors including competition,
economic conditions affecting consumer spending and changes in guests’ tastes and preferences. Sales at company restaurants
and royalty, advertising and fee income from franchised restaurants are also impacted by the opening of new restaurants, the
closing of existing restaurants, the sale of company restaurants to franchisees and the acquisition of restaurants from
franchisees.
Costs of company restaurant sales are exposed to volatility in two main areas: payroll and benefit costs and product costs. The
volatility of payroll and benefit costs results primarily from changes in wage rates and increases in labor related expenses, such
as medical benefit costs and workers’ compensation costs. Additionally, changes in guest counts and investments in store-level
labor impact payroll and benefit costs as a percentage of sales. Many of the products sold in our restaurants are affected by
commodity pricing and are, therefore, subject to price volatility. This volatility is caused by factors that are fundamentally
outside of our control and are often unpredictable. In general, we purchase food products based on market prices or we set firm
prices in purchase agreements with our vendors. In an inflationary commodity environment, our ability to lock in prices on
certain key commodities is imperative to controlling food costs. In addition, our continued success with menu management
helps us offer menu items that provide a compelling value to our customers while maintaining attractive product costs and
profitability. Packaging costs also fluctuate with changes in delivery and off-premise sales.
Our fiscal year ends on the last Wednesday in December. As a result, a fifty-third week is added to a fiscal year every five or
six years. Fiscal 2020 included 53 weeks of operations, whereas 2019 and 2018 each included 52 weeks of operations. We
estimate that the additional operating week added approximately $6.3 million of operating revenue in 2020.
Impact of the COVID-19 Pandemic
Sales Trends
The COVID-19 pandemic significantly impacted our sales during 2020. In 2019, prior to the impacts of the COVID-19
pandemic, our average annual restaurant sales were $2.5 million for company restaurants and $1.7 million for domestic
franchised restaurants. In 2020, as a result of the COVID-19 pandemic, our average annual restaurant sales declined to $1.8
million for company restaurants and $1.2 million for domestic franchised restaurants. Additionally, average unit volumes of
off-premise sales have more than doubled since the beginning of the COVID-19 pandemic, supported by temporarily waived
delivery fees, curbside service programs and shareable family meal packs.
24
The following table presents monthly sales results compared to the equivalent fiscal periods in 2019:
Domestic System-Wide Same-Store Sales(1) Compared to 2019 Fiscal Periods:
Fiscal Year 2020: (31%)
Q1: (6%)
Q2: (57%)
Q3: (34%)
Q4: (33%)
Jan
3%
Feb
2%
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
(19%)
(76%)
(65%)
(41%)
(39%)
(35%)
(28%)
(26%)
(27%)
(41%)
The following table presents domestic capacity restrictions:
Domestic Capacity Restrictions as of December 30, 2020:
75% Capacity or Social Distancing
% of Domestic System
50% - 66% Capacity
25% - 33% Capacity
Off-Premise Only
No Restrictions
Temporarily Closed
Total
29%
23%
5%
39%
1%
3%
100%
Franchise and License Revenue Reductions
In addition to the impacts that reduced sales had on franchise and licenses revenues, certain forms of franchise support resulted
in reductions to these revenues throughout 2020 including:
•
•
abatement of $6.0 million of royalties including $1.9 million in the first quarter, $3.1 million in the second quarter and
$1.0 in the fourth quarter;
abatement of $1.3 million of advertising fees in the first quarter.
Cost Savings Initiatives
In response to the COVID-19 pandemic, we also implemented the following cost savings initiatives:
suspended travel and canceled in-person field meetings;
placed holds on all open corporate and field positions;
significantly reduced restaurant level staffing across the company restaurant portfolio;
•
•
•
• meaningfully reduced compensation for our Board of Directors and multiple levels of management; and
•
furloughed over 25% of the employees at our corporate office, approximately half of which were subsequently separated
from the Company.
We subsequently eased certain of these cost savings measures. For example, we have resumed recruiting for certain corporate
and field positions, and the compensation reductions expired on June 25, 2020.
We also secured $2.6 million of federal tax credits in connection with wages paid to retained employees during the crisis under
the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Liquidity Actions Taken
Effective February 27, 2020, we suspended share repurchases, and effective March 16, 2020 terminated our Rule 10b5-1 Plan
in both cases in light of uncertain market conditions arising from the COVID-19 pandemic.
25
Due to the impact of the COVID-19 pandemic, effective May 13, 2020 and December 15, 2020, the Company and certain of its
subsidiaries entered into a second and third amendment, respectively, to the current credit facility which amended the credit
agreement dated as of October 26, 2017. See Liquidity and Capital Resources - Credit Facility. As of December 30, 2020, the
Company was in compliance with its financial covenants related to the amended credit facility.
On July 6, 2020, we closed on the issuance and sale of 8,000,000 shares of common stock. Net proceeds of $69.6 million were
received after deducting the underwriters’ discounts and commissions and offering expenses payable by the Company and
disbursed to pay down the outstanding balance on the credit facility.
Growing and Revitalizing the Brand
Over the last five years, our growth initiatives have led to 169 new restaurant openings. During 2020, our franchisees opened 20
restaurants, of which eight are international franchised locations, including four in Canada, two in Mexico, and one each in
Indonesia and Central America. Our goal is to increase net restaurant growth through both domestic and international avenues.
Domestic growth will continue to focus on markets in which we have modest penetration. Development agreements related to
the sale of 113 of our company restaurants during 2018 and 2019 and recently enhanced development agreements in Canada
and the Philippines are expected to stimulate both domestic and international growth over the next several years.
A total of 22 remodels were completed during 2020, consisting of 20 at franchised restaurants and two at company restaurants.
Eleven of these remodels were in our Heritage image, which we launched in late 2013. This updated look reflects a more
contemporary diner feel to further reinforce our America’s Diner positioning. The remaining 11 restaurants updated to our
Heritage 2.0 image which features more attention-grabbing exterior elements while extending the relaxing interior elements
from the original Heritage program. As of the end of 2020, approximately 91% of the restaurants in the system have been
remodeled to one of our two Heritage images.
Balancing the Use of Cash
Though certain strategies have been impacted by the COVID-19 pandemic, we are still focused in the longer term on balancing
the use of cash between reinvesting in our base of company restaurants, growing and strengthening the brand and returning cash
to shareholders. During 2020, cash capital expenditures were $7.0 million. Our real estate strategy is to redeploy proceeds from
the sale of certain pieces of our owned real estate to acquire higher quality real estate underlying company and franchised
restaurants. During 2020, we generated $9.4 million of cash proceeds from the sale of real estate.
Prior to suspending share repurchases, during 2020, we repurchased a total of 1.7 million shares of our common stock for $34.2
million. Since initiating our share repurchase program in November 2010, we have repurchased a total of 54.0 million shares of
our common stock for $553.9 million. The Company is prohibited from paying dividends and making stock repurchases and
other general investments until the date of delivery of our financial statements for the fiscal quarter ending September 29, 2021.
See Liquidity and Capital Resources - Credit Facility.
In December 2019, the Board approved a new share repurchase authorization for $250 million. As of December 30, 2020, there
was approximately $248.0 million remaining under our current repurchase authorization.
Other Factors Impacting Comparability
For 2020, 2019 and 2018, the following items impacted the comparability of our results:
•
•
•
Company restaurant sales decreased from $411.9 million in 2018 to $118.2 million in 2020, primarily from the impact of
the sale of 113 company restaurants to franchisees during 2019 and 2018 and, in 2020, the impact of the COVID-19
pandemic.
Royalty income, which is included as a component of franchise and license revenue, increased from $101.6 million in
2018 to $108.8 million in 2019 primarily as a result of the sale of company restaurants to franchisees, increases in same-
store sales and a higher average royalty rate. The subsequent decrease to $67.5 million in 2020 was primarily due to the
impact of the COVID-19 pandemic on our business.
Occupancy revenues, included as a component of franchise and license revenue, result from leasing or subleasing
restaurants to franchisees. When restaurants are sold and leased or subleased to franchisees, the occupancy costs related
to these restaurants move from costs of company restaurant sales to costs of franchise and license revenue to match the
26
related occupancy revenue. Additionally, as leases or subleases with franchisees expire, franchise occupancy revenue and
costs could decrease if franchisees enter into direct leases with landlords. Occupancy revenue has increased from $32.0
million in 2018 to $41.9 million in 2020 as a result of the sale of restaurants to franchisees, partially offset by the impact
of lease expirations. At the end of 2020, we had 265 franchised restaurants that were leased or subleased from Denny’s,
compared to 243 at the end of 2018.
______________
(1)
Domestic system-wide same-store sales include sales at company restaurants and non-consolidated franchised and
licensed restaurants that were open the same period in noted prior period. While we do not record franchise and
licensed sales as revenue in our consolidated financial statements, we believe system-wide same-store sales
information is useful to investors in understanding our financial performance, as our royalty revenues are calculated
based on a percentage of franchise sales. Accordingly, system-wide same-store sales should be considered as a
supplement to, not a substitute for, our results as reported under GAAP.
27
24.4 %
39.9 %
5.6 %
14.7 %
84.7 %
52.4 %
10.1 %
4.3 %
0.4 %
88.3 %
11.7 %
3.3 %
0.1 %
8.3 %
1.4 %
6.9 %
Statements of Operations
Revenue:
Company restaurant sales
Franchise and license revenue
Total operating revenue
Costs of company restaurant sales, excluding
depreciation and amortization (a):
Product costs
Payroll and benefits
Occupancy
Other operating expenses
Total costs of company restaurant sales
Costs of franchise and license revenue (a)
General and administrative expenses
Depreciation and amortization
Fiscal Year Ended
December 30, 2020
December 25, 2019
December 26, 2018
(Dollars in thousands)
$ 118,160
170,445
40.9 % $ 306,377
56.6 % $ 411,932
59.1 % 235,012
43.4 % 218,247
65.4 %
34.6 %
288,605
100.0 % 541,389
100.0 % 630,179
100.0 %
29,816
51,684
11,241
21,828
114,569
94,348
55,040
16,161
25.2 % 74,720
24.4 % 100,532
43.7 % 118,806
38.8 % 164,314
9.5 % 18,613
6.1 % 23,228
18.5 % 46,257
15.1 % 60,708
97.0 % 258,396
84.3 % 348,782
55.4 % 120,326
51.2 % 114,296
19.1 % 69,018
12.7 % 63,828
5.6 % 19,846
3.7 % 27,039
Operating (gains), losses and other charges, net
1,808
0.6 % (91,180)
(16.8) %
2,620
Total operating costs and expenses, net
281,926
97.7 % 376,406
69.5 % 556,565
Operating income
Interest expense, net
Other nonoperating (income) expense, net
Net income (loss) before income taxes
Provision for (benefit from) income taxes
6,679
2.3 % 164,983
30.5 % 73,614
17,965
6.2 % 18,547
3.4 % 20,745
(4,171)
(7,115)
(1,999)
(1.4) %
(2,763)
(0.5) %
619
(2.5) % 149,199
27.6 % 52,250
(0.7) % 31,789
5.9 %
8,557
Net income (loss)
$ (5,116)
(1.8) % $ 117,410
21.7 % $ 43,693
Other Data:
Company average unit sales
Franchise average unit sales
Company equivalent units (b)
Franchise equivalent units (b)
$ 1,812
$ 1,181
65
1,614
Company same-store sales increase (decrease) (c)(d)
(36.7) %
Domestic franchised same-store sales increase
(decrease) (c)(d)
(30.9) %
$ 2,477
$ 1,669
124
1,578
1.9 %
2.0 %
$ 2,300
$ 1,615
179
1,538
1.8 %
0.6 %
(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 company restaurants or non-consolidated franchised and licensed restaurants that
were open the same period in the prior year. While we do not record franchise and licensed sales as revenue in our
consolidated financial statements, we believe domestic franchised same-store sales information is useful to investors in
understanding our financial performance, as our royalty revenues are calculated based on a percentage of franchise sales.
Accordingly, domestic franchised same-store sales should be considered as a supplement to, not a substitute for, our
results as reported under GAAP.
(d) Prior year amounts have not been restated for 2020 comparable restaurants.
28
Unit Activity
Company restaurants, beginning of period
Units opened
Units acquired from franchisees
Units sold to franchisees
Units closed
End of period
Franchised and licensed restaurants, beginning of
period
Units opened
Units purchased from Company
Units acquired by Company
Units closed
End of period
Total restaurants, end of period
Company Restaurant Operations
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
68
—
—
—
(3)
65
1,635
20
—
—
(70)
1,585
1,650
173
—
—
(105)
—
68
1,536
30
105
—
(36)
1,635
1,703
178
1
6
(8)
(4)
173
1,557
29
8
(6)
(52)
1,536
1,709
Company same-store sales decreased 36.7% in 2020 and increased 1.9% in 2019 compared with the respective prior year.
Company restaurant sales for 2020 decreased $188.2 million, or 61.4%, primarily resulting from a 59 equivalent unit decrease
in company restaurants and a 36.7% decrease in company same-store sales caused primarily by dine-in restrictions and
temporary closures related to the COVID-19 pandemic. Company restaurant sales for 2019 decreased $105.6 million, or 25.6%,
primarily resulting from a 55 equivalent unit decrease in company restaurants, partially offset by the increase in same-store
sales.
Total costs of company restaurant sales as a percentage of company restaurant sales were 97.0% in 2020, 84.3% in 2019 and
84.7% in 2018 consisting of the following:
Product costs were 25.2% in 2020 and 24.4% in 2019 and 2018. For 2020, the increase was due to increases in paper products
due to the increase in delivery and to-go orders related to the COVID-19 pandemic. For 2019, leverage gained from increased
pricing offset the impacts of commodity price increases.
Payroll and benefits were 43.7% in 2020, 38.8% in 2019 and 39.9% in 2018. The 2020 increase as a percentage of sales was
primarily the result of sales deleveraging caused by lower sales resulting from the COVID-19 pandemic. The 2020 increase
included a 3.2 percentage point increase in management labor, 0.8 percentage point increase in team labor, and 0.3 percentage
point increase in fringe benefits. The 2019 decrease was primarily due to a 0.4 percentage point decrease in payroll taxes and
fringe benefits, a 0.5 percentage point decrease in labor resulting from the impact of refranchising restaurants and a 0.1
percentage point decrease in workers' compensation costs related to claims development.
Occupancy costs were 9.5% in 2020, 6.1% in 2019 and 5.6% in 2018. For 2020, the increase as a percentage of sales was
primarily due to the sales deleveraging effect caused by the COVID-19 pandemic. Additionally, the impact of refranchising of
restaurants during 2019 where we owned the real estate contributed to the rate increase. The 2019 increase was related to a 0.3
percentage point increase in rental costs primarily due to the impact of refranchising restaurants and a 0.2 percentage point
increase in general liability costs primarily due to higher property insurance costs.
Other operating expenses consisted of the following amounts and percentages of company restaurant sales:
29
Utilities
Repairs and maintenance
Marketing
Other direct costs
Fiscal Year Ended
December 30, 2020
December 25, 2019
December 26, 2018
(Dollars in thousands)
$
5,148
4.4 % $ 10,359
3.4 % $ 14,347
2,608
3,904
10,168
2.2 %
6,792
2.2 %
7,761
3.3 %
11,195
3.7 %
15,008
8.6 %
17,911
5.8 %
23,592
3.5 %
1.9 %
3.6 %
5.7 %
Other operating expenses
$ 21,828
18.5 % $ 46,257
15.1 % $ 60,708
14.7 %
Other direct costs were higher as a percentage of sales for 2020 due to the deleveraging effect of lower sales as well as higher
delivery costs due to the increase in delivery sales during the COVID-19 pandemic. For 2019, the increases in repairs and
maintenance as a percentage of company restaurant sales were primarily due to additional costs related to the sale of company
restaurants sold to franchisees as part of our refranchising and development strategy.
Franchise Operations
Franchise and license revenue and costs of franchise and license revenue consisted of the following amounts and percentages of
franchise and license revenue for the periods indicated:
Royalties
Advertising revenue
Initial and other fees
Occupancy revenue
Fiscal Year Ended
December 30, 2020
December 25, 2019
December 26, 2018
(Dollars in thousands)
$ 67,501
39.6 % $ 108,813
46.3 % $ 101,557
53,745
7,332
41,867
31.5 %
81,144
34.5 %
78,308
4.3 %
6,541
2.8 %
6,422
24.6 %
38,514
16.4 %
31,960
46.5 %
35.9 %
2.9 %
14.6 %
Franchise and license revenue
$ 170,445
100.0 % $ 235,012
100.0 % $ 218,247
100.0 %
Advertising costs
Occupancy costs
Other direct costs
$ 53,745
31.5 % $ 81,144
34.5 % $ 78,309
26,732
13,871
15.7 %
25,806
11.0 %
22,285
8.1 %
13,376
5.7 %
13,702
Costs of franchise and license revenue
$ 94,348
55.4 % $ 120,326
51.2 % $ 114,296
35.9 %
10.2 %
6.3 %
52.4 %
Royalties decreased by $41.3 million, or 38.0%, in 2020 primarily resulting from a 30.9% decrease in domestic same-store
sales. Additionally, we abated $6.0 million of royalties during the year to help our franchisees weather the impact of the
COVID-19 pandemic. Partially offsetting these decreases was an increase of 36 equivalent units resulting from our
refranchising and development strategy in 2019. Royalties increased by $7.3 million, or 7.1%, in 2019 primarily resulting from
a 40 equivalent unit increase from the impact of our refranchising and development strategy and a 2.0% increase in domestic
same-store sales. The average domestic royalty rate, including the impact of abatements, was 3.86%, 4.22% and 4.17% for
2020, 2019 and 2018, respectively.
Advertising revenue decreased $27.4 million, or 33.8%, in 2020 resulting from the decrease in same-store sales. Additionally,
we abated $1.3 million of advertising fees during the year. Partially offsetting these decreases was an increase of 36 equivalent
units resulting from our refranchising and development strategy in 2019. Advertising revenue increased $2.8 million, or 3.6%,
in 2019 resulting from the the increase in equivalent units and impact of the increase in same-store sales. Initial and other fees
increased $0.1 million, or 1.9%, as the recognition of revenue on additional franchised units from the sale of restaurants to
franchisees exceeded the impact of less accelerated revenue recognition during 2019 as a result of fewer franchised unit
closures compared to 2018.
Occupancy revenue increased $3.4 million, or 8.7%, in 2020 primarily resulting from additional leases and subleases to
franchisees as a result of our refranchising and development strategy in 2019. Occupancy revenue increased by $6.6 million, or
20.5%, in 2019 primarily resulting from the sale of restaurants to franchisees.
30
Costs of franchise and license revenue decreased $26.0 million, or 21.6%, in 2020. The decreases were primarily related to
lower advertising costs, which corresponds to the related advertising revenue decreases noted above. Occupancy costs increased
$0.9 million, or 3.6%, in 2020, primarily related to the sale of leased company units to franchisees in the prior year, partially
offset by lower percentage rent expense as a result of the sales decreases. Other direct costs increased $0.5 million, or 3.7%,
primarily due to $1.5 million of bad debt allowances resulting from actual and expected losses on franchise related receivables
due to the COVID-19 pandemic. As a result, costs of franchise and license revenue as a percentage of franchise and license
revenue increased to 55.4% for 2020 from 51.2% in 2019.
Costs of franchise and license revenue increased $6.0 million, or 5.3%, in 2019. Advertising costs increased $2.8 million, or
3.6%. Occupancy costs increased $3.5 million, or 15.8%. The changes to advertising costs and occupancy costs were a result of
the changes in the related revenues noted above. Other direct costs decreased $0.3 million, or 2.4%. The decrease resulted
primarily from lower franchise administration costs. As a result, costs of franchise and license revenue as a percentage of
franchise and license revenue decreased to 51.2% in 2019 from 52.4% in 2018.
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:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Corporate administrative expenses
$
41,135 $
50,319 $
Share-based compensation
Incentive compensation
Deferred compensation valuation adjustments
7,948
4,351
1,606
6,694
9,425
2,580
Total general and administrative expenses
$
55,040 $
69,018 $
52,439
6,038
6,388
(1,037)
63,828
Total general and administrative expenses decreased by $14.0 million, or 20.3%, in 2020 and increased by $5.2 million, or
8.1%, in 2019. Corporate administrative expenses decreased by $9.2 million in 2020 and decreased by $2.1 million in 2019.
The 2020 decrease was primarily due to cost savings initiatives related to the COVID-19 pandemic, including tax credits related
to the CARES Act of approximately $1.7 million and the rationalization of certain business costs in connection with our
refranchising and development strategy. The 2019 decrease was primarily due to the rationalization of certain business costs in
connection with our refranchising and development strategy. Share-based compensation increased by $1.3 million and $0.7
million in 2020 and 2019, respectively. Incentive compensation decreased by $5.1 million in 2020 and increased by $3.0
million in 2019. The changes in share-based compensation and incentive compensation for both periods primarily resulted from
our performance against plan metrics and as the result of modifications to certain 2018 and 2019 share-based compensation
awards during the fourth quarter of 2020. See Note 12 to our Consolidated Financial Statements for further details on the
modifications. Changes in deferred compensation valuation adjustments have offsetting gains or losses on the underlying
nonqualified deferred plan investments included as a component of other nonoperating (income) expense, net.
Depreciation and amortization is comprised of the following:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Depreciation of property and equipment
$
11,284 $
13,295 $
Amortization of finance right-of-use assets
Amortization of intangible and other assets
1,870
3,007
2,991
3,560
Total depreciation and amortization expense
$
16,161 $
19,846 $
18,506
4,451
4,082
27,039
In 2020 and 2019, the decrease in total depreciation and amortization expense was primarily a result of the sale of owned
company units to franchisees as part of our refranchising and development strategy during 2019.
31
Operating (gains), losses and other charges, net are comprised of the following:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Gains on sales of assets and other, net
$
(4,678) $
(93,608) $
Restructuring charges and exit costs
Impairment charges
2,403
4,083
2,428
—
Operating (gains), losses and other charges, net
$
1,808 $
(91,180) $
(513)
1,575
1,558
2,620
Gains on sales of assets and other, net of $4.7 million for 2020 primarily related to the sale of real estate. Gains on sales of
assets and other, net of $93.6 million for 2019 related to the sale of restaurants and real estate to franchisees. Gains on sales of
assets and other, net of $0.5 million for 2018 primarily related to $1.2 million of insurance settlement gains on fire-damaged
and hurricane-damaged restaurants, partially offset by $0.7 million of losses on sales of company owned units to franchisees.
See Note 13 to our Consolidated Financial Statements for details on refranchisings.
Restructuring charges and exit costs were comprised of the following:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Exit costs
Severance and other restructuring charges
Total restructuring and exit costs
$
$
204 $
2,199
2,403 $
272 $
2,156
2,428 $
518
1,057
1,575
During the year ended December 30, 2020, the Company permanently separated approximately 50 support center staff resulting
in increased severance and other restructuring charges for the year. Severance and other restructuring charges for 2019 and
2018 were primarily the result of positions eliminated as part of our refranchising and development strategy.
Impairment charges of $4.1 million for 2020 were the result of assessments of the recoverability of assets resulting from the
impact of the COVID-19 pandemic. Impairment charges of $1.6 million for 2018 primarily related to the impairment of an
underperforming unit.
Operating income was $6.7 million in 2020, $165.0 million in 2019 and $73.6 million in 2018.
Interest expense, net is comprised of the following:
Interest on credit facilities
Interest on interest rate swaps
Interest on finance lease liabilities
Letters of credit and other fees
Interest income
Total cash interest
Amortization of deferred financing costs
Amortization of interest rate swap losses
Interest accretion on other liabilities
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
$
8,658 $
11,685 $
(In thousands)
3,160
3,129
1,259
(96)
16,110
875
783
197
291
4,537
1,208
(170)
17,551
608
—
388
11,792
307
6,354
1,288
(146)
19,595
607
—
543
Total interest expense, net
$
17,965 $
18,547 $
20,745
Interest expense, net decreased during 2020 and 2019 primarily due to a reduction in financing lease interest resulting from the
sales of restaurants to franchisees during 2019.
32
Other nonoperating (income) expense, net was income of $4.2 million for 2020, income of $2.8 million for 2019 and expense
of $0.6 million for 2018. The income for 2020 includes losses on interest rate swaps of $7.4 million resulting from the
discontinuance of hedge accounting treatment on a portion of our interest rate swaps and income of $10.3 million related to
interest rate swap valuation adjustments on dedesignated interest rate swaps subsequent to the discontinuation of hedge
accounting and $1.8 million in gains on deferred compensation plan investments. The income for 2019 primarily resulted from
gains on deferred compensation plan investments. The expense for 2018 was primarily the result of losses on deferred
compensation plan investments, partially offset by gains on lease terminations. For additional details related to the interest rate
swaps, see Note 9 to our Consolidated Financial Statements.
The provision for (benefit from) income taxes was a benefit of $2.0 million for 2020, expense of $31.8 million for 2019 and
expense of $8.6 million for 2018. The effective tax rate was 28.1% for 2020, 21.3% for 2019 and 16.4% for 2018.
For 2020, the difference in the overall effective rate from the U.S. statutory rate was primarily due to state and foreign taxes and
the generation of employment credits. The 2020 rate was also impacted by a $0.9 million benefit from the statutory rate
differential due to a net operating loss carryback to a prior year and an expense of $1.0 million from disallowed compensation
deductions.
For 2019, there was no significant difference between our effective tax rate and the statutory tax rate of 21%. The impact of
state taxes on the statutory rate was partially offset by the generation of employment and foreign tax credits. In addition, the
2019 rate benefited $2.0 million related to share-based compensation and $2.0 million related to the completion of an Internal
Revenue Service federal income audit of the 2016 tax year.
The 2018 rate was primarily impacted by the statutory tax rate reduction under the Tax Cuts and Jobs Act of 2017. For 2018,
the difference in the overall effective rate from the U.S. statutory rate was primarily due to state taxes and the generation of
employment and foreign tax credits. In addition, the 2018 rate benefited $1.4 million related to share-based compensation.
Net income (loss) was a loss of $5.1 million for 2020, income of $117.4 million for 2019 and income of $43.7 million for 2018.
Liquidity and Capital Resources
Summary of Cash Flows
Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit
facility (as described below). Principal uses of cash are operating expenses, capital expenditures and, prior to the second quarter
of 2020, 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:
December 30, 2020
December 25, 2019
December 26, 2018
Fiscal Year Ended
(In thousands)
Net cash provided by (used in) operating activities
$
(3,137) $
43,327 $
Net cash provided by (used in) investing activities
Net cash used in financing activities
4,651
(994)
104,969
(149,950)
Increase (decrease) in cash and cash equivalents
$
520 $
(1,654) $
73,690
(32,017)
(41,630)
43
Net cash flows used in operating activities were $3.1 million for the year ended December 30, 2020 compared to net cash flows
provided by operating activities of $43.3 million for the year ended December 25, 2019. The decrease in cash flows provided
by (used in) operating activities was primarily due to the impacts of the COVID-19 pandemic and the timing of prior year
accrual payments. Net cash flows provided by operating activities were $43.3 million for the year ended December 25, 2019
compared to $73.7 million for the year ended December 26, 2018. The decrease in cash flows provided by operating activities
was primarily due to the reduction in equivalent units and the related runoff of liabilities resulting from the sale of company
restaurants. We believe that our estimated cash flows from operations for 2021, 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.
33
Net cash flows provided by investing activities were $4.7 million for the year ended December 30, 2020. These cash flows are
primarily proceeds from the sale of real estate of $9.4 million and proceeds from the sale of investments of $2.9 million,
partially offset by capital expenditures of $7.0 million and investment purchases of $1.4 million. Net cash flows provided by
investing activities were $105.0 million for the year ended December 25, 2019. These cash flows are primarily comprised of
$129.7 million of proceeds from the sale of assets, including $119.0 million from the sale of 105 restaurants and $10.7 million
from the sale of real estate. These cash flows are offset by capital expenditures of $14.0 million and acquisitions of real estate
of $11.3 million. Net cash flows used in investing activities were $32.0 million for the year ended December 26, 2018. These
cash flows are primarily comprised of capital expenditures of $22.0 million and acquisitions of restaurants and real estate of
$10.4 million. Cash flows for acquisitions include $8.1 million for the reacquisition of six franchised restaurants, $1.8 million
for real estate and $0.5 million related to a prior year acquisition.
Our principal capital requirements have been largely associated with the following:
Facilities
New construction
Remodeling
Information technology
Other
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
$
4,107 $
9,078 $
(In thousands)
23
992
1,386
454
2,019
1,124
1,060
694
9,613
3,186
4,525
1,930
2,771
Capital expenditures (excluding acquisitions)
$
6,962 $
13,975 $
22,025
Cash flows used in financing activities were $1.0 million for the year ended December 30, 2020, which included net debt
repayments of $31.6 million, cash payments for stock repurchases of $36.0 million offset by proceeds of $69.6 million from the
issuance of common stock. Cash flows used in financing activities were $150.0 million for the year ended December 25, 2019,
which included stock repurchases of $94.5 million and net debt repayments of $49.0 million. Cash flows used in financing
activities were $41.6 million for the year ended December 26, 2018, which included stock repurchases of $61.2 million and the
purchase of a $6.8 million equity forward contract related to an accelerated share repurchase agreement we entered into in 2018,
partially offset by net debt borrowings of $24.3 million.
Our working capital deficit was $28.5 million at December 30, 2020 compared with $42.8 million at December 25, 2019. The
decrease in working capital deficit was primarily related to lower payables and accruals resulting from the impacts of the
COVID-19 pandemic. 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
We have a $375 million senior secured revolver due October, 26, 2022. As of December 30, 2020, we had outstanding revolver
loans of $210.0 million and outstanding letters of credit under the senior secured revolver of $17.3 million. These balances
resulted in availability of $147.7 million under the credit facility prior to considering the liquidity covenant in our credit facility.
Factoring in the liquidity covenant, our availability was $81.6 million. The credit facility is available for working capital,
capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material
subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than our
insurance captive subsidiary). During the year, we executed two amendments to our credit agreement, which modified the
agreement as described below.
On May 13, 2020, we entered into an amendment (the "Second Amendment") to our credit agreement. As a result of the Second
Amendment, beginning May 13, 2020 until the date of delivery of our financial statements for the fiscal quarter ending June 30,
2021, the interest rate of the amended credit agreement was increased to LIBOR plus 3.00% and the commitment fee, paid on
the unused portion of the credit facility, was increased to 0.40%. During this period, we also had supplemental monthly
reporting obligations to our lenders and were prohibited from paying dividends and making stock repurchases and other general
investments. Additionally, capital expenditures were to be restricted to $10 million in the aggregate from May 13, 2020 through
the fiscal quarter ending March 31, 2021.
34
The Second Amendment temporarily waived certain financial covenants. The consolidated fixed charge coverage ratio was
waived until the fiscal quarter ending March 31, 2021, at which point the covenant level was to revert to a minimum of 1.50x.
The consolidated leverage ratio covenant was waived until the fiscal quarter ending March 31, 2021, at which point the
covenant level was to increase from 4.00x to 4.50x, stepping down to 4.25x in the second quarter of 2021 and 4.00x in the third
fiscal quarter of 2021 and thereafter. In addition, the Second Amendment added a monthly minimum liquidity covenant,
defined as the sum of unrestricted cash and revolver availability, ranging from $60 million to $70 million, commencing on May
13, 2020 to May 26, 2021.
On December 15, 2020, we executed an additional amendment (the “Third Amendment”) to our credit agreement. Commencing
with the effective date of the Third Amendment until the date of delivery of the financial statements for the fiscal quarter ending
December 29, 2021, the interest rate shall remain LIBOR plus 3.00%. As of the effective date of the Third Amendment, the
accordion feature is removed, and the total credit facility commitment is $375 million and will be reduced to $350 million on
July 1, 2021. Commencing with the effective date of the Third Amendment until the date of delivery of the financial statements
for the fiscal quarter ending September 29, 2021, the Company will continue to have supplemental monthly reporting
obligations to its lenders and will be prohibited from paying dividends and making stock repurchases and other general
investments. Additionally, existing restrictions on capital expenditures of $10 million in the aggregate will remain in effect
through March 31, 2021, at which point the restrictions will expand to $12 million in the aggregate through September 29,
2021.
The Third Amendment temporarily waives certain financial covenants. The consolidated fixed charge coverage ratio covenant
is waived through March 31, 2021, at which point the covenant level will be a minimum of 1.00x, adjusting to 1.25x on July 1,
2021, and 1.50x on September 30, 2021 and thereafter. The consolidated leverage ratio covenant is waived through March 31,
2021, at which point the covenant level will be a maximum of 5.25x, stepping down to 4.75x on July 1, 2021, and 4.00x on
September 30, 2021 and thereafter. In addition, the Third Amendment maintains a monthly minimum liquidity covenant,
defined as the sum of unrestricted cash and revolver availability, of $70 million, commencing on the effective date until the date
of delivery of the financial statements for the fiscal quarter ending September 29, 2021. We were in compliance with all
financial covenants as of December 30, 2020.
Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding
revolver loans was 3.15% as of December 30, 2020. Taking into consideration our interest rate swaps that are designated as
cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 5.01% as of December 30, 2020.
Interest Rate Hedges
We have interest rate swaps to hedge a portion of the forecasted cash flows of our floating rate debt. See Part II Item 7A.
Quantitative and Qualitative Disclosures About Market Risk for details on our interest rate swaps.
Contractual Obligations
Our future contractual obligations and commitments at December 30, 2020 consisted of the following:
Payments Due by Period
Total
Less than 1
Year
1-2 Years
3-4 Years
(In thousands)
5 Years and
Thereafter
Long-term debt
$
210,000 $
— $
210,000 $
— $
—
Finance lease obligations (a)
Operating lease obligations
Interest obligations (a)
Defined benefit plan obligations
Purchase obligations (b)
Unrecognized tax benefits (c)
38,556
209,824
19,279
2,307
155,631
1,047
4,737
25,184
10,516
716
155,631
—
8,121
42,527
8,763
956
—
—
6,334
36,074
19,364
106,039
—
222
—
—
—
413
—
—
Total
$
636,644 $
196,784 $
270,367 $
42,630 $
125,816
35
(a)
Interest obligations represent payments related to our long-term debt outstanding at December 30, 2020. For long-
term debt with variable rates, we have used the rate applicable at December 30, 2020 to project interest over the
periods presented in the table above, taking into consideration the impact of the interest rate swaps that are
designated as cash flow hedges for the applicable periods. The finance lease obligation amounts above are
inclusive of interest.
(b) Purchase obligations include amounts payable for company and franchised restaurants under purchase contracts
for food and non-food products. Many of these agreements do not obligate us to purchase any specific
volumes and include provisions that would allow us to cancel such agreements with appropriate notice. For
agreements with cancellation provisions, amounts included in the table above represent our estimate of purchase
obligations during the periods presented if we were to cancel these contracts with appropriate notice.
(c) Unrecognized tax benefits are related to uncertain tax positions. As we are not able to reasonably estimate the
timing or amount of these payments, the related balances have not been reflected in this table.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex
judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may significantly
impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could
significantly affect our results of operations and financial condition and cash flows in future years. Descriptions of what we
consider to be our most significant critical accounting policies are as follows:
Self-insurance liabilities. We are self-insured for a portion of our losses related to certain medical plans, workers’
compensation, general, product and automobile insurance liability. In estimating these liabilities, we utilize independent
actuarial estimates of expected losses, which are based on statistical analysis of historical data. Our estimates of expected losses
are adjusted over time based on changes to the actual costs of the underlying claims, which could result in additional expense or
reversal of expense previously recorded. See Note 2 to our Consolidated Financial Statements for a further discussion of our
policies regarding self-insurance liabilities.
Impairment of long-lived assets. We evaluate our long-lived assets for impairment at the restaurant level on a quarterly basis,
when assets are identified as held for sale or whenever changes or events indicate that the carrying value may not be
recoverable. For assets identified as held for sale, we use the market approach and consider proceeds from similar asset sales.
We assess impairment of restaurant-level assets based on the operating cash flows of the restaurant, expected proceeds from the
sale of assets and our plans for restaurant closings. For underperforming assets, we use the income approach to determine both
the recoverability and estimated fair value of the assets. To estimate future cash flows, we make certain assumptions about
expected future operating performance, such as revenue growth, operating margins, risk-adjusted discount rates, and future
economic and market conditions. If the long-lived assets of a restaurant are not recoverable based upon estimated future,
undiscounted cash flows, we write the assets down to their fair value. If these estimates or their related assumptions change in
the future, we may be required to record additional impairment charges. See Note 2 and Note 14 to our Consolidated Financial
Statements for further discussion of our policies regarding impairment of long-lived assets.
Dedesignation of Interest Rate Hedges. We estimated the amount reclassified from accumulated other comprehensive loss, net
to other nonoperating expense (income), net due to the dedesignation of certain hedge relationships as a result of cash flows
from certain interest rate swaps no longer being probable of occurring. In determining this estimate, we utilized credit default
curve and recovery rate assumptions applied to forecasted balances of variable rate debt. The credit default curve and recovery
rate assumptions are based on industry data for companies with similar credit and risk profiles. To estimate forecasted balances
of variable rate debt, we make certain assumptions about expected future operating performance, such as revenue growth,
operating margins, uses of cash, and future economic and market conditions. See Note 9 to our Consolidated Financial
Statements for a further discussion of our policies regarding interest rate swap dedesignation.
Income taxes. We make certain estimates and judgments in the calculation of our provision for income taxes, in the resulting tax
liabilities, and in the recoverability of deferred tax assets. We record valuation allowances against our deferred tax assets, when
necessary. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. We assess the
likelihood that our deferred tax assets in each of the jurisdictions in which we operate will be recovered from future taxable
income. Deferred tax assets do not include future tax benefits that we deem likely not to be realized.
We record a liability for unrecognized tax benefits resulting from more likely than not tax positions taken, or expected to be
taken, in an income tax return. We recognize any interest and penalties related to unrecognized tax benefits in income tax
36
expense. Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution.
See Note 15 to our Consolidated Financial Statements for a further discussion of our policies regarding income taxes.
Recent Accounting Pronouncements
See the Accounting Standards to be Adopted section of Note 2 to our Consolidated Financial Statements for further details of
recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, as
of December 30, 2020, borrowings under our credit facility bore interest at variable rates based on LIBOR plus 3.00% per
annum.
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt. A
summary of our interest rate swaps as of December 30, 2020 is as follows:
Trade Date
Effective Date
Maturity Date
Notional
Amount
Fair Value
Fixed Rate
(In thousands)
Swaps designated as
cash flow hedges
March 20, 2015
March 29, 2018
March 31, 2025
October 1, 2015
March 29, 2018
March 31, 2026
Dedesignated swaps
February 15, 2018
March 31, 2020
December 31, 2033
Total
$
$
$
$
120,000
50,000
$
$
100,000 (1) $
270,000
$
10,698
5,232
60,515
76,445
2.44 %
2.46 %
3.19 %
(1) The notional amount of the swaps entered into on February 15, 2018 increases annually beginning September 30, 2020 until they reach the
maximum notional amount of $425.0 million on September 28, 2029.
As of December 30, 2020, the total notional amount of our interest rate swaps was in excess of 100% of our floating rate debt.
Based on the levels of borrowings under the credit facility at December 30, 2020, if interest rates changed by 100 basis points,
our annual cash flow and income before taxes would not change. However, depending on market considerations, fluctuations in
the fair values of our interest rate swaps could be significant. With the exception of these changes in the fair value of our
interest rate swaps and in the levels of borrowings under our credit facility, there have been no material changes in our
quantitative and qualitative market risks since the prior reporting period. For additional information related to our interest rate
swaps, including changes in the fair value, refer to Notes 7, 9 and 18 to our Consolidated Financial Statements.
Commodity Price Risk
We purchase certain food products, such as beef, poultry, pork, eggs and coffee, and utilities such as gas and electricity, that 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.
37
We have established a process 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.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements which appears on page F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and financial officers, including the Chief Executive Officer
(the “CEO”) and Chief Financial Officer (the “CFO”), evaluated the effectiveness of our design and operation of our disclosure
controls and procedures pursuant to and as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as
amended (the “Exchange Act”), as of the end of the period covered by this report.
Based on their assessment as of December 30, 2020, our CEO and CFO have concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by
Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is designed to provide reasonable assurance to our
management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of
financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation
of the effectiveness of our internal control over financial reporting as of December 30, 2020 based on the framework in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of
December 30, 2020.
The effectiveness of our internal control over financial reporting as of December 30, 2020 has also been audited by KPMG
LLP, an independent registered public accounting firm, as stated in their report that appears herein.
38
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Denny’s Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Denny’s Corporation and subsidiaries’ (the Company) internal control over financial reporting as of
December 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 30, 2020, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 30, 2020 and December 25, 2019, the related
consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for each of the years
in the three-year period ended December 30, 2020, and the related notes (collectively, the consolidated financial statements),
and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Greenville, South Carolina
March 1, 2021
39
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item with respect to our executive officers and directors; compliance by our directors, executive
officers and certain beneficial owners of our common stock with Section 16(a) of the Exchange Act; the committees of our
Board of Directors; our Audit Committee Financial Expert; and our Code of Ethics is furnished by incorporation by reference to
information under the captions entitled “General-Equity Security Ownership,” “Election of Directors,” “Executive
Compensation,” “Related Party Transactions” and “Code of Ethics” in the proxy statement (to be filed hereafter) in connection
with Denny’s Corporation’s 2021 Annual Meeting of Stockholders (the “proxy statement”) and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report). Additional information required by this item related to our executive
officers appears in Item 1 of Part I of this report under the caption “Information about our Executive Officers.”
Item 11. Executive Compensation
The information required by this item is furnished by incorporation by reference to information under the captions entitled
“Executive Compensation” and “Election of Directors” in the proxy statement and possibly elsewhere in the proxy statement
(or will be filed by amendment to this report).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The security ownership of certain beneficial owners information required by this item is furnished by incorporation by
reference to information under the caption “Equity Security Ownership” in the proxy statement and possibly elsewhere in the
proxy statement (or will be filed by amendment to this report).
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 30, 2020 with respect to our compensation plans under which equity
securities of Denny’s Corporation are authorized for issuance.
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not approved
by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
(2)
Number of securities
remaining available
for future issuance
under equity
compensation plans
4,088,681
(1)
$
—
4,088,681
$
3.89
—
3.89
2,012,399
(3)
704,166
(4)
2,716,565
(1) Includes shares issuable in connection with our outstanding stock options, performance share awards and restricted stock
units awards.
(2) Includes the weighted-average exercise price of stock options only.
(3) Includes shares of our common stock available for issuance as awards of stock options, restricted stock, restricted stock
units, deferred stock units and performance awards under the Denny’s Corporation 2017 Omnibus Incentive Plan.
(4) Includes shares of our common stock available for issuance as awards of stock options and restricted stock units outside
of the Denny’s Incentive Plans in accordance with NASDAQ Listing Rule 5635(c)(4).
40
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is furnished by incorporation by reference to information under the captions “Related
Party Transactions” and “Election of Directors” in the proxy statement and possibly elsewhere in the proxy statement (or will
be filed by amendment to this report).
Item 14. Principal Accounting Fees and Services
The information required by this item is furnished by incorporation by reference to information under the caption entitled
“Selection of Independent Registered Public Accounting Firm” in the proxy statement and possibly elsewhere in the proxy
statement (or will be filed by amendment to this report).
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: See the Index to Consolidated Financial Statements which appears on page F-1 hereof.
(a)(2) Financial Statement Schedules: No schedules are filed herewith because of the absence of conditions under which they
are required or because the information called for is in our Consolidated Financial Statements or notes thereto appearing
elsewhere herein.
(a)(3) Exhibits: Certain of the exhibits to this Report, indicated by an asterisk, are hereby incorporated by reference from other
documents on file with the Commission with which they are electronically filed, under File No. 001-18051, to be a part hereof
as of their respective dates.
41
Exhibit No. Description
*3.1
*3.2
*4.1
+*10.1
+*10.2
+*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
Restated Certificate of Incorporation of Denny's Corporation dated March 3, 2003, as amended by Certificate of
Amendment to Restated Certificate of Incorporation to Increase Authorized Capitalization dated August 25,
2004 (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of Denny's Corporation for
the year ended December 29, 2004).
Amended and Restated By-laws of Denny’s Corporation, amended and restated as of November 7, 2018
(incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Denny’s Corporation filed with
the Commission on November 13, 2018).
Description of Common Stock of Denny’s Corporation (incorporated by reference to Exhibit 4.1 to the Annual
Report on Form 10-K of Denny’s Corporation for the year ended December 25, 2019).
Form of deferred stock unit award certificate to be used under the Denny's Corporation 2004 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of Denny's
Corporation for the year ended December 29, 2004).
Employment Offer Letter dated August 16, 2005 between Denny's Corporation and F. Mark Wolfinger
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Denny's Corporation for
the quarter ended September 28, 2005).
Employment Offer Letter dated January 6, 2011 between Denny's Corporation and John C. Miller (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Denny's Corporation for the quarter
ended March 30, 2011).
Third Amended and Restated Credit Agreement dated as of October 26, 2017 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 Citizens Bank,
National Association, as Co-Syndication Agents, Cadence Bank, N.A. and Fifth Third Bank, as Co-
Documentation Agents, and The Other Lenders Party Hereto, Wells Fargo Securities, LLC, Regions Capital
Markets, a Division of Regions Bank and Citizens Bank, National Association, as Joint Lead Arrangers and
Joint Bookrunners (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Denny's
Corporation filed with the Commission on October 31, 2017).
Third Amended and Restated Guarantee and Collateral Agreement dated as of October 26, 2017 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, National Association, as Administrative Agent (incorporated
by reference to Exhibit 99.2 to the Current Report on Form 8-K of Denny's Corporation filed with the
Commission on October 31, 2017).
First Amendment to Third Amended and Restated Credit Agreement dated June 26, 2018 among Denny's Inc.,
as the Borrower, Denny's Corporation, as Parent, and each of the Subsidiaries of Parent party thereto, as
Guarantors, and Wells Fargo Bank, National Association, as Administrative Agent on behalf of the Lenders
(incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny's Corporation for
the quarter ended September 26, 2018).
Second Amendment to Third Amended and Restated Credit Agreement dated May 13, 2020 among Denny's
Inc., as the Borrower, Denny's Corporation, as Parent, and each of the Subsidiaries of Parent party thereto, as
Guarantors, and Wells Fargo Bank, National Association, as Administrative Agent on behalf of the Lenders
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Denny's Corporation filed with
the Commission on May 14, 2020.)
Third Amendment to Third Amended and Restated Credit Agreement dated December 15, 2020 among Denny's
Inc., as the Borrower, Denny's Corporation, as Parent, and along with each of the Subsidiaries of Parent party
thereto, as Guarantors, and Wells Fargo Bank, National Association, as Administrative Agent on behalf of the
Lenders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Denny's Corporation
filed with the Commission on December 17, 2020.)
+*10.9
Denny's Corporation Amended and Restated Executive and Key Employee Severance Pay Plan (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Denny's Corporation for the quarter
ended September 26, 2018).
42
Exhibit No. Description
+*10.10
+*10.11
Denny's Inc. Deferred Compensation Plan, as amended and restated effective March 1, 2017 (incorporated by
reference to Exhibit 99.1 to the Registration Statement on Form S-8 of Denny's Corporation (Commission File
No. 333-216655) filed with the Commission on March 13, 2017).
Denny's Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 of Denny's Corporation (Commission File No. 333-217843) filed with the Commission on
May 10, 2017).
+*10.12
Denny's Corporation 2012 Omnibus Incentive Plan (incorporated by reference to Appendix A of the Definitive
Proxy Statement of Denny's Corporation filed with the Commission on April 5, 2012).
+*10.13
Denny's Corporation 2008 Omnibus Incentive Plan (incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K of Denny's Corporation filed with the Commission on May 27, 2008).
+*10.14
Amendment to the Denny's Corporation 2008 Omnibus Incentive Plan (incorporated by reference to Exhibit
10.3 to the Quarterly Report on Form 10-Q of Denny's Corporation for the quarter ended April 1, 2009).
+*10.15
Denny's Corporation Amended and Restated 2004 Omnibus Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny's Corporation for the quarter ended June 25,
2008).
+*10.16
Form of Long-Term Incentive Program Award Certificate (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Denny's Corporation for the quarter ended April 1, 2015).
+*10.17
Form of the Written Description of the Denny’s Long-Term Incentive Program (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Denny’s Corporation for the quarter ended April 1,
2015).
+*10.18
Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.28 to the Annual Report on
Form 10-K of Denny's Corporation for the year ended December 29, 2010).
+*10.19
+*10.20
+*10.21
+*10.22
+*10.23
+*10.24
+*10.25
+*10.26
Denny's Corporate Incentive Plan (incorporated by reference to Exhibit 10.30 to the Annual Report on Form
10-K of Denny's Corporation for the year ended December 30, 2009).
Form of deferred stock unit award certificate to be used under the Denny's Corporation 2012 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.27 to the Annual Report on From 10-K of Denny's
Corporation for the year ended December 31, 2014).
Form of deferred stock unit award certificate to be used under the Denny’s Corporation 2017 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K of Denny’s
Corporation for the year ended December 27, 2017).
2018 Long-Term Incentive Program Performance Share Unit Award Certificate (Executive Officers)
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Denny's Corporation for
the quarter ended March 28, 2018).
2018 Long-Term Incentive Program Performance Share Unit Award Certificate (Executive Officers with
Special Retirement Vesting) (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
of Denny's Corporation for the quarter ended March 28, 2018).
2019 Long-Term Incentive Program Performance Share Unit Award Certificate (Executive Officers)
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Denny’s Corporation for
the quarter ended March 27, 2019).
2019 Long-Term Incentive Program Performance Share Unit Award Certificate (Executive Officers with
Special Retirement Vesting) (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
of Denny’s Corporation for the quarter ended March 27, 2019).
2020 Long-Term Incentive Program Restricted Stock Unit Award (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q of Denny's Corporation for the quarter ended June 24, 2020.)
43
Exhibit No. Description
+*10.27
Summary of Non-Employee Director Compensation as of May 8, 2019 (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of Denny’s Corporation for the quarter ended June 26, 2019).
21.1
23.1
31.1
31.2
32.1
Subsidiaries of Denny’s Corporation.
Consent of KPMG LLP.
Certification of John C. Miller, 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.
Certification of Robert P. Verostek, Executive Vice President 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.
Statement of John C. Miller, Chief Executive Officer of Denny’s Corporation, and Robert P. Verostek,
Executive Vice President 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
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
+
*
Denotes management contracts or compensatory plans or arrangements.
Incorporated by reference.
Item 16. Form 10-K Summary
None.
44
DENNY’S CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F - 1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Denny’s Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Denny’s Corporation and subsidiaries (the Company) as of
December 30, 2020 and December 25, 2019, the related consolidated statements of operations, comprehensive income (loss),
shareholders’ deficit, and cash flows for each of the years in the three‑year period ended December 30, 2020, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 30, 2020 and December 25, 2019, and the results of
its operations and its cash flows for each of the years in the three‑year period ended December 30, 2020, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 30, 2020, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases
effective December 27, 2018 due to the adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and all
subsequent ASUs that modified Topic 842.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of assumptions underlying self-insurance liabilities
As discussed in Note 2 to the consolidated financial statements, the Company’s self-insurance liabilities related to workers’
compensation, general, product and automobile insurance as of December 30, 2020 were $14.0 million. The liabilities
represent estimated incurred losses. These estimates include assumptions regarding frequency and severity of claims as well
as changes in the Company’s business environment, medical costs and the regulatory environment that could impact the
overall self-insurance costs.
We identified the evaluation of assumptions underlying self-insurance liabilities as a critical audit matter. Specifically,
inherent uncertainty in the frequency and severity of claims assumptions that are used to actuarially estimate the self-
F - 2
insurance liabilities involved especially subjective auditor judgment. It also required professionals with specialized skills and
knowledge to evaluate these key assumptions and the impact of these assumptions on the self-insurance liabilities.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and
tested the operating effectiveness of certain internal controls over the Company’s self-insurance process, including controls
related to the underlying claims data used to develop the frequency and severity of historical claims. We evaluated the
Company’s ability to accurately estimate claims expense by comparing the prior estimated claim payments to actual claim
payments. We also assessed the Company’s estimate of the self-insurance liabilities by evaluating facts and circumstances
related to incurred claims received after year-end but before the consolidated financial statements were issued, to identify the
presence of trends not considered by the Company when it developed its assumptions. We involved actuarial professionals
with specialized skills and knowledge, who assisted with:
•
•
performing an independent assessment of the frequency and severity of the claims used by the Company to estimate
the self-insurance liabilities
developing an independent acceptable range for the self-insurance liabilities using the Company’s underlying historical
claims data, which involved assessing the frequency and severity of the Company’s claims assumptions.
Evaluation of assumptions underlying the de-designation of a cash flow hedging relationship
As discussed in Note 9 to the consolidated financial statements, during 2020 the Company determined that a portion of the
underlying cash flows related to a cash flow hedging relationship were no longer probable of occurring. Accordingly, the
Company de-designated the cash flow hedging relationship, discontinued cash flow hedge accounting treatment for certain
interest rate swaps and reclassified approximately $7.4 million of losses from accumulated other comprehensive loss, net to
other nonoperating expense (income), net. The determination of the amount reclassified was based on credit default curve and
recovery rate assumptions applied to forecasted balances of variable rate debt.
We identified the evaluation of assumptions underlying the de-designation of a cash flow hedging relationship as a critical
audit matter. Specifically, inherent uncertainty in forecasted balances of variable rate debt and credit default curve and
recovery rate assumptions used to estimate the amount to be reclassified from accumulated other comprehensive loss, net to
other nonoperating expense (income), net involved especially subjective auditor judgment. It also required professionals with
specialized skills and knowledge to evaluate these assumptions and their impact on the amount reclassified.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and
tested the operating effectiveness of certain internal controls over the Company’s de-designation process, including controls
related to evaluating forecasted balances of variable rate debt and the selected credit default curve and recovery rate
assumptions. We evaluated the Company’s forecasted balances of variable rate debt assumption by comparing the assumption
to company-specific operational information and minutes of internal communications to the Board of Directors. We also
compared certain balances of forecasted variable rate debt to actual balances of variable rate debt to assess the Company’s
ability to accurately forecast balances of variable rate debt. We involved valuation professionals with specialized skills and
knowledge, who assisted with:
•
•
performing an independent assessment of the credit default curve and recovery rate assumptions used by the Company
developing an independent acceptable range of losses reclassified from accumulated other comprehensive loss, net to
other nonoperating expense (income), net using the Company’s forecasted balances of variable rate debt.
/s/ KPMG LLP
We have served as the Company’s auditor since 2003.
Greenville, South Carolina
March 1, 2021
F - 3
Denny’s Corporation and Subsidiaries
Consolidated Balance Sheets
December 30, 2020
December 25, 2019
(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Investments
Receivables, net
Inventories
Assets held for sale
Prepaid and other current assets
Total current assets
Property, net of accumulated depreciation of $146,583 and $147,445, respectively
Financing lease right-of-use assets, net of accumulated amortization of $9,907 and $8,468,
respectively
Operating lease right-of-use assets, net
Goodwill
Intangible assets, net
Deferred financing costs, net
Deferred income taxes, net
Other noncurrent assets
Total assets
Liabilities
Current liabilities:
Current finance lease liabilities
Current operating lease liabilities
Accounts payable
Other current liabilities
Total current liabilities
Long-term liabilities:
Long-term debt
Noncurrent finance lease liabilities
Noncurrent operating lease liabilities
Liability for insurance claims, less current portion
Other noncurrent liabilities
Total long-term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ deficit
Common stock $0.01 par value; shares authorized - 135,000; December 30, 2020: 63,962
shares issued and outstanding; December 25, 2019: 109,415 shares issued and 57,095
shares outstanding
Paid-in capital
Deficit
Accumulated other comprehensive loss, net
Treasury stock, at cost, 0 and 52,320 shares, respectively
Total shareholders’ deficit
Total liabilities and shareholders’ deficit
$
$
$
$
3,892 $
2,272
21,349
1,181
1,125
18,847
48,666
86,154
9,830
139,534
36,884
51,559
2,414
23,210
32,698
430,949 $
1,839 $
16,856
12,021
46,462
77,178
210,000
13,530
137,534
10,309
112,844
484,217
561,395
3,372
3,649
27,488
1,325
1,925
14,974
52,733
97,626
11,720
158,550
36,832
53,956
1,727
14,718
32,525
460,387
1,674
16,344
20,256
57,307
95,581
240,000
14,779
152,750
11,454
83,887
502,870
598,451
640
123,833
(194,514)
(60,405)
—
(130,446)
430,949 $
1,094
603,980
(189,398)
(33,960)
(519,780)
(138,064)
460,387
See accompanying notes to consolidated financial statements.
F - 4
Denny’s Corporation and Subsidiaries
Consolidated Statements of Operations
Fiscal Year Ended
December 30, 2020 December 25, 2019 December 26, 2018
(In thousands, except per share amounts)
Revenue:
Company restaurant sales
Franchise and license revenue
Total operating revenue
Costs of company restaurant sales, excluding depreciation and
amortization:
Product costs
Payroll and benefits
Occupancy
Other operating expenses
Total costs of company restaurant sales
Costs of franchise and license revenue
General and administrative expenses
Depreciation and amortization
Operating (gains), losses and other charges, net
Total operating costs and expenses, net
Operating income
Interest expense, net
Other nonoperating (income) expense, net
Net income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
$
118,160 $
306,377 $
170,445
288,605
29,816
51,684
11,241
21,828
114,569
94,348
55,040
16,161
1,808
281,926
6,679
17,965
(4,171)
(7,115)
(1,999)
235,012
541,389
74,720
118,806
18,613
46,257
258,396
120,326
69,018
19,846
(91,180)
376,406
164,983
18,547
(2,763)
149,199
31,789
$
$
$
(5,116) $
117,410 $
(0.08) $
(0.08) $
1.96 $
1.90 $
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
60,812
60,812
59,944
61,833
See accompanying notes to consolidated financial statements.
411,932
218,247
630,179
100,532
164,314
23,228
60,708
348,782
114,296
63,828
27,039
2,620
556,565
73,614
20,745
619
52,250
8,557
43,693
0.69
0.67
63,364
65,562
F - 5
Denny’s Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Net income (loss)
$
(5,116) $
117,410 $
43,693
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment, net of tax of $(67), $15
and $53, respectively
Changes in the fair value of cash flow derivatives, net of tax of
$(12,345), $(10,410) and $(339), respectively
Reclassification of cash flow derivatives to interest expense,
net of tax of $874, $75 and $36, respectively
Reclassification of loss related to dedesignation of derivatives
to other nonoperating (income) expense, net of tax of
$1,892, $0 and $0, respectively
Amortization of unrealized losses related to dedesignated
derivatives to interest expense, net of tax of $214, $0 and
$0, respectively
Other comprehensive loss
Total comprehensive income (loss)
(197)
46
155
(34,565)
(30,076)
(2,256)
2,286
5,462
569
(26,445)
(31,561) $
$
216
—
—
271
—
—
(29,814)
87,596 $
(1,830)
41,863
See accompanying notes to consolidated financial statements.
F - 6
Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
Paid-in
Capital
(Deficit)
Accumulated
Other
Comprehensive
Loss, Net
Total
Shareholders’
Deficit
Balance, December 27, 2017
Cumulative effect adjustment
Net income
Other comprehensive loss
Share-based compensation on equity classified awards, net
Purchase of treasury stock
Equity forward contract issuance
Issuance of common stock for share-based compensation
Exercise of common stock options
Balance, December 26, 2018
Cumulative effect adjustment
Net income
Other comprehensive loss
Share-based compensation on equity classified awards, net
Purchase of treasury stock
Equity forward contract settlement
Issuance of common stock for share-based compensation
Exercise of common stock options
Balance, December 25, 2019
Net loss
Other comprehensive loss
Issuance of common stock
Share-based compensation on equity classified awards, net
Purchase of treasury stock
Retirement of treasury stock
Issuance of common stock for share-based compensation
Exercise of common stock options
Balance, December 30, 2020
107,740 $
—
—
—
—
—
—
447
398
108,585 $
—
—
—
—
—
—
468
362
109,415 $
—
—
8,000
—
—
(54,010)
447
110
63,962 $
1,077
—
—
—
—
—
—
5
4
1,086
—
—
—
—
—
—
5
3
1,094
—
—
80
—
—
(540)
5
1
640
(In thousands)
(43,151) $ (355,626) $ 594,166 $ (334,661) $
—
—
—
—
(3,901)
—
—
—
—
—
—
—
(61,189)
—
—
—
—
—
(15,446)
43,693
—
4,325
—
(6,763)
(5)
1,221
—
—
—
—
—
—
(47,052) $ (416,815) $ 592,944 $ (306,414) $
—
—
—
—
(4,879)
(389)
—
—
—
—
—
—
(96,202)
(6,763)
—
—
—
—
—
3,310
—
6,763
(5)
968
(394)
117,410
—
—
—
—
—
—
(52,320) $ (519,780) $ 603,980 $ (189,398) $
—
—
—
—
(1,690)
54,010
—
—
— $
—
—
—
—
(34,193)
553,973
—
—
— $ 123,833 $ (194,514) $
—
—
69,491
3,374
—
(553,433)
(5)
426
(5,116)
—
—
—
—
—
—
—
(2,316) $
—
—
(1,830)
—
—
—
—
—
(4,146) $
—
—
(29,814)
—
—
—
—
—
(33,960) $
—
(26,445)
—
—
—
—
—
—
(60,405) $
(97,360)
(15,446)
43,693
(1,830)
4,325
(61,189)
(6,763)
—
1,225
(133,345)
(394)
117,410
(29,814)
3,310
(96,202)
—
—
971
(138,064)
(5,116)
(26,445)
69,571
3,374
(34,193)
—
—
427
(130,446)
See accompanying notes to consolidated financial statements.
F - 7
Denny’s Corporation and Subsidiaries
Consolidated Statements of Cash Flows
December 30, 2020
Fiscal Year Ended
December 25, 2019
(In thousands)
December 26, 2018
$
(5,116) $
117,410 $
43,693
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows provided
by (used in) operating activities:
Depreciation and amortization
Operating (gains), losses and other charges, net
Gains (losses) on interest rate swap derivatives, net
Amortization of deferred financing costs
Gains on investments
(Gains) losses on early extinguishments of debt and leases
Deferred income tax expense
Increase (decrease) of tax valuation allowance
Share-based compensation
Changes in assets and liabilities:
Receivables
Inventories
Prepaids and other current assets
Other assets
Operating lease assets/liabilities
Accounts payable
Accrued salaries and vacations
Accrued taxes
Other accrued liabilities
Other noncurrent liabilities
Net cash flows provided by (used in) operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of restaurants and real estate
Proceeds from disposition of property
Investment purchases
Proceeds from sale of investments
Collections on notes receivable
Issuance of notes receivable
Net cash flows provided by (used in) investing activities
Cash flows from financing activities:
Revolver borrowings
Revolver payments
Long-term debt payments
Tax withholding on share-based payments
Deferred financing costs
Purchase of treasury stock
Purchase of equity forward contract
Proceeds from issuance of common stock
Proceeds from exercise of stock options
Net bank overdrafts
Net cash flows used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
16,161
1,808
(2,164)
876
(123)
224
3,981
(3,041)
7,948
6,378
101
(3,872)
(1,816)
844
(10,682)
(2,835)
(774)
(5,525)
(5,510)
(3,137)
(6,962)
—
9,398
(1,400)
2,900
1,814
(1,099)
4,651
140,500
(170,500)
(1,570)
(4,331)
(1,758)
(36,008)
—
69,571
427
2,675
(994)
520
3,372
3,892 $
19,846
(91,180)
—
608
(180)
(4)
16,005
(2,935)
6,694
(2,030)
1,668
(4,108)
(4,581)
(601)
(5,170)
(3,826)
(2,043)
(4,144)
1,898
43,327
(13,975)
(11,320)
129,721
(1,760)
—
3,654
(1,351)
104,969
164,400
(210,900)
(2,464)
(3,206)
—
(94,459)
—
—
971
(4,292)
(149,950)
(1,654)
5,026
3,372 $
27,039
2,620
—
607
(9)
(171)
6,193
121
6,038
(4,722)
141
921
2
—
(5,147)
2,175
283
(1,676)
(4,418)
73,690
(22,025)
(10,416)
3,052
(1,700)
—
2,740
(3,668)
(32,017)
136,000
(108,500)
(3,181)
(1,714)
—
(61,237)
(6,763)
—
1,225
2,540
(41,630)
43
4,983
5,026
See accompanying notes to consolidated financial statements.
F - 8
Denny’s Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Introduction and Basis of Reporting
Denny’s Corporation, Denny’s, or the Company, is one of America’s largest franchised full-service restaurant chains based on
number of restaurants. Denny’s restaurants are operated in 49 states, the District of Columbia, two U.S. territories and 11
foreign countries with principal concentrations in California (23% of total restaurants), Texas (12%) and Florida (8%).
The global crisis resulting from the spread of coronavirus ("COVID-19") has had a substantial impact on our restaurant
operations for the year ended December 30, 2020, which is expected to continue, with the timing of a recovery uncertain.
During the year ended December 30, 2020, many of our company and franchised and licensed restaurants were temporarily
closed and most of the restaurants that remained open had limited operations. Our operating results substantially depend upon
the sales volumes, restaurant profitability, and financial stability of our company and franchised and licensed restaurants.
We cannot currently estimate the duration or future negative financial impact of the COVID-19 pandemic on our business;
however, we expect the COVID-19 pandemic will continue to impact our results of operations through at least 2021. Ongoing
material adverse effects of the COVID-19 pandemic for an extended period could negatively affect our business, results of
operations, liquidity and financial condition and could impact our impairment assessments of accounts receivable, intangible
assets, long-lived assets and goodwill.
At December 30, 2020, the Denny’s brand consisted of 1,650 restaurants, 1,585 of which were franchised/licensed restaurants
and 65 of which were company restaurants. Changes in restaurant counts are as follows:
Company restaurants, beginning of period
Units opened
Units acquired from franchisees
Units sold to franchisees
Units closed
End of period
Franchised and licensed restaurants, beginning of
period
Units opened
Units purchased from Company
Units acquired by Company
Units closed
End of period
Total restaurants, end of period
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
68
—
—
—
(3)
65
1,635
20
—
—
(70)
1,585
1,650
173
—
—
(105)
—
68
1,536
30
105
—
(36)
1,635
1,703
178
1
6
(8)
(4)
173
1,557
29
8
(6)
(52)
1,536
1,709
Note 2. Summary of Significant Accounting Policies
The following accounting policies significantly affect the preparation of our Consolidated Financial Statements:
Use of Estimates. In preparing our Consolidated Financial Statements in conformity with U.S. generally accepted accounting
principles (GAAP), management is required to make certain assumptions and estimates that affect reported amounts of assets,
liabilities, revenues, expenses and the disclosure of contingencies. In making these assumptions and estimates, management
may from time to time seek advice and consider information provided by actuaries and other experts in a particular area. Actual
amounts could differ materially from these estimates.
Consolidation Policy. Our Consolidated Financial Statements include the financial statements of Denny’s Corporation and its
wholly-owned subsidiaries: Denny’s, Inc., DFO, LLC, Denny’s Realty, LLC and East Main Insurance Company. All significant
intercompany balances and transactions have been eliminated in consolidation.
F - 9
Fiscal Year. Our fiscal year ends on the last Wednesday in December. As a result, a fifty-third week is added to a fiscal year
every five or six years. Fiscal 2020 included 53 weeks of operation, whereas 2019 and 2018 each included 52 weeks of
operations.
Cash and Cash Equivalents. Our policy is to invest cash in excess of operating requirements in short-term highly liquid
investments with an original maturity of three months or less, which we consider to be cash equivalents. Cash and cash
equivalents include short-term investments of $0.4 million at December 30, 2020 and December 25, 2019.
Receivables. Effective December 26, 2019, the first day of fiscal 2020, we adopted Accounting Standards Update (“ASU”)
2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and all
subsequent ASUs that modified Topic 326. The new guidance replaces the incurred loss impairment methodology in current
GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform financial statement users of credit loss estimates.
Receivables, which are recorded at net realizable value, primarily consist of trade accounts receivables and financing
receivables from franchisees, vendor receivables and credit card receivables. Trade accounts receivables from franchisees
consist of royalties, advertising and rent. Financing receivables from franchisees primarily consist of notes from franchisees
related to the roll-out of restaurant equipment. We accrue interest on notes receivable based on the contractual terms. The
allowance for doubtful accounts is based on management’s estimates of expected credit losses. Receivables that are ultimately
deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for
doubtful accounts.
Inventories. Inventories consist primarily of food and beverages and are valued at the lower of first-in, first-out cost or net
realizable value.
Property and Depreciation. Owned property is stated at cost. Property under finance leases is stated at the lesser of its fair
value or the net present value of the related minimum lease payments at the lease inception. Maintenance and repairs are
expensed as incurred. We depreciate owned property over its estimated useful life using the straight-line method. We amortize
property held under finance leases (at capitalized value) over the lesser of its estimated useful life or the lease term. Building
assets are assigned estimated useful lives that range from five to 30 years. Other property and equipment assets are assigned
lives that range from two to ten years. Leasehold improvements are generally assigned lives between five and 15 years limited
by the expected lease term.
Goodwill. Amounts recorded as goodwill primarily represent excess reorganization value recognized as a result of our 1998
bankruptcy. We also record goodwill in connection with the acquisition of restaurants from franchisees. Likewise, upon the sale
of restaurant operations to franchisees, goodwill is decremented. We test goodwill for impairment at each fiscal year end and
more frequently if circumstances indicate impairment may exist. Such indicators include, but are not limited to, a significant
decline in our expected future cash flows, a significant adverse decline in our stock price, significantly adverse legal
developments and a significant change in the business climate.
Intangible Assets. Intangible assets consist primarily of trade names and reacquired franchise rights. Trade names are
considered indefinite-lived intangible assets and are not amortized. Reacquired franchise rights are amortized using the straight-
line basis over the term of the related franchise agreement. Reacquired franchise rights resulting from acquisitions are
accounted for using the purchase method of accounting and are estimated by management based on the fair value of the assets
received.
We test trade name assets for impairment at each fiscal year end, and more frequently if circumstances indicate impairment may
exist. We assess impairment of reacquired franchise rights whenever changes or events indicate that the carrying value may not
be recoverable. Costs incurred to renew or extend the term of recognized intangible assets are recorded in general and
administrative expenses in our Consolidated Statements of Operations.
Marketable Securities. Marketable securities included in investments consist of available for sale equity instruments and are
recorded at fair market value in our Consolidated Balance Sheets. The aggregate cost and fair value of these marketable
securities was $2.2 million and $2.3 million, respectively, at December 30, 2020 and $3.5 million and $3.6 million,
respectively, at December 25, 2019. Unrealized gains and losses included in fair value were losses of $0.1 million and gains of
$0.2 million at December 30, 2020 and December 25, 2019, respectively.
F - 10
Marketable securities included in other noncurrent assets consist of trading debt and equity mutual funds and are recorded at
fair market value in our Consolidated Balance Sheets. These securities represent the plan assets of our nonqualified deferred
compensation plan (the “plan assets”). The plan assets are held in a rabbi trust. Each plan participant’s account consists of their
contribution, our matching contribution (made prior to 2016) and each participant’s share of earnings or losses in the plan. We
have recorded offsetting deferred compensation liabilities as a component of other noncurrent liabilities in our Consolidated
Balance Sheets.
The realized and unrealized holding gains and losses related to marketable securities are recorded in other income (expense)
with an offsetting amount recorded in general and administrative expenses related to deferred compensation plan liabilities.
During 2020, 2019 and 2018, we incurred a net gain of $1.8 million, a net gain of $2.7 million and a net loss of $1.0 million,
respectively, related to marketable securities.
Deferred Financing Costs. Costs related to the issuance of debt are deferred and amortized as a component of interest expense
using the effective interest method over the terms of the respective debt issuances.
Self-insurance Liabilities. We record liabilities for insurance claims during periods in which we have been insured under large
deductible programs or have been self-insured for our medical claims and workers’ compensation, general, product and
automobile insurance liabilities. The liabilities represent estimated incurred losses. These estimates include assumptions
regarding claims frequency and severity as well as changes in our business environment, medical costs and the regulatory
environment that could impact our overall self-insurance costs.
Total workers’ compensation, general, product and automobile insurance liabilities at December 30, 2020 and December 25,
2019 were $14.0 million and $16.1 million, respectively.
Income Taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. All deferred taxes
are reported as noncurrent in our Consolidated Balance Sheets. A valuation allowance reduces our net deferred tax asset to the
amount that is more likely than not to be realized. We make certain estimates and judgments in the calculation of our provision
for incomes taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets.
We recognize positions taken or expected to be taken in a tax return in the Consolidated Financial Statements when it is more-
likely-than-not that the position would be sustained upon examination by tax authorities. A recognized tax position is then
measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement. We
recognize any interest and penalties related to unrecognized tax benefits in income tax expense. Assessment of uncertain tax
positions requires judgments relating to the amounts, timing and likelihood of resolution.
Leases and Subleases. Effective December 27, 2018, the first day of fiscal 2019, we adopted Accounting Standards Update
(“ASU”) 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. Upon adoption of Topic 842, we
recorded operating lease liabilities of $101.3 million and ROU assets of $94.2 million related to existing operating leases. In
addition, we recorded a cumulative effect adjustment increasing opening deficit by $0.4 million and deferred tax assets by
$0.1 million. See Note 8 for further information about our transition to Topic 842 and the required disclosures.
Lessee
We lease certain real estate and equipment for our restaurants and support facilities. At contract inception, we determine
whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset
for a period of time. We recognize a lease liability and a right-of-use (“ROU”) asset at the lease commencement date.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments
at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for
operating leases, and is subsequently measured at amortized cost using the effective interest method.
Operating lease ROU assets are initially and subsequently measured throughout the lease term at the carrying amount of the
lease liability adjusted for initial direct costs, prepayments, accrued payments and lease incentives, if any. Lease cost is
recognized on a straight-line basis over the lease term. Operating lease payments are classified as cash flows for operating
activities with ROU asset amortization and the change in the lease liability combined as "Operating lease assets/liabilities" in
the reconciliation of net income (loss) to net cash flows provided by (used in) operating activities in the Consolidated Statement
of Cash Flows. Finance lease ROU assets are initially measured at cost and subsequently amortized on a straight-line basis over
F - 11
the lesser of the useful life or the lease term. Finance lease payments are classified as cash flows used in financing activities in
the Consolidated Statement of Cash Flows. Operating and finance lease ROU assets are assessed for impairment using long-
lived assets impairment guidance.
We use a consistent lease term for calculating the depreciation period for the related assets, classifying the lease and computing
periodic rent expense where the lease terms include escalations in rent over the lease term.
The new lease guidance provides practical expedients and accounting elections for our ongoing accounting after adoption. We
elected the practical expedient to not separate nonlease components (such as common area maintenance) from lease
components in regard to all leases and the portfolio approach in applying the discount rate to our leases.
Key estimates and judgments include how we determine (1) lease payments, (2) lease term and (3) the discount rate used to
discount the unpaid lease payments to present value.
We have certain lease agreements structured with both a fixed base rent and a contingent rent based on a percentage of sales
over contractual levels, others with only contingent rent based on a percentage of sales and some with a fixed base rent adjusted
periodically for inflation or changes in the fair market rent rate. Contingent rent is recognized as sales occur. Our lease
agreements do not contain any material residual value guarantees or material restrictive covenants.
The exercise of lease renewal options is at our sole discretion, except in certain sublease situations in which we have
determined that it is reasonably certain that one or more options will be exercised, including where the exercise of a sublease
option compels us to exercise the renewal option of the underlying master lease. Renewal option periods are included in the
measurement of lease ROU asset and lease liability where the exercise is reasonably certain to occur.
The discount rate used to determine the present value of the lease payments is our estimated collateralized incremental
borrowing rate, based on the yield curve for the respective lease terms, as we generally cannot determine the interest rate
implicit in the lease.
Lessor
We lease or sublease certain restaurant properties to our franchisees and occasionally to third parties. The lease descriptions,
terms, variable lease payments and renewal options are the same as the lessee leases described above. Contingent rental income
is recognized when earned. Similar to our lessee accounting, we elected the lessor practical expedient to not separate nonlease
components from lease components in regard to all leases.
Refer to the Newly Adopted Accounting Standards section of this Note for adoption of the practical expedient on lease
concessions related to effects of the COVID-19 pandemic.
Employee Benefit Plans. Each year we measure and recognize the funded status of our defined benefit plans in our
Consolidated Balance Sheets as of December 31. That date represents the month-end that is closest to our fiscal year-end. The
funded status is adjusted for any contributions or significant events (such as a plan amendment, settlement, or curtailment that
calls for a remeasurement) that occurs between our fiscal year-end and December 31.
Derivative Instruments. We use derivative financial instruments to manage our exposure to interest rate risk. We do not enter
into derivative instruments for trading or speculative purposes. All derivatives are recognized on our Consolidated Balance
Sheets at fair value. Changes in the fair values of derivatives are recorded in earnings or other comprehensive income (“OCI”),
based on whether the instrument is designated as a hedge transaction. Gains or losses on derivative instruments reported in OCI
are classified to earnings in the period the hedged item affects earnings. If the underlying hedge transaction ceases to exist, any
associated amounts reported in OCI are reclassified to earnings. By entering into derivative instruments, we are exposed to
counterparty credit risk. When the fair value of a derivative instrument is in an asset position, the counterparty has a liability to
us, which creates credit risk for us. We manage our exposure to this risk by selecting counterparties with investment grade
credit ratings and regularly monitoring our market position with each counterparty.
Contingencies and Litigation. We are subject to legal proceedings involving ordinary and routine claims incidental to our
business, as well as legal proceedings that are nonroutine and include compensatory or punitive damage claims. Our ultimate
legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in
recording liabilities for potential litigation settlements. When the reasonable estimate is a range, the recorded loss will be the
best estimate within the range. We record legal settlement costs as other operating expenses in our Consolidated Statements of
Operations as those costs are incurred.
F - 12
Comprehensive Income (Loss). Comprehensive income (loss) includes net income (loss) and OCI items that are excluded from
net income (loss) under U.S. generally accepted accounting principles. OCI items include additional minimum pension liability
adjustments, the effective unrealized portion of changes in the fair value of cash flow hedges, and the reclassification and
amortization of loss related to the dedesignation of cash flow derivatives.
Segment. Denny’s operates in only one segment. All significant revenues and pre-tax earnings relate to retail sales of food and
beverages to the general public through either company or franchised restaurants.
Revenues. Effective December 28, 2017, the first day of fiscal 2018, we adopted ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. We elected to apply the modified retrospective
method of adoption to those contracts which were not completed as of December 28, 2017. In doing so, we applied the practical
expedient to aggregate all contract modifications that occurred before December 28, 2017 in determining the satisfied and
unsatisfied performance obligations, the transaction price and the allocation of the transaction price to the satisfied and
unsatisfied performance obligations.
Company Restaurant Revenue. Company restaurant revenue is recognized at the point in time when food and beverage products
are sold at company restaurants. We present company restaurant sales net of sales-related taxes collected from customers and
remitted to governmental taxing authorities.
Franchise Revenue. Franchise and license revenues consist primarily of royalties, advertising revenue, initial and other fees and
occupancy revenue.
Under franchise agreements we provide franchisees with a license of our brand’s symbolic intellectual property, administration
of advertising programs (including local co-operatives), and other ongoing support functions. These services are highly
interrelated so we do not consider them to be individually distinct performance obligations, and therefore account for them as a
single performance obligation. Revenue from franchise agreements is recognized evenly over the term of the agreement with
the exception of sales-based royalties.
Royalty and advertising revenues represent sales-based royalties that are recognized in the period in which the sales occur.
Sales-based royalties are variable consideration related to our performance obligation to our franchisees to maintain the
intellectual property being licensed. Under our franchise agreements, franchisee advertising contributions must be spent on
marketing and related activities. Advertising revenues and expenditures are recorded on a gross basis within the Consolidated
Statements of Operations.
Initial and other fees include initial, successor and assignment franchise fees (“initial franchise fees”). Initial franchise fees are
billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the commencement
date of the agreement and occurs over time based on the term of the underlying franchise agreement. In the event a franchise
agreement is terminated, any remaining deferred fees are recognized in the period of termination.
Initial and other fees also include revenue that are distinct from the franchise agreement and are separate performance
obligations. Training and other franchise services fees are billed and recognized at a point in time as services are rendered.
Similar to advertising revenue, other franchise services fees are recorded on a gross basis within the Consolidated Statements of
Operations.
Occupancy revenue results from leasing or subleasing restaurants to franchisees and is recognized over the term of the lease
agreement.
With the exception of initial and other franchise fees, revenues are typically billed and collected on a weekly basis. For 2020,
2019 and 2018, our ten largest franchisees accounted for 39%, 35% and 30% of our franchise revenues, respectively.
Gift cards. Company restaurants, franchised restaurants and certain third party retailers sell gift cards which have no stated
expiration dates. We recognize revenue when a gift card is redeemed in one of our company restaurants. We maintain a gift
card liability for cards sold in our company restaurants and for cards sold by third parties. Gift card breakage is recognized
proportionally as redemptions occur. Our gift card breakage primarily relates to cards sold by third parties and is recorded as
advertising revenue (included as a component of franchise and license revenue).
Advertising Costs. We expense production costs for radio and television advertising in the year in which the commercials are
initially aired and other advertising costs as incurred. Advertising costs for company restaurants are recorded as a component of
F - 13
other operating expenses in our Consolidated Statements of Operations and were $3.9 million, $11.2 million and $15.0 million
for 2020, 2019 and 2018, respectively. Advertising costs related to franchised restaurants are recorded as a component of
franchise and license costs and were $53.7 million, $81.1 million and $78.3 million in 2020, 2019 and 2018, respectively.
Restructuring and Exit Costs. Restructuring and exit costs are included as a component of operating (gains), losses and other
charges, net in our Consolidated Statements of Operations. Restructuring costs consist primarily of severance and other
restructuring charges for terminated employees.
Prior to the adoption of Topic 842, exit costs consisted primarily of the costs of future obligations related to closed restaurants.
Discounted liabilities for future lease costs and the fair value of related subleases of closed restaurants were recorded when the
restaurants were closed. All other costs related to closed restaurants were expensed as incurred. As a result of the adoption of
Topic 842, exit cost liabilities related to operating lease costs are now included as a component of operating lease liabilities in
our Consolidated Balance Sheets. Amounts recorded as exit costs include period costs related to closed units.
Disposal or Impairment of Long-lived Assets. We evaluate our long-lived assets for impairment at the restaurant level on a
quarterly basis, when assets are identified as held for sale or whenever changes or events indicate that the carrying value may
not be recoverable. For assets identified as held for sale, we use the market approach and consider proceeds from similar asset
sales. We assess impairment of restaurant-level assets based on the operating cash flows of the restaurant, expected proceeds
from the sale of assets and our plans for restaurant closings. For underperforming assets, we use the income approach to
determine both the recoverability and estimated fair value of the assets. To estimate future cash flows, we make certain
assumptions about expected future operating performance, such as revenue growth, operating margins, risk-adjusted discount
rates, and future economic and market conditions. If the long-lived assets of a restaurant are not recoverable based upon
estimated future, undiscounted cash flows, we write the assets down to their fair value. If these estimates or their related
assumptions change in the future, we may be required to record additional impairment charges. These charges are included as a
component of operating (gains), losses and other charges, net in our Consolidated Statements of Operations.
Assets held for sale consist of real estate properties and/or restaurant operations that we expect to sell within the next year. The
assets are reported at the lower of carrying amount or fair value less costs to sell. Fair value is based upon Level 2 inputs, which
include sales agreements. We cease recording depreciation on assets that are classified as held for sale. If the determination is
made that we no longer expect to sell an asset within the next year, the asset is reclassified out of held for sale.
Discontinued Operations. We evaluate restaurant closures and assets reclassified to assets held for sale for potential disclosure
as discontinued operations. Only disposals resulting in a strategic shift that will have a major effect on our operations and
financial results are reported as discontinued operations. There have been no such disposals, nor any disposals of individually
significant components. The gains and losses related to restaurant closures and assets reclassified to assets held for sale are
included as a component of operating (gain), losses and other charges, net in our Consolidated Statements of Operations.
Gains and Losses on Sales of Restaurants Operations to Franchisees, Real Estate and Other Assets. Generally, gains and
losses on sales of restaurant operations to franchisees (which may include real estate), real estate properties and other assets are
recognized when the sales are consummated and certain other gain recognition criteria are met. Total gains and losses are
included as a component of operating (gains), losses and other charges, net in our Consolidated Statements of Operations.
Share-based Compensation. Share-based compensation cost is measured at the grant date, based on the fair value of the award,
and is recognized as an expense over the requisite service period. Share-based compensation expense is included as a
component of general and administrative expenses in our Consolidated Statements of Operations. We account for forfeitures as
they occur. Excess tax benefits recognized related to share-based compensation are included as a component of provision for
(benefit from) income taxes in our Consolidated Statements of Operations and are classified as operating activities in our
Consolidated Statements of Cash Flows.
Generally, compensation expense related to performance share units and restricted stock units for board members is based on
the number of units granted, the period over which they are expected to vest and the fair market value of our common stock on
the date of the grant. For restricted stock units and performance share units that contain a market condition, compensation
expense is based on the Monte Carlo valuation method, which utilizes multiple input variables to determine the probability of
the Company achieving the market condition and the fair value of the award. The key assumptions used include expected
volatility and risk-free interest rates over the term of the award.
Subsequent to the vesting period, earned stock-settled restricted stock units and performance share units (both of which are
equity classified) are paid to the holder in shares of our common stock, provided the holder was still employed with Denny’s or
an affiliate as of the vesting date.
F - 14
Earnings Per Share. Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares and potential common shares outstanding during the period.
Newly Adopted Accounting Standards
Effective December 26, 2019, the first day of fiscal 2020, we adopted ASU 2016-13, “Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments.” The new guidance replaces the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform financial statement users of credit loss estimates. The adoption of
this guidance did not have a material impact on our Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting”. The new guidance provides optional guidance, for a limited time, to ease the potential
burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 is effective for
a limited time, from March 12, 2020 through December 31, 2022. The Company adopted this ASU on March 12, 2020. The
adoption of ASU 2020-04 did not have a significant impact on the Company’s consolidated financial position or results of
operations.
In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election
to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would
be accounted for under ASU 2016-02, “Leases (Topic 842): Targeted Improvements”, as though enforceable rights and
obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions
explicitly exist in the contract). Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will
not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract
and can elect to apply or not apply the lease modification guidance in Topic 842 to those contracts. This election is available for
concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the
lessor or the obligations of the lessee.
We have elected to apply this interpretive guidance to the rent relief we have secured, and have assumed that enforceable rights
and obligations for those concessions exist in the lease contract. As such, starting in April 2020, we began recognizing
abatements or deferrals in rents received from landlords as reductions in variable lease payments. This election will continue
while these abatement or deferrals are in effect.
Additional new accounting guidance became effective for us as of December 26, 2019 that we reviewed and concluded was
either not applicable to our operations or had no material effect on our Consolidated Financial Statements and related
disclosures.
Accounting Standards to be Adopted
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes”, which modifies Topic 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for financial
statements issued for annual periods beginning after December 15, 2020, and for the interim periods therein. The adoption of
ASU 2019-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of
operations.
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our
business or are not expected to have a material effect on our Consolidated Financial Statements as a result of future adoption.
F - 15
Note 3. Receivables
Receivables, net consisted of the following:
Receivables, net:
Trade accounts receivable from franchisees
Other receivables from franchisees
Vendor receivables
Credit card receivables
Other
Allowance for doubtful accounts
Total receivables, net
Other noncurrent assets:
Financing receivables from franchisees
December 30, 2020 December 25, 2019
(In thousands)
$
15,535 $
2,104
2,199
542
2,668
(1,699)
21,349 $
14,551
2,230
3,260
6,806
915
(274)
27,488
502 $
364
$
$
In response to the COVID-19 pandemic, direct financial relief to our franchisees has included the deferral of one week of
royalty and advertising fees due from franchisees during the first quarter of 2020 as well as rent payments due from franchisees
during certain periods of 2020. At December 30, 2020, trade accounts receivable from franchisees included $5.7 million of
amounts related to these deferrals. These balances are expected to be collected within one year. We recorded $1.5 million of
expected credit losses during the year ended December 30, 2020, based on actual and expected losses on franchise-related
receivables, primarily as a result of uncertainties related to the impacts of the COVID-19 pandemic.
Note 4. Property
Property, net consisted of the following:
Land
Buildings and leasehold improvements
Other property and equipment
Total property
Less accumulated depreciation
Property, net
December 30, 2020 December 25, 2019
(In thousands)
$
36,815 $
160,842
35,080
232,737
146,583
$
86,154 $
39,720
172,881
32,470
245,071
147,445
97,626
F - 16
The following table reflects the property assets, included in the table above, and buildings with finance leases which were
leased to franchisees:
December 30, 2020
December 25, 2019
Land
Buildings and leasehold improvements
Total property owned, leased to franchisees
Less accumulated depreciation
Property owned, leased to franchisees, net
Buildings held under finance leases, leased to franchisees
Less accumulated amortization
Property held under finance leases, leased to franchisees, net
(In thousands)
$
25,192 $
69,656
94,848
59,038
35,810
8,062
4,137
3,925
Total property leased to franchisees, net
$
39,735 $
27,205
78,584
105,789
65,476
40,313
8,445
3,768
4,677
44,990
Depreciation expense, including amortization of property under finance leases, for 2020, 2019 and 2018 was $13.2 million,
$16.3 million and $23.0 million, respectively. Substantially all owned property is pledged as collateral for our Credit Facility.
See Note 9.
Note 5. Goodwill and Intangible Assets
The following table reflects the changes in carrying amounts of goodwill:
Balance, beginning of year
Adjustments related to the sale of restaurants
Balance, end of year
Intangible assets consist of the following:
December 30, 2020 December 25, 2019
$
$
(In thousands)
36,832 $
52
36,884 $
39,781
(2,949)
36,832
December 30, 2020
December 25, 2019
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
(In thousands)
$
44,087 $
— $
44,087 $
120
—
120
12,218
4,866
15,516
$
56,425 $
4,866 $
59,723 $
—
—
5,767
5,767
Intangible assets with indefinite lives:
Trade names
Liquor licenses
Intangible assets with definite lives:
Reacquired franchise rights
Intangible assets
The weighted-average life of the reacquired franchise rights is approximately eight years. The amortization expense for
definite-lived intangibles for 2020, 2019 and 2018 was $3.0 million, $3.6 million and $4.1 million, respectively. Estimated
amortization expense for intangible assets with definite lives in the next five years is as follows:
F - 17
2021
2022
2023
2024
2025
$
(In thousands)
1,333
1,226
902
832
776
Due to the impact of the COVID-19 pandemic to the global economy, including but not limited to the volatility of the
Company's stock price as well as that of its competitors, the negative impact on sales at company and franchised and licensed
restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were
indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the year ended December 30,
2020. As such, the Company performed impairment assessments for both goodwill and indefinite-lived intangible assets and
concluded that the fair value of these assets substantially exceeded their carrying values. However, we recorded approximately
$0.1 million of impairment related to reacquired franchise rights during the year ended December 30, 2020. See Note 14.
We updated our impairment assessments as of December 30, 2020 to perform our annual impairment tests and determined that
none of the recorded goodwill or other intangible assets with indefinite lives were impaired.
Note 6. Other Current Liabilities
Other current liabilities consisted of the following:
Accrued payroll
Accrued insurance, primarily current portion of liability for insurance claims
Accrued taxes
Accrued advertising
Gift cards
Other
Other current liabilities
December 30, 2020 December 25, 2019
(In thousands)
$
17,076 $
4,667
4,850
4,318
6,127
9,424
$
46,462 $
19,689
6,515
5,624
6,753
6,469
12,257
57,307
F - 18
Note 7. Fair Value of Financial Instruments
Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair value measurements as of December 30, 2020:
Deferred compensation plan investments (1)
Interest rate swaps, net (2)
Investments (3)
Total
Fair value measurements as of December 25, 2019:
Deferred compensation plan investments (1)
Interest rate swaps (2)
Investments (3)
Total
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(In thousands)
$ 13,627 $
13,627 $
— $
(76,445)
2,272
—
—
(76,445)
2,272
$ (60,546) $
13,627 $
(74,173) $
$ 13,517 $
13,517 $
— $
(44,670)
3,649
—
—
(44,670)
3,649
$ (27,504) $
13,517 $
(41,021) $
—
—
—
—
—
—
—
—
(1) The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments.
(2) The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models. The key inputs for the valuation models
are quoted market prices, interest rates and forward yield curves. See Note 9 for details on the interest rate swaps.
(3) The fair value of investments is valued using a readily determinable net asset value per share based on the fair value of the underlying securities.
There are no significant redemption restrictions associated with these investments.
Those assets and liabilities measured at fair value on a nonrecurring basis are summarized below:
Fair value measurements as of December 30, 2020:
Assets held and used (1)
Significant
Unobservable
Inputs
(Level 3)
Impairment
Charges
(In thousands)
$
2,425 $
1,564
(1) At December 30, 2020, impaired assets were written down to their fair value. To determine fair value, we used the income approach, which assumes
that the future cash flows reflect current market expectations. These fair value measurements require significant judgment using Level 3 inputs, such
as discounted cash flows from operations, which are not observable from the market, directly or indirectly. There is uncertainty in the projected
future cash flows used in the Company's impairment analysis, which requires the use of estimates and assumptions. If actual performance does not
achieve the projections, or if the assumptions used change in the future, we may be required to recognize impairment charges in future periods.
Assets that are measured at fair value on a non-recurring basis include property, operating right-of-use assets, finance right-of-
use assets and reacquired franchise rights. During the year ended December 30, 2020, we recognized impairment charges of
$4.1 million related to certain of these assets. See Note 14.
The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses are deemed to
approximate fair value due to the immediate or short-term maturity of these instruments. The fair value of notes receivable
approximates the carrying value after consideration of recorded allowances and related risk-based interest rates. The liabilities
under our credit facility are carried at historical cost, which approximates fair value. See Note 13 for the disclosures related to
the fair value of assets held for sale and acquired franchised restaurants. The fair value of our senior secured revolver
approximates its carrying value since it is a variable rate facility (Level 2).
F - 19
Note 8. Leases
Lessee
Our operations utilize property, facilities and equipment leased from others. Buildings and facilities are primarily used for
restaurants and support facilities. Many of our restaurants are operated under lease arrangements which generally provide for a
fixed base rent, and, in many instances, contingent rent based on a percentage of gross revenues. Initial terms of land and
restaurant building leases generally range from 10 to 20 years, exclusive of options to renew, which are typically for five year
periods. Leases of equipment consist primarily of restaurant equipment, computer equipment and vehicles. Initial terms of
equipment leases generally range from three to five years.
Lessor
We lease or sublease certain restaurant properties to our franchisees and occasionally to third parties. The lease descriptions,
terms, variable lease payments and renewal options are generally the same as the lessee leases described above.
The components of lease costs were as follows:
Classification
December 30, 2020 December 25, 2019
Fiscal Year Ended
Lease costs
Finance lease costs:
Amortization of right-of-use assets
Depreciation and amortization
$
Interest on lease liabilities
Operating lease costs:
Operating lease costs - company
Operating lease costs - franchise
Interest expense, net
Occupancy
Costs of franchise and license revenue
Operating lease costs - general and administrative General and administrative expenses
Operating lease costs - closed stores
Restructuring charges and exit costs
Variable lease costs:
Variable lease costs - company
Variable lease costs - franchise
Occupancy
Costs of franchise and license revenue
Variable lease costs - general and administrative
General and administrative expenses
Variable lease costs - closed stores
Restructuring charges and exit costs
Sublease income:
Sublease income - franchise
Franchise and license revenue
Sublease income - closed stores
Restructuring charges and exit costs
(In thousands)
1,870 $
3,129
6,432
18,682
100
173
2,854
6,102
61
56
(30,925)
(114)
Total lease costs
$
8,420 $
2,991
4,536
8,253
17,097
108
—
5,993
7,001
41
49
(28,986)
(306)
16,777
Lease terms and discount rates were as follows:
Weighted-average remaining lease term (in years):
Finance leases
Operating leases
Weighted-average discount rate:
Finance leases
Operating leases
December 30, 2020 December 25, 2019
9.3
10.7
23.8 %
5.8 %
9.7
10.8
23.5 %
5.9 %
F - 20
The components of lease income were as follows:
Classification
December 30, 2020 December 25, 2019
Fiscal Year Ended
Lease income
Operating lease income - franchise
Franchise and license revenue
Operating lease income - closed stores
Restructuring charges and exit costs
Variable lease income - franchise
Franchise and license revenue
Variable lease income - closed stores
Restructuring charges and exit costs
Total lease income
$
$
Cash and supplemental noncash amounts were as follows:
(In thousands)
33,621 $
66
8,246
48
41,981 $
28,050
255
10,464
49
38,818
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases
Operating cash flows from operating leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for new finance lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Fiscal Year Ended
December 30, 2020 December 25, 2019
(In thousands)
$
$
$
$
$
3,129 $
23,511 $
1,570 $
142 $
4,831 $
4,536
26,329
2,464
305
79,534
Maturities of lease liabilities and receipts in accordance with Topic 842 as of December 30, 2020 were as follows:
2021
2022
2023
2024
2025
Thereafter
Total undiscounted cash flows
Less: interest
Present value of lease liabilities
Less: current lease liabilities
Long-term lease liabilities
Lease Liabilities
Lease Receipts
Finance
Operating
Operating
$
4,737 $
25,184 $
(In thousands)
4,343
3,778
3,171
3,163
19,364
38,556
23,187
15,369
1,839
$
13,530 $
22,381
20,146
18,621
17,453
106,039
209,824 $
55,434
154,390
16,856
137,534
31,732
28,792
26,210
24,704
24,248
177,448
313,134
F - 21
Rental expense and income in accordance with Topic 840 as of December 26, 2018 was comprised of the following:
Rental expense:
Included as a component of occupancy:
Base rents
Contingent rents
Included as a component of costs of franchise and license revenue:
Base rents
Contingent rents
Total rental expense
Rental income:
Included as a component of franchise and license revenue:
Base rents
Contingent rents
Total rental income
Note 9. Long-Term Debt
Long-term debt consisted of the following:
Revolving loans
Finance lease obligations
Total long-term debt
Less current maturities
Noncurrent portion of long-term debt
Fiscal Year Ended
December 26, 2018
(In thousands)
$
$
$
$
10,272
3,074
15,108
2,629
31,083
22,831
4,662
27,493
December 30, 2020 December 25, 2019
$
$
(In thousands)
210,000 $
15,369
225,369
1,839
223,530 $
240,000
16,453
256,453
1,674
254,779
There are no scheduled maturities of our revolving loans due in 2021. The $210.0 million of revolving loans are due October
26, 2022.
Denny’s Corporation and certain of its subsidiaries have a credit facility consisting of a five-year $375 million senior secured
revolver (with a $30 million letter of credit sublimit). As of December 30, 2020, we had outstanding revolver loans of $210.0
million and outstanding letters of credit under the senior secured revolver of $17.3 million. These balances resulted in
availability of $147.7 million under the credit facility prior to considering the liquidity covenant in our credit facility. Factoring
in the liquidity covenant, our availability was $81.6 million. The credit facility is available for working capital, capital
expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material subsidiaries and
is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than our insurance captive
subsidiary). During the year, we executed two amendments to our credit agreement, which modified the agreement as described
below.
On May 13, 2020, we entered into an amendment (the "Second Amendment") to our credit agreement. As a result of the Second
Amendment, beginning May 13, 2020 until the date of delivery of our financial statements for the fiscal quarter ending June 30,
2021, the interest rate of the amended credit agreement was increased to LIBOR plus 3.00% and the commitment fee, paid on
the unused portion of the credit facility, was increased to 0.40%. During this period, we have supplemental monthly reporting
obligations to our lenders and we are prohibited from paying dividends and making stock repurchases and other general
investments. Additionally, capital expenditures were to be restricted to $10 million in the aggregate from May 13, 2020 through
the fiscal quarter ending March 31, 2021.
F - 22
The Second Amendment temporarily waived certain financial covenants. The consolidated fixed charge coverage ratio was
waived until the fiscal quarter ending March 31, 2021, at which point the covenant level was to revert to a minimum of 1.50x.
The consolidated leverage ratio covenant was waived until the fiscal quarter ending March 31, 2021, at which point the
covenant level was to increase from 4.00x to 4.50x, stepping down to 4.25x in the second quarter of 2021 and 4.00x in the third
fiscal quarter of 2021 and thereafter. In addition, the Second Amendment added a monthly minimum liquidity covenant,
defined as the sum of unrestricted cash and revolver availability, ranging from $60 million to $70 million, commencing on May
13, 2020 to May 26, 2021.
On December 15, 2020, we executed an additional amendment (the “Third Amendment”) to our credit agreement. Commencing
with the effective date of the Third Amendment until the date of delivery of the financial statements for the fiscal quarter ending
December 29, 2021, the interest rate shall remain LIBOR plus 3.00%. As of the effective date of the Third Amendment, the
accordion feature was removed, and the total credit facility commitment was reduced from $400 million to $375 million and
will be reduced to $350 million on July 1, 2021. As a result of the decrease in borrowing capacity, we wrote off $0.2 million of
deferred financing costs as a component of other nonoperating (income) expense, net in the Consolidated Statements of
Operations. Commencing with the effective date of the Third Amendment until the date of delivery of the financial statements
for the fiscal quarter ending September 29, 2021, the Company will continue to have supplemental monthly reporting
obligations to its lenders and will be prohibited from paying dividends and making stock repurchases and other general
investments. Additionally, existing restrictions on capital expenditures of $10 million in the aggregate will remain in effect
through March 31, 2021, at which point the restrictions will expand to $12 million in the aggregate through September 29,
2021.
The Third Amendment temporarily waives certain financial covenants. The consolidated fixed charge coverage ratio covenant
is waived through March 31, 2021, at which point the covenant level will be a minimum of 1.00x, adjusting to 1.25x on July 1,
2021, and 1.50x on September 30, 2021 and thereafter. The consolidated leverage ratio covenant is waived through March 31,
2021, at which point the covenant level will be a maximum of 5.25x, stepping down to 4.75x on July 1, 2021, and 4.00x on
September 30, 2021 and thereafter. In addition, the Third Amendment maintains a monthly minimum liquidity covenant,
defined as the sum of unrestricted cash and revolver availability, of $70 million, commencing on the effective date until the date
of delivery of the financial statements for the fiscal quarter ending September 29, 2021. We were in compliance with all
financial covenants as of December 30, 2020.
Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding
revolver loans was 3.15% and 3.47% as of December 30, 2020 and December 25, 2019, respectively. Taking into consideration
our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans
was 5.01% and 3.99% as of December 30, 2020 and December 25, 2019, respectively.
Interest Rate Hedges
We have receive-variable, pay-fixed interest rate swaps to hedge the forecasted cash flows of our floating rate debt. We initially
designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to variable
interest payments due on forecasted notional amounts. A summary of our interest rate swaps as of December 30, 2020 is as
follows:
Trade Date
Effective Date
Maturity Date
Notional
Amount
Fair Value
Fixed Rate
(In thousands)
Swaps designated as
cash flow hedges
March 20, 2015
March 29, 2018
March 31, 2025
October 1, 2015
March 29, 2018
March 31, 2026
Dedesignated swaps
February 15, 2018
March 31, 2020
December 31, 2033
Total
$
$
$
$
120,000
50,000
$
$
100,000 (1) $
270,000
$
10,698
5,232
60,515
76,445
2.44 %
2.46 %
3.19 %
(1) The notional amount of the swaps entered into on February 15, 2018 increases annually beginning September 30, 2020 until they reach the
maximum notional amount of $425.0 million on September 28, 2029.
F - 23
Swaps Designated as Cash Flow Hedges
To the extent the swaps are highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of
the swaps are not included in the Consolidated Statements of Operations but are reported as a component of accumulated other
comprehensive loss, net. The interest rate swaps entered into in 2015 are designated as cash flow hedges with unrealized gain
and losses recorded as a component of accumulated other comprehensive loss, net.
As of December 30, 2020, the fair value of swaps designated as cash flow hedges was $15.9 million and was recorded as a
component of other noncurrent liabilities with an offsetting amount (before taxes) recorded as a component of accumulated
other comprehensive loss, net in our Consolidated Balance Sheets. See Note 18 for the amounts recorded in accumulated other
comprehensive loss related to the interest rate swaps. We expect to reclassify approximately $3.9 million from accumulated
other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to swaps designated
as cash flow hedges during the next twelve months.
Dedesignated Interest Rate Hedges
During the quarter ended June 24, 2020, we determined that a portion of the underlying cash flows related to our hedging
relationship entered into in 2018 (“2018 Swaps”) were no longer probable of occurring over the term of the interest rate swaps
as a result of the ongoing impacts of the COVID-19 pandemic and using proceeds from our share offering described in Note 18
to repay a portion of our long-term debt. Accordingly, during the quarter ended June 24, 2020, we dedesignated the cash flow
relationship and discontinued hedge accounting treatment for the 2018 Swaps. As a result, we reclassified approximately
$7.4 million of losses from accumulated other comprehensive loss, net to other nonoperating expense (income), net in our
Consolidated Statements of Operations for the year ended December 30, 2020 related to the portion of the forecasted
transaction no longer considered probable of occurring. The determination of the amount reclassified was based on credit
default curve and recovery rate assumptions applied to forecasted balances of variable rate debt.
The remaining amounts of unrealized losses related to the 2018 Swaps are included in accumulated other comprehensive loss,
net and are amortized into the Consolidated Statements of Operations as a component of interest expense, net over the
remaining term of the 2018 Swaps. For the year ended December 30, 2020, we reclassified unrealized losses of approximately
$0.8 million to interest expense, net related to the 2018 Swaps. At December 30, 2020, approximately $64.4 million (before
taxes) of unrealized losses remained in accumulated other comprehensive loss, net.
As a result of the dedesignated cash flow relationship related to the 2018 Swaps, changes in the fair value of the 2018 Swaps
are recorded as a component of other nonoperating expense (income), net in our Consolidated Statements of Operations. For the
year ended December 30, 2020, we recorded income of approximately $10.3 million as a component of nonoperating expense
(income) related to the 2018 Swaps resulting from changes in fair value.
As of December 30, 2020, the fair value of the dedesignated interest rate swaps was $60.5 million, $0.3 million of which was
recorded as a component of other current liabilities and $60.2 million of which was recorded as a component of other
noncurrent liabilities in our Consolidated Balance Sheets. We expect to amortize approximately $0.2 million from accumulated
other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to dedesignated
interest rate swaps during the next twelve months.
Note 10. Revenues
Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and
franchised and licensed restaurants. The following table disaggregates our revenue by sales channel and type of good or service:
F - 24
Fiscal Year Ended
December 30, 2020
December 25, 2019
December 26, 2018
(In thousands)
Company restaurant sales
$
118,160 $
306,377 $
411,932
Franchise and license
revenue:
Royalties
Advertising revenue
Initial and other fees
Occupancy revenue
Franchise and license
revenue
Total operating revenue
$
67,501
53,745
7,332
41,867
108,813
81,144
6,541
38,514
170,445
288,605 $
235,012
541,389 $
101,557
78,308
6,422
31,960
218,247
630,179
Company restaurant sales decreased from $411.9 million in 2018 to $118.2 million in 2020, primarily as a result of impact of
the sale of company restaurants to franchisees and, during 2020, the impact of the COVID-19 pandemic. Franchise and license
revenue increased from $218.2 million in 2018 to $235.0 million in 2019 primarily as a result of the impact of the sale of
company restaurants to franchisees. The decrease in franchise and licenses revenue to $170.4 million in 2020 is primarily the
result of the impact of the COVID-19 pandemic. Many of our company and franchised and licensed restaurants were
temporarily closed and most of the restaurants that remained open had limited operations during 2020 resulting in significant
declines in revenues.
Balances related to contracts with customers consists of receivables, deferred franchise revenue and deferred gift card revenue.
See Note 3 for details on our receivables.
Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being
amortized into revenue and amounts related to development agreements and unopened restaurants that will begin amortizing
into revenue when the related restaurants are opened. Deferred franchise revenue represents our remaining performance
obligations to our franchisees, excluding amounts of variable consideration related to sales-based royalties and advertising. The
components of the change in deferred franchise revenue are as follows:
Balance, December 25, 2019
Fees received from franchisees
Revenue recognized (1)
Balance, December 30, 2020
Less current portion included in other current liabilities
Deferred franchise revenue included in other noncurrent liabilities
(In thousands)
$
$
23,256
868
(3,318)
20,806
1,997
18,809
(1) Of this amount $3.2 million was included in the deferred franchise revenue balance as of December 25, 2019.
As of December 30, 2020, the deferred franchise revenue expected to be recognized in the future is as follows:
2021
2022
2023
2024
2025
Thereafter
Deferred franchise revenue
(In thousands)
$
$
1,997
1,893
1,812
1,760
1,690
11,654
20,806
Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party
locations. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The
F - 25
balance of deferred gift card liabilities as of December 30, 2020 and December 25, 2019 was $6.1 million and $6.5 million,
respectively. During the year ended December 30, 2020, we recognized revenue of $0.4 million from gift card redemptions at
company restaurants.
Financial Statement Impact of Adoption
Upon adoption of Topic 606, we recorded a cumulative effect adjustment related to previously recognized initial franchise fees
resulting in a $21.0 million increase to deferred franchise revenue, a $15.6 million increase to opening deficit and a $5.4 million
increase to deferred tax assets. The deferred franchise revenue resulting from the cumulative effect adjustment will be
amortized over the remaining lives of the individual franchise agreements. Also upon adoption, we recorded a cumulative effect
adjustment to recognize breakage in proportion to redemptions that occurred prior to December 28, 2017 resulting in a decrease
of $0.6 million to gift card liability (a component of other current liabilities), a $0.5 million increase to accrued advertising (a
component of other current liabilities) and a $0.1 million decrease to opening deficit.
Note 11. Employee Benefit Plans
We maintain defined contribution plans and defined benefit plans which cover a substantial number of employees.
Defined Contribution Plans
Eligible employees can elect to contribute up to 25% of their compensation to our 401(k) plan. Effective January 1, 2016, the
plan was amended and restated to incorporate Safe Harbor Plan design features which included changes to participant
eligibility, company contribution amounts and vesting. As a result, we match up to a maximum of 4% of compensation deferred
by the participant.
In addition, a non-qualified deferred compensation plan is offered to certain employees. This plan allows participants to defer
up to 50% of annual salary and up to 75% of bonuses and incentive compensation awards, on a pre-tax basis. There are no
matching contributions made under this plan.
We made total contributions of $1.5 million, $1.9 million and $2.2 million for 2020, 2019 and 2018, respectively, under these
plans.
F - 26
Defined Benefit Plans
Benefits under our defined benefit plans are based upon each employee’s years of service and average salary. The following
table provides a reconciliation of the changes in the benefit obligations, plan assets, and funded status of our defined benefit
plans:
December 30, 2020 December 25, 2019
(In thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year
Interest cost
Actuarial losses
Benefits paid
Settlements
Benefit obligation at end of year
Accumulated benefit obligation
Change in Plan Assets:
Fair value of plan assets at beginning of year
Employer contributions
Benefits paid
Settlements
Fair value of plan assets at end of year
Unfunded status at end of year
Amounts recognized on the balance sheet:
Other current liabilities
Other noncurrent liabilities
Net amount recognized
Amounts in accumulated other comprehensive loss not yet reflected in net
period benefit cost:
Unamortized actuarial losses, net
Other changes in plan assets and benefit obligations recognized in
accumulated other comprehensive loss:
Benefit obligation actuarial loss
Amortization of net loss
Settlement loss recognized
Other comprehensive income (loss)
The components of net periodic benefit cost were as follows:
$
$
$
$
$
$
$
$
$
$
$
2,337 $
41
448
(151)
(377)
2,298 $
2,298 $
— $
528
(151)
(377)
— $
(2,298) $
(717) $
(1,581)
(2,298) $
2,393
81
25
(162)
—
2,337
2,337
—
162
(162)
—
—
(2,337)
(662)
(1,675)
(2,337)
(1,087) $
(823)
(448) $
89
95
(264) $
(25)
86
—
61
Interest cost
Amortization of net loss
Settlement loss recognized
Net periodic benefit cost
Assumptions
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
$
$
41 $
89
95
225 $
81 $
86
—
167 $
76
112
—
188
The discount rates used to determine the benefit obligations as of December 30, 2020 and December 25, 2019 were 1.34% and
2.56%, respectively. The discount rates used to determine net period pension costs for 2020, 2019 and 2018 were 2.56%, 3.83%
and 3.08%, respectively.
F - 27
In determining the discount rate, we have considered long-term bond indices of bonds having similar timing and amounts of
cash flows as our estimated defined benefit payments. We use a yield curve based on high quality, long-term corporate bonds to
calculate the single equivalent discount rate that results in the same present value as the sum of each of the plan’s estimated
benefit payments discounted at their respective spot rates.
Contributions and Expected Future Benefit Payments
We made contributions of $0.5 million and $0.2 million to our defined benefit plans during the years ended December 30, 2020
and December 25, 2019, respectively. We expect to contribute $0.7 million to our defined benefit plans during 2021.
Benefits expected to be paid for each of the next five years and in the aggregate for the five fiscal years from 2026 through
2030 are as follows:
2021
2022
2023
2024
2025
2026 through 2030
Note 12. Share-Based Compensation
Share-Based Compensation Plans
Defined Benefit Plans
(In thousands)
$
716
406
550
122
100
413
We maintain four share-based compensation plans under which stock options and other awards granted to our employees and
directors are outstanding. Currently, the Denny’s Corporation 2017 Omnibus Incentive Plan (the “2017 Omnibus Plan”) is used
to grant share-based compensation to selected employees, officers and directors of Denny’s and its affiliates. However, we
reserve the right to pay discretionary bonuses, or other types of compensation, outside of this plan. At December 30, 2020, there
were 2.0 million shares available for grant under the 2017 Omnibus Plan. In addition, we have 0.7 million shares available to be
issued outside of the 2017 Omnibus Plan pursuant to the grant or exercise of employment inducement awards of stock options
and restricted stock units in accordance with NASDAQ Listing Rule 5635(c)(4).
Share-Based Compensation Expense
Total share-based compensation expense included as a component of net income (loss) was as follows:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Employee share awards
Restricted stock units for board members
Total share-based compensation
$
$
7,104 $
844
7,948 $
5,765 $
929
6,694 $
5,039
999
6,038
The income tax benefits recognized as a component of the provision for (benefit from) income taxes in our Consolidated
Statements of Operations related to share-based compensation expense were approximately $2.0 million, $1.7 million and $1.6
million during the years ended December 30, 2020, December 25, 2019 and December 26, 2018, respectively.
F - 28
Employee Share Awards
Employee share awards consist of performance share units and restricted stock units (which are equity classified). Prior to fiscal
2020, we primarily granted performance share units (“PSUs”) containing a market condition based on the total shareholder
return of our stock compared with the returns of a group of peer companies and performance share units containing a
performance condition based on the Company’s achievement of certain operating metrics. The number of shares that are
ultimately issued is dependent upon the level of obtainment of the market and performance conditions. The following table
summarizes the employee share awards activity during the year ended December 30, 2020:
Outstanding, beginning of year
Granted
Vested
Forfeited
Cancellations due to modification
Reissuance due to modification
Outstanding, end of year
Convertible, end of year
Weighted
Average Grant
Date
Fair Value
Units
(In thousands)
1,681 $
824 $
(829) $
(113) $
(522) $
522 $
1,563 $
577 $
16.22
10.47
11.84
16.25
16.83
9.04
12.91
14.92
During the year ended December 30, 2020, as a component of our annual compensation program, we granted certain employees
approximately 0.8 million restricted stock units with a weighted average grant date fair value of $10.47 per share that vest over
a two-year period, as defined under the terms of the award. The vesting period for these restricted stock units is the two-year
period beginning May 20, 2020 through May 20, 2022.
Modification of Performance Share Units
On September 30, 2020, the Company’s Board of Directors (the "Board") approved adjustments to certain PSUs granted to
employees as part of the Company’s Long-Term Incentive Program.
Awards for 2018 and 2019 were originally made 100% in the form of PSUs with three-year performance periods (2018-2020
for the 2018 PSUs and 2019-2021 for the 2019 PSUs). The PSUs are earned based 50% on growth in earnings per share over
the performance period (“EPS Growth”) and 50% on the relative total stockholder return of the Company for the performance
period against a peer group for the 2018 awards and against the S&P 600 Consumer Discretionary Index for the 2019 awards
(“Relative TSR”).
The full service dining sector in which the Company operates has been severely negatively impacted by business disruptions
resulting from the COVID-19 pandemic. These business disruptions, which could not have been foreseen when the 2018 and
2019 PSUs were awarded, have caused the EPS Growth goals for the PSUs to be unattainable. To address the loss of retentive
and incentive value due to these unforeseen events, the Board approved the following adjustments to the 2018 and 2019 PSUs:
2018 PSUs
The EPS Growth goal for the 2018 PSUs was measured in accordance with the methodology established at the time of grant for
the first two years of the performance period, 2018-2019, before the onset of the COVID-19 pandemic. That performance was
above the maximum goal that had been set. That portion of the award was then prorated by two-thirds (since two-thirds of the
performance period had been completed before the pandemic). The modification impacts approximately 0.2 million PSUs with
a fair value of approximately $2.4 million at the modification date based on the grant date fair value of $10.00, the market value
of our stock on the date of grant. The modified award equals 100% of target (i.e., 150% performance times two-thirds). The
modified award vested and was expensed during the year ended December 30, 2020 (the remaining term of the original award).
Prior to the modification, the fair value of the award was zero.
F - 29
2019 PSUs
The Board removed the 2019-2021 EPS Growth goal and will instead apply the 2019-2021 Relative TSR goal to that portion of
the award. The modification impacts approximately 0.3 million PSUs with a fair value of approximately $2.3 million at the
modification date. As these awards contain a market condition, a Monte Carlo valuation was used to determine the
modification date fair value of $8.24 per share. The modified award will vest and be expensed over the fifteen-month period
ending December 29, 2021 (the remaining term of the original award), subject to continued employment. Prior to the
modification, the fair value of the award was zero.
The Board did not change the existing Relative TSR portion of either award. These adjustments were accounted for as
modifications beginning in the fourth quarter of 2020.
For 2020, 2019 and 2018, the weighted average grant date fair value of awards granted was $10.47, $19.02 and $16.97,
respectively.
We made payments of $0.2 million, $0.4 million and $0.2 million in cash during 2020, 2019 and 2018, respectively, related to
converted performance share units. Payments relate to the payment of payroll taxes. The intrinsic value of units converted was
$12.0 million, $16.9 million and $9.8 million during 2020, 2019 and 2018, respectively. As of December 30, 2020 and
December 25, 2019, we had accrued compensation of $0.1 million and $0.1 million, respectively, included as a component of
other current liabilities and $0.2 million and $0.2 million, respectively, included as a component of other noncurrent liabilities
in our Consolidated Balance Sheets, which represents future estimated payroll taxes. As of December 30, 2020, we had $8.8
million of unrecognized compensation cost related to unvested performance share unit awards granted, which is expected to be
recognized over a weighted average of 1.3 years.
Restricted Stock Units for Board Members
During the year ended December 30, 2020, we granted less than 0.1 million restricted stock units (which are equity classified)
with a weighted average grant date fair value of $10.43 per unit to non-employee members of our Board. The restricted stock
units vest after a one year service period. A director may elect to convert these awards into shares of common stock on a
specific date in the future (while still serving as a member of our Board), upon termination as a member of our Board or in three
equal annual installments commencing after termination of service as a member of our Board. During the year ended
December 30, 2020, less than 0.1 million restricted stock units were converted into shares of common stock.
There were 0.8 million and 0.7 million restricted stock units outstanding as of December 30, 2020 and December 25, 2019,
respectively. As of December 30, 2020, we had approximately $0.3 million of unrecognized compensation cost related to all
unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 0.4 years.
Stock Options
Prior to 2012, stock options were granted that vest evenly over three years, have a 10-year contractual life and are issued at the
market value at the date of grant. There were no options granted in 2020, 2019 or 2018.
The following table summarizes information about stock options outstanding and exercisable at December 30, 2020:
Options
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(In thousands, except per share amounts)
Outstanding, beginning of year
Exercised
Outstanding, end of year
Exercisable, end of year
140 $
(110) $
30 $
30 $
3.89
3.89
3.89
3.89
0.1
0.1
$
$
305
305
The total intrinsic value of the options exercised was $0.8 million, $6.6 million and $4.9 million during the years ended
December 30, 2020, December 25, 2019 and December 26, 2018, respectively.
F - 30
Note 13. Refranchisings and Acquisitions
Refranchisings
The following table summarizes the activity related to our refranchising and development strategy. Gains (losses) on the sales
of company restaurants and real estate are included as a component of operating (gains), losses and other charges, net in our
Consolidated Statements of Operations. See Note 14.
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
Restaurants sold to franchisees
Gains (losses) on sales of company restaurants:
Cash Proceeds
Receivables
Less: Property sold
Less: Goodwill
Less: Intangibles
Less: Deferred gain
(Dollars in thousands)
—
105
$
— $
118,964 $
—
—
—
—
—
920
(30,511)
(2,897)
(2,260)
(1,350)
Total gains (losses) on sales of company restaurants
$
— $
82,866 $
Real estate parcels sold
Gains on sales of real estate:
Cash proceeds
Noncash consideration
Less: Property sold
Less: Other assets
Total gains on sales of real estate
10
6
9,419 $
10,680 $
—
(3,648)
(835)
3,000
(1,686)
(120)
4,936 $
11,874 $
$
$
8
1,777
—
(2,448)
(62)
(13)
—
(746)
—
—
—
—
—
—
No restaurants were sold to franchisees during 2020 as we completed our transition to a more franchise-based model during
2019. The majority of gains on sales of real estate during 2019 qualified for like-kind exchange treatment related to real estate
acquired. In addition to the cash proceeds received on the sale of real estate during 2019, we also recorded additional noncash
consideration for the fair value of restaurant space we expect to receive within a building being developed by the buyer of the
real estate. The fair value of this space was determined using a market approach with Level 2 inputs based on third party
appraisals of fair values of other similar properties. The $3.0 million of noncash consideration is recorded as a component of
other noncurrent assets in our Consolidated Balance Sheets as of December 30, 2020 and December 25, 2019.
As of December 30, 2020, we have recorded assets held for sale at their carrying amount of $1.1 million (consisted of property
of $1.0 million, other assets of $0.1 million) related to two parcels of real estate. There were $1.9 million in assets held for sale,
at their carrying value, as of December 25, 2019 (consisted of property of $1.6 million, other assets of $0.2 million and
goodwill of $0.1 million) related to four company restaurants and two pieces of real estate.
Acquisitions
We account for the acquisition of franchised restaurants using the acquisition method of accounting for business combinations.
The purchase price allocations were based on Level 3 fair value estimates. The following table summarizes our restaurant and
real estate acquisition activity.
F - 31
Restaurants acquired from franchisees
—
—
6
Fiscal Year Ended
December 30, 2020 December 25, 2019 December 26, 2018
(Dollars in thousands)
Purchase price allocation:
Reacquired franchise rights
Property
Goodwill
Total purchase price
Finance leases recorded
Real estate parcels acquired
Total purchase price
$
$
$
$
— $
—
—
— $
— $
—
—
— $
5,434
1,121
1,574
8,129
— $
— $
2,409
—
— $
5
11,320 $
1
1,787
Note 14. Operating (Gains), Losses and Other Charges, Net
Operating (gains), losses and other charges, net consists of the following:
Fiscal Year Ended
December 30, 2020 December 25, 2019 December 26, 2018
(In thousands)
Gains on sales of assets and other, net
$
(4,678) $
(93,608) $
Restructuring charges and exit costs
Impairment charges
2,403
4,083
2,428
—
Operating (gains), losses and other charges, net
$
1,808 $
(91,180) $
(513)
1,575
1,558
2,620
Gains on sales of assets and other, net of $4.7 million for the year ended December 30, 2020 were primarily related to the sales
of parcels of real estate. Gains on sales of assets and other, net of $93.6 million for the year ended December 25, 2019 were
primarily the result of sales of company restaurants and real estate as part of our refranchising and development strategy. See
Note 13 for details on refranchisings. Gains on sales of assets and other, net of $0.5 million for the year ended December 26,
2018 primarily related to gains of $1.2 million of insurance settlements on fire-damaged and hurricane-damaged restaurants,
partially offset by $0.7 million of losses on sales of company owned units to franchisees.
Restructuring charges and exit costs consists of the following:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Exit costs
Severance and other restructuring charges
Total restructuring charges and exit costs
$
$
204 $
2,199
2,403 $
272 $
2,156
2,428 $
518
1,057
1,575
Exit costs primarily consists of costs related to closed restaurants. Exit cost liabilities were $0.1 million and $0.2 million as of
December 30, 2020 and December 25, 2019, respectively. Exit cost liabilities related to lease costs are included as a component
of operating lease liabilities in our Consolidated Balance Sheets. See Note 8.
F - 32
Severance and other restructuring charges for the year ended December 30, 2020 were primarily related to positions eliminated
as a cost reduction effort in response to the COVID-19 pandemic. Severance and other restructuring charges for the years ended
December 25, 2019 and December 26, 2018 were primarily the result of positions eliminated as part of our refranchising and
development strategy announced during the fourth quarter of 2018. As of December 30, 2020 and December 25, 2019, we had
accrued severance and other restructuring charges of $0.6 million and $0.9 million, respectively. The balance as of
December 30, 2020 is expected to be paid during the next 12 months.
We recorded impairment charges of $4.1 million for the year ended December 30, 2020 resulting from the impacts of the
COVID-19 pandemic. The $4.1 million included $2.4 million related to property, $1.6 million related to operating lease ROU
assets, $0.1 million related to reacquired franchise rights and less than $0.1 million related to finance lease ROU assets.
Impairment charges of $1.6 million for the year ended December 26, 2018 primarily related to the impairment of an
underperforming unit.
Note 15. Income Taxes
The provisions for (benefits from) income taxes were as follows:
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
(In thousands)
Current:
Federal
State and local
Foreign
Deferred:
Federal
State and local
(Decrease) increase of valuation allowance
$
(3,497) $
12,421 $
(109)
667
393
3,588
(3,041)
5,156
1,142
9,944
6,061
(2,935)
Total provision for (benefit from) income taxes
$
(1,999) $
31,789 $
The reconciliation of income taxes at the U.S. federal statutory tax rate to our effective tax rate was as follows:
(632)
1,833
1,042
5,432
761
121
8,557
Statutory provision rate
21 %
21 %
21 %
December 30, 2020 December 25, 2019 December 26, 2018
State, foreign and local taxes, net of federal income tax
benefit
Change in state valuation allowance
General business credits generated
Foreign tax credits generated
Carryback of net operating loss rate differential
Section 162(m) and share-based compensation
Insurance premiums
Other
Effective tax rate
(11)
(1)
9
2
12
(11)
5
2
8
(2)
(2)
(1)
—
(3)
—
—
6
—
(5)
(2)
—
(3)
—
(1)
28 %
21 %
16 %
For 2020, the difference in the overall effective rate from the U.S. statutory rate was primarily due to state and foreign taxes and
the generation of employment credits. The 2020 rate was also impacted by a $0.9 million benefit from the statutory rate
differential due to a net operating loss carryback to a prior year and an expense of $1.0 million from disallowed compensation
deductions.
For 2019, there was no significant difference between our effective tax rate and the statutory tax rate of 21%. The impact of
state taxes on the statutory rate was partially offset by the generation of employment and foreign tax credits. In addition, the
F - 33
2019 rate benefited $2.0 million related to share-based compensation and $2.0 million related to the completion of an Internal
Revenue Service federal income audit of the 2016 tax year.
The 2018 rate was primarily impacted by the statutory tax rate reduction under the Tax Cuts and Jobs Act of 2017. For 2018,
the difference in the overall effective rate from the U.S. statutory rate was primarily due to state taxes and the generation of
employment and foreign tax credits. In addition, the 2018 rate benefited $1.4 million from items related to share-based
compensation.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law as a response
to the economic impacts of the COVID-19 pandemic. As a result of the CARES Act, the Company is allowed to carryback a
current year net operating loss to years 2015 and forward, to obtain approximately $2.1 million in federal income tax refunds.
See Note 16 for a discussion of other items related to the CARES Act.
The following table represents the approximate tax effect of each significant type of temporary difference that resulted in
deferred income tax assets or liabilities.
Deferred tax assets:
Self-insurance accruals
Finance lease liabilities
Operating lease liabilities
Accrued exit cost
Interest rate swaps
Pension, other retirement and compensation plans
Deferred income
General business and foreign tax credit carryforwards - state and federal
Net operating loss carryforwards - state
Charitable contribution carryforwards - federal and state
Total deferred tax assets before valuation allowance
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Deferred finance costs
Operating lease right-of-use assets
Fixed assets
Other accruals
Total deferred tax liabilities
Net deferred tax asset
December 30, 2020 December 25, 2019
(In thousands)
$
3,315 $
1,369
39,555
25
19,806
10,638
5,337
2,782
5,888
161
88,876
(7,223)
81,653
(14,579)
(86)
(35,732)
(7,679)
(367)
(58,443)
$
23,210 $
4,202
1,263
43,497
48
11,491
10,549
4,688
2,945
9,621
—
88,304
(10,264)
78,040
(14,858)
(211)
(40,751)
(6,711)
(791)
(63,322)
14,718
The Company’s state net operating loss tax asset of approximately $5.9 million includes $4.6 million related to South Carolina.
The $3.0 million change in the valuation allowance primarily relates to the expiration of South Carolina net operating loss
carryforwards that may never be utilized.
Of the $7.2 million valuation allowance, $4.4 million related to South Carolina net operating loss carryforwards, $1.5 million
relates to California enterprise zone credits and $0.3 million relates to foreign tax credit carryforwards, all of which may never
be utilized.
It is more likely than not that we will be able to utilize all of our existing temporary differences and most of our remaining state
tax net operating losses and state credit tax carryforwards, net of existing valuation allowance, prior to their expiration.
F - 34
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits:
Balance, beginning of year
Decrease related to prior-year tax positions
Balance, end of year
December 30, 2020 December 25, 2019
$
$
(In thousands)
1,047 $
—
1,047 $
2,940
(1,893)
1,047
There was no interest expense associated with unrecognized tax benefits for the years ended December 30, 2020 and
December 25, 2019.
We file income tax returns in the U.S. federal jurisdictions and various state jurisdictions. With few exceptions, we are no
longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2016. We
completed our federal audit by the Internal Revenue Service for tax year 2016 during 2019. We remain subject to examination
for U.S. federal taxes for 2017, 2018 and 2019 and in the following major state jurisdictions: California (2016-2020), Florida
(2017-2020) and Texas (2016-2020).
Note 16. Other CARES Act Provisions
The CARES Act allowed eligible employers to claim employee retention tax credits (“ERTC”) for qualified wages paid after
March 12, 2020 and before January 1, 2021.
We qualified for the credit for the entire period subsequent to March 12, 2020 under the provisions of the CARES Act as (1)
our business operations were fully or partially suspended due to government COVID-related orders limiting our business and
(2) our gross receipts during a calendar quarter in 2020 were below 50% of the gross receipts for the same calendar quarter in
2019 and our sales never returned to 80% of 2019’s sales in any quarter within 2020. The amount of the credit for 2020 is 50%
of qualified wages paid not to exceed $10,000 per person during 2020.
The total amount of credits recorded in 2020 related to the ERTC was $2.6 million, of which $0.9 million was included as a
component of costs of company restaurant sales and $1.7 million was included as a component of general and administrative
expenses in our Consolidated Statement of Operations for the year ended December 30, 2020.
In addition, as allowed under the CARES Act, we have deferred $3.1 million of our portion of FICA taxes. We expect to pay
the amounts deferred in 2021.
Note 17. Net Income (Loss) Per Share
The amounts used for the basic and diluted net income (loss) per share calculations are summarized below:
Fiscal Year Ended
December 30, 2020 December 25, 2019 December 26, 2018
(In thousands, except per share amounts)
Net income (loss)
$
(5,116) $
117,410 $
43,693
Weighted average shares outstanding - basic
Effect of dilutive share-based compensation awards
Weighted average shares outstanding - diluted
60,812
—
60,812
59,944
1,889
61,833
Basic net income (loss) per share
Diluted net income (loss) per share
$
$
(0.08) $
(0.08) $
1.96 $
1.90 $
Anti-dilutive share-based compensation awards(1)
1,682
270
63,364
2,198
65,562
0.69
0.67
—
(1) For the year ended December 30, 2020, share-based compensation awards have been omitted from the calculations because they have an anti-
dilutive effect on loss per share.
F - 35
Note 18. Shareholders’ Equity
Share Repurchases
We suspended share repurchases as of February 27, 2020 and terminated our previously approved Rule 10b5-1 Repurchase Plan
effective March 16, 2020 in light of uncertain market conditions arising from the COVID-19 pandemic. Under our amended
credit agreement, we are prohibited, until the date of delivery of our financial statements for the fiscal quarter ending September
29, 2021, from making any stock repurchases.
Over the past several years, our Board has approved share repurchase programs authorizing us to repurchase up to a set amount
of shares or dollar amount of our common stock. Under the programs, we may, from time to time, purchase shares in the open
market (including pre-arranged stock trading plans in accordance with guidelines specified in Rule 10b5-1 under the Securities
Exchange Act of 1934, as amended) or in privately negotiated transactions, subject to market and business conditions. During
2019, 2017 and 2016, the Board approved share repurchase programs for $250 million, $200 million and $100 million of our
common stock, respectively.
During 2020, we repurchased a total of 1.7 million shares of our common stock for approximately $34.2 million, thus
completing the 2017 repurchase program. During 2019, including the settlement of the 2018 accelerated share repurchase
(“ASR”) agreement, we repurchased a total of 5.3 million shares of our common stock for approximately $103.0 million.
During 2018, including shares repurchased under the 2018 ASR, we repurchased a total of 3.9 million shares of our common
stock for $61.2 million. As of December 30, 2020, there was approximately $248.0 million remaining under the 2019
repurchase program.
In recent years, as part of our previously authorized share repurchase programs, we have entered into variable term, capped
ASR agreements to repurchase our common stock. Pursuant to the terms of these ASR agreements, we pay cash, receive an
initial delivery of shares of our common stock (which represents the minimum shares to be delivered based on the cap price)
and record treasury stock related to these shares. The remaining balance is recorded as an equity forward contract. When
settled, the final delivery of shares is received and treasury stock is recorded related to the additional shares. The total number
of shares repurchased is based on a combined discounted volume-weighted average price (“VWAP”) per share, which is
determined based on the average of the daily VWAP of our common stock, less a fixed discount, over the term of the ASR
agreement.
In November 2018, we entered into a $25 million ASR agreement with MUFG (the “2018 ASR”). We paid $25 million in cash
and received approximately 1.1 million shares of our common stock (which represents the minimum shares to be delivered
based on the cap price) and recorded $18.2 million of treasury stock related to these shares. The remaining balance of $6.8
million was recorded as additional paid-in capital in shareholders’ deficit as of December 26, 2018 as an equity forward
contract. During 2019, we settled the 2018 ASR agreement, recording $6.8 million of treasury stock related to the final delivery
of an additional 0.4 million shares of our common stock based on a combined discounted VWAP of $17.04 per share.
Repurchased shares as of December 25, 2019, are included as treasury stock in our Consolidated Balance Sheets and our
Consolidated Statements of Shareholders’ Deficit.
Retirement of Treasury Stock
In the fourth quarter of fiscal 2020, the Board approved the retirement of 54.0 million shares of Treasury stock at a weighted
average share price of $10.26. As of year end December 30, 2020, no shares remained in treasury.
Issuance and Sale of Common Stock
On July 1, 2020, the Company entered into an underwriting agreement with Wells Fargo Securities, LLC, as representative of
the several underwriters named therein, for the issuance and sale by the Company of 8,000,000 shares of its common stock, par
value $0.01 per share, in an underwritten public offering at a price to the public of $9.15 per share. On July 6, 2020, the
Company received net proceeds of $69.6 million from the sale of shares, after deducting the underwriters' discounts and
commissions and offering expenses.
F - 36
Accumulated Other Comprehensive Loss
The components of the change in accumulated other comprehensive loss were as follows:
Pensions
Derivatives
(In thousands)
Accumulated Other
Comprehensive
Loss
Balance as of December 27, 2017
$
(982) $
(1,334) $
(2,316)
Benefit obligation actuarial gain
Amortization of net loss (1)
Changes in the fair value of cash flow derivatives
Reclassification of cash flow derivatives to interest
expense, net (2)
Income tax (expense) benefit
96
112
—
—
(53)
—
—
(2,595)
307
303
96
112
(2,595)
307
250
Balance as of December 26, 2018
$
(827) $
(3,319) $
(4,146)
Benefit obligation actuarial loss
Amortization of net loss (1)
Changes in the fair value of cash flow derivatives
Reclassification of cash flow derivatives to interest
expense, net (2)
Income tax (expense) benefit
Balance as of December 25, 2019
$
Benefit obligation actuarial loss
Amortization of net loss (1)
Settlement loss recognized
Changes in the fair value of cash flow derivatives
Reclassification of cash flow derivatives to interest
expense, net (2)
Reclassification of loss related to dedesignation of
derivatives to other nonoperating expense
(income)(3)
Amortization of unrealized losses related to
dedesignated derivatives to interest expense, net (3)
Income tax benefit
(25)
86
—
—
(15)
(781) $
(448)
89
95
—
—
—
—
67
—
—
(40,486)
291
10,335
(33,179) $
—
—
—
(25)
86
(40,486)
291
10,320
(33,960)
(448)
89
95
(46,910)
(46,910)
3,160
7,354
783
9,365
3,160
7,354
783
9,432
Balance as of December 30, 2020
$
(978) $
(59,427) $
(60,405)
(1) Before-tax amount that was reclassified from accumulated other comprehensive loss and included as a component of pension expense within
general and administrative expenses in our Consolidated Statements of Operations. See Note 11 for additional details.
(2) Amounts reclassified from accumulated other comprehensive loss into income represent payments made to the counterparty for the effective
portions of the interest rate swaps. These amounts are included as a component of interest expense in our Consolidated Statements of Operations.
We expect to reclassify approximately $3.9 million from accumulated other comprehensive loss related to our interest rate swaps during the next
twelve months. See Note 9 for additional details.
(3) During the quarter ended June 24, 2020, we dedesignated the cash flow relationship and discontinued hedge accounting treatment for the 2018
Swaps. As a result, we reclassified approximately $7.4 million of losses from accumulated other comprehensive loss, net to other nonoperating
expense (income), net in our Consolidated Statements of Operations related to the portion of forecasted transaction no longer considered probable
of occurring. The remaining losses related to the 2018 Swaps will continue to be included in accumulated other comprehensive loss, net and will
be amortized as a component of interest expense, net in our Consolidated Statements of Operations over the remaining term of the 2018 Swaps.
For the year ended December 30, 2020, we amortized approximately $0.8 million of losses to interest expense, net related to the 2018 Swaps. We
expect to amortize approximately $0.2 million from accumulated other comprehensive loss related to our interest rate swaps during the next
twelve months. See Note 9 for additional details.
F - 37
Note 19. Commitments and Contingencies
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 have amounts payable under purchase contracts for food and non-food products. Many of these agreements do not obligate
us to purchase any specific volumes and include provisions that would allow us to cancel such agreements with appropriate
notice. Our future purchase obligation payments due by period for both company and franchised restaurants at December 30,
2020 consist of the following:
Less than 1 year
1-2 years
3-4 years
5 years and thereafter
Total
(In thousands)
155,631
—
—
—
155,631
$
$
For agreements with cancellation provisions, amounts included in the table above represent our estimate of purchase obligations
during the periods presented if we were to cancel these contracts with appropriate notice. We would likely take delivery of
goods under such circumstances.
Note 20. Supplemental Cash Flow Information
December 30, 2020 December 25, 2019 December 26, 2018
Fiscal Year Ended
Income taxes paid, net
Interest paid
Noncash investing and financing activities:
Noncash consideration received in connection
with the sale of real estate
Notes received in connection with disposition of
property
Accrued purchase of property
Insurance proceeds receivable
Issuance of common stock, pursuant to share-based
compensation plans
Execution of finance leases
Treasury stock payable
$
$
$
$
$
$
$
$
$
(In thousands)
6 $
15,889 $
24,147 $
17,792 $
3,254
19,447
— $
3,000 $
— $
133 $
— $
7,949 $
142 $
— $
920 $
1,791 $
48 $
7,522 $
305 $
1,816 $
—
—
178
653
4,671
3,623
72
F - 38
Note 21. Quarterly Data (Unaudited)
The results for each quarter include all adjustments which, in our opinion, are necessary for a fair presentation of the results for
interim periods. All adjustments are of a normal and recurring nature.
Selected consolidated financial data for each quarter of fiscal 2020 and 2019 are set forth below:
Fiscal Year Ended December 30, 2020 (1)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(In thousands, except per share data)
Company restaurant sales
$
42,291 $
15,128 $
27,849 $
Franchise and licensing revenue
Total operating revenue
Total operating costs and expenses
Operating income (loss)
Net income (loss)
Basic net income (loss) per share (2)
Diluted net income (loss) per share (2)
$
$
$
$
54,404
96,695
78,649
18,046 $
9,013 $
0.16 $
0.16 $
25,033
40,161
53,688
(13,527) $
(22,965) $
(0.41) $
(0.41) $
43,795
71,644
68,404
3,240 $
6,477 $
0.10 $
0.10 $
32,892
47,213
80,105
81,185
(1,080)
2,359
0.04
0.04
Fiscal Year Ended December 25, 2019 (3)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(In thousands, except per share data)
Company restaurant sale
$
98,545 $
95,447 $
63,582 $
Franchise and licensing revenue
Total operating revenue
Total operating costs and expenses
Operating income
Net income
Basic net income per share (2)
Diluted net income per share (2)
52,866
151,411
127,280
24,131 $
15,490 $
0.25 $
0.24 $
56,437
151,884
105,769
46,115 $
34,239 $
0.57 $
0.55 $
60,676
124,258
56,084
68,174 $
49,122 $
0.83 $
0.80 $
$
$
$
$
48,803
65,033
113,836
87,273
26,563
18,559
0.32
0.31
(1) During 2020, the COVID-19 pandemic had a significant adverse impact on the Company’s business performance, results of operations and
cash flows. The fiscal year ended December 30, 2020 includes 53 weeks of operations compared with 52 weeks for all other years presented.
(2) Per share amounts do not necessarily sum to the total year amounts due to changes in shares outstanding and rounding.
(3) During 2019, the Company migrated from a 90% franchised business model to one that is 96% franchised by selling company owned
restaurants to franchisees which resulted in, among other items, a reduction in revenues and the recording of approximately $82.9 million of
gains. In addition, the Company also recorded an additional $11.9 million of gains related to the sale of real estate. See Note 13 and Note 14
for details.
F - 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 2021
DENNY’S CORPORATION
BY: /s/ Robert P. Verostek
Robert P. Verostek
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ John C. Miller
(John C. Miller)
/s/ Robert P. Verostek
(Robert P. Verostek)
/s/ Jay C. Gilmore
(Jay C. Gilmore)
/s/ Brenda J. Lauderback
(Brenda J. Lauderback)
/s/ Bernadette S. Aulestia
(Bernadette S. Aulestia)
/s/ Gregg R. Dedrick
(Gregg R. Dedrick)
/s/ José M. Gutiérrez
(José M. Gutiérrez)
/s/ Robert E. Marks
(Robert E. Marks)
/s/ Donald C. Robinson
(Donald C. Robinson)
/s/ Laysha Ward
(Laysha Ward)
/s/ F. Mark Wolfinger
(F. Mark Wolfinger)
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President, Chief Accounting Officer and Corporate
Controller
(Principal Accounting Officer)
Date
March 1, 2021
March 1, 2021
March 1, 2021
Director and Chair of the Board of Directors
March 1, 2021
Director
Director
Director
Director
Director
Director
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
President and Director
March 1, 2021
NON-GaaP RECONCILIaTIONS
The Company believes that, in addition to GAAP measures, certain non-GAAP financial measures are appropriate indicators to assist in the evaluation of operating
performance and liquidity on a period-to-period basis. The Company uses Adjusted EBITDA, Adjusted Free Cash Flow, Adjusted Net Income (Loss) and Adjusted Net Income
(Loss) Per Share internally as performance measures for planning purposes, including the preparation of annual operating budgets, and for compensation purposes, including
incentive compensation for certain employees. Adjusted EBITDA is also used in the calculation of financial covenant ratios in accordance with the Company’s credit facility.
Adjusted Free Cash Flow is also used as a non-GAAP liquidity measure by Management to assess the Company’s ability to generate cash and plan for future operating and
capital actions. Management believes that the presentation of Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) Per Share and Adjusted Free Cash
Flow provide useful information to investors and analysts about the Company’s operating results, financial condition or cash flows. However, each of these non-GAAP
financial measures should be considered as a supplement to, not a substitute for, operating income (loss), net income (loss), net cash provided by (used in) operating activities
or other financial performance and liquidity measures prepared in accordance with U.S. generally accepted accounting principles.
$ in Millions
Net Income (Loss)
Provision for (benefit from) income taxes
Operating (gains), losses and other charges, net
Other nonoperating expense (income), net
Share-based compensation
Deferred compensation plan valuation adjustments2
Interest expense, net
Depreciation and amortization
Cash payments for restructuring charges and exit costs
Cash payments for share-based compensation
2016
$19.4
2017
$39.6
2018
$43.7
16.5
26.9
(1.1)
7.6
0.9
12.2
22.2
(1.8)
(2.5)
17.2
4.3
(1.7)
8.5
1.6
15.6
23.7
(1.7)
(3.9)
8.6
2.6
0.6
6.0
(1.0)
20.7
27.0
(1.1)
(1.9)
2019
$117.4
31.8
(91.2)
(2.8)
6.7
2.6
18.5
19.8
(2.6)
(3.6)
1
2020
($5.1)
(2.0)
1.8
(4.2)
7.9
1.6
18.0
16.2
(3.0)
(4.6)
Adjusted EBITDA2
$100.2
$103.3
$105.3
$96.8
$26.6
Net Cash Provided By (Used In) Operating Activities
Capital expenditures
Acquisition of restaurants and real estate
Cash payments for restructuring charges and exit costs
Cash payments for share-based compensation
Deferred compensation plan valuation adjustments2
Other nonoperating expense (income), net
Gains on investments
Gains (losses) on early extinguishment of debt and leases
Amortization of deferred financing costs
Gains (losses) on interest rate swap derivatives, net
Interest expense, net
Cash interest expense, net3
Deferred income tax expense
Decrease (increase) in tax valuation allowance
Provision for (benefit from) income taxes
Income taxes received (paid), net
Changes in operating assets and liabilities
Receivables
Inventories
Other current assets
Other noncurrent assets
Operating lease assets and liabilities
Accounts payable
Accrued payroll
Accrued taxes
Other accrued liabilities
Other noncurrent liabilities
Adjusted Free Cash Flow2
$71.2
(19.7)
(14.3)
(1.8)
(2.5)
0.9
(1.1)
—
0.0
(0.6)
—
12.2
(11.2)
(8.8)
(0.1)
16.5
(3.0)
2.9
(0.1)
(4.6)
3.6
—
(4.8)
7.4
(0.1)
10.2
(0.0)
$78.3
(18.8)
(12.4)
(1.7)
(3.9)
1.6
(1.7)
—
(0.1)
(0.6)
—
15.6
(14.6)
(10.3)
(0.2)
17.2
(6.4)
0.8
0.2
2.4
6.3
—
(10.0)
6.4
0.0
(0.1)
3.1
$73.7
(22.0)
(10.4)
(1.1)
(1.9)
(1.0)
0.6
0.0
0.2
(0.6)
—
20.7
(19.6)
(6.2)
(0.1)
8.6
(3.3)
4.7
(0.1)
(0.9)
(0.0)
—
5.1
(2.2)
(0.3)
1.7
4.4
$43.3
(14.0)
(11.3)
(2.6)
(3.6)
2.6
(2.8)
0.2
0.0
(0.6)
—
18.5
(17.6)
(16.0)
2.9
31.8
(24.1)
2.0
(1.7)
4.1
4.6
0.6
5.2
3.8
2.0
4.1
(1.9)
($3.1)
(7.0)
—
(3.0)
(4.6)
1.6
(4.2)
0.1
(0.2)
(0.9)
2.2
18.0
(18.0)
(4.0)
3.0
(2.0)
(0.0)
(6.4)
(0.1)
3.9
1.8
(0.8)
10.7
2.8
0.8
5.5
5.5
$51.9
$51.2
$50.0
$29.8
$1.6
1 Includes 53 operating weeks.
2 Beginning in 2018, historical presentations of Adjusted EBITDA and Adjusted Free Cash Flow have been restated to exclude the impact of market valuation changes in the
Company’s non-qualified deferred compensation plan liabilities.
3 Includes cash interest expense, net and cash payments of approximately $1.9 million for dedesignated interest rate swap derivatives for the year ended December 30, 2020.
NON-GaaP RECONCILIaTIONS (CONTINUED)
$ in Millions (EXCEPT PER SHARE AMOUNTS)
Adjusted EBITDA2
Cash interest expense, net3
Cash paid for income taxes, net
Cash paid for capital expenditures
Adjusted Free Cash Flow2
Net Income (Loss)
Pension settlement loss
(Gains) losses on interest rate swap derivatives, net
(Gains) losses on sale of assets and other, net
Impairment charges
Tax reform
Tax effect4
Adjusted Net Income (Loss)
Diluted Weighted Average Shares Outstanding (000's)
Diluted Net Income (Loss) per Share
Adjustments per Share
Adjusted Net Income (Loss) per Share
2016
$100.2
(11.2)
(3.0)
(34.0)
2017
$103.3
(14.6)
(6.4)
(31.2)
2018
$105.3
(19.6)
(3.3)
(32.4)
2019
$96.8
(17.6)
(24.1)
(25.3)
1
2020
$26.6
(18.0)
(0.0)
(7.0)
$51.9
$51.2
$50.0
$29.8
$1.6
$19.4
24.3
—
—
1.1
—
(2.5)
$39.6
$43.7
$117.4
($5.1)
—
—
3.5
0.3
(1.6)
(1.2)
—
—
—
—
(0.5)
(93.6)
1.6
—
—
—
(0.2)
24.1
—
(2.2)
(4.7)
4.1
—
0.7
$42.3
$40.7
$44.6
$47.9
($7.2)
77,206
70,403
65,562
61,833
60,812
$0.25
0.30
$0.55
$0.56
0.02
$0.58
$0.67
0.01
$0.68
$1.90
($0.08)
(1.13)
$0.77
(0.04)
($0.12)
1 Includes 53 operating weeks.
2 Beginning in 2018, historical presentations of Adjusted EBITDA and Adjusted Free Cash Flow have been restated to exclude the impact of market valuation changes in the
Company’s non-qualified deferred compensation plan liabilities.
3 Includes cash interest expense, net and cash payments of approximately $1.9 million for dedesignated interest rate swap derivatives for the year ended December 30, 2020.
4 The tax adjustment for the loss on pension termination in 2016 is calculated using an effective tax rate of 8.8%, with all remaining adjustments calculated using an effective tax
rate of 30.9%. Tax adjustments for full year 2017 and 2018 use full year effective tax rates of 30.3% and 16.4%, respectively. Tax adjustments for the gains on sales of assets and
other, net in 2019 are calculated using an effective rate of 25.7%. For the year ended December 30, 2020, the tax adjustments are calculated using an effective tax rate of 25.6%.
Denny’s officers: John C. Miller, Chief Executive Officer • F. Mark Wolfinger, President • Christopher D. Bode, Executive Vice President, Chief
Operating Officer • John W. Dillon, Executive Vice President, Chief Brand Officer • Gail Sharps Myers, Executive Vice President, Chief Legal Officer, Chief
People Officer and Secretary • Robert P. Verostek, Executive Vice President, Chief Financial Officer • Stephen C. Dunn, Senior Vice President, Chief Global
Development Officer • Michael L. Furlow, Senior Vice President, Chief Information Officer • Jay C. Gilmore, Senior Vice President, Chief Accounting Officer
and Corporate Controller • Mark S. Burgess, Vice President, Real Estate and Business Development • David W. Coltrin, Vice President, Guest Experience
and Marketing Technology • Laurie R. Curtis, Vice President, Marketing and Menu Innovation • Ethan R. Gallagher, Vice President, Field Finance and Growth
Strategies • Erik P. Jensen, Vice President, Brand Engagement • R. Gregory Linford, Vice President, Purchasing • Fasika Melaku-Peterson, Vice President, Chief
Learning and Development Officer • Ross B. Nell, Vice President, Tax and Treasurer • Curtis L. Nichols, Jr., Vice President, Investor Relations and Financial
Planning & Analysis • Thomas M. Starnes, Vice President, Brand Protection, Quality and Chief Food Safety Officer • Ramon Torres, Vice President, Operations
Services • J. Scott Melton, Assistant General Counsel and Assistant Secretary
Denny’s BOaRD OF DIRECTORS: Brenda J. Lauderback, Board Chair, Retired; Former President of Wholesale and Retail Group of Nine West Group,
Inc. • Bernadette S. Aulestia, Former President, Global Distribution, Home Box Office, Inc. • Gregg R. Dedrick, Former President, KFC • José M. Gutiérrez,
Retired; President and Chief Executive Officer, AT&T Southwestern Bell • Robert E. Marks, Retired; President, Marks Ventures, LLC • John C. Miller, Chief
Executive Officer of Denny’s Corporation • Donald C. Robinson, Retired; President, Potcake Holdings, LLC • Laysha Ward, Executive Vice President and Chief
External Engagement Officer, Target Corporation • F. Mark Wolfinger, President of Denny’s Corporation
ShaREHOLDER INFORMaTION
Corporate Office: Denny’s Corporation | 203 East Main Street | Spartanburg, SC 29319 | (864) 597-8000
Independent Auditors: KPMG LLP | Greenville, SC
Stock Listing Information: Denny’s Corporation common stock is listed on the NASDAQ Capital Market® under the symbol DENN
Transfer Agent for Common Stock: Continental Stock Transfer & Trust Co. | 1 State Street, New York, NY 10004 | (212) 509-4000, (800) 509-5586
For Information regarding change of address or other matters concerning your shareholder account, please contact the transfer agent.
For Financial Information: Call (877) 784-7167 • Email ir@dennys.com | Or write to: Investor Relations | Denny’s Corporation | 203 East Main Street,
Spartanburg, SC 29319. Other investor information such as news releases, SEC filings and stock quotes may be accessed from Denny’s investor
relations website at: investor.dennys.com.
Annual Meeting: Wednesday, May 19, 2021
© 2021 DFO, LLC. Printed in the U.S.A.