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Published: 2022-08-02 16:53:37 ET
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denn-20220629
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________

Commission File Number 0-18051

denn-20220629_g1.jpg
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
203 East Main Street
Spartanburg, South Carolina29319-0001
(Address of principal executive offices)(Zip Code)
(864) 597-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s) Name of each exchange on which registered
$.01 Par Value, Common StockDENN The Nasdaq Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý No  ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ý  No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerýAccelerated 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐   No  ý

As of July 28, 2022, 57,929,626 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.




TABLE OF CONTENTS
 
 Page
 
  
 
  
 
  
  
2

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 June 29, 2022December 29, 2021
 (In thousands, except per share amounts)
Assets  
Current assets:  
Cash and cash equivalents$1,360 $30,624 
Investments3,529 2,551 
Receivables, net23,193 19,621 
Inventories12,208 5,060 
Assets held for sale1,319 — 
Prepaid and other current assets7,829 11,393 
Total current assets49,438 69,249 
Property, net of accumulated depreciation of $152,311 and $151,836, respectively
92,934 91,176 
Financing lease right-of-use assets, net of accumulated amortization of $10,071 and $11,210, respectively
7,103 7,709 
Operating lease right-of-use assets, net124,176 128,727 
Goodwill36,884 36,884 
Intangible assets, net49,581 50,226 
Deferred financing costs, net2,654 2,971 
Deferred income taxes, net— 11,502 
Other noncurrent assets30,048 37,083 
Total assets$392,818 $435,527 
Liabilities  
Current liabilities:  
Current finance lease liabilities$1,896 $1,952 
Current operating lease liabilities15,051 15,829 
Accounts payable16,675 15,595 
Other current liabilities56,680 64,146 
Total current liabilities90,302 97,522 
Long-term liabilities:  
Long-term debt187,000 170,000 
Noncurrent finance lease liabilities10,117 10,744 
Noncurrent operating lease liabilities121,807 126,296 
Liability for insurance claims, less current portion7,386 8,438 
Deferred income taxes, net1,994 — 
Other noncurrent liabilities32,920 87,792 
Total long-term liabilities361,224 403,270 
Total liabilities451,526 500,792 
Shareholders' deficit  
Common stock $0.01 par value; 135,000 shares authorized; June 29, 2022: 64,998 shares issued and 58,344 outstanding; December 29, 2021: 64,200 shares issued and 62,210 shares outstanding
$650 $642 
Paid-in capital138,347 135,596 
Deficit(71,583)(116,441)
Accumulated other comprehensive loss, net(46,281)(54,470)
Treasury stock, at cost, 6,654 and 1,990 shares, respectively
(79,841)(30,592)
Total shareholders' deficit(58,708)(65,265)
Total liabilities and shareholders' deficit$392,818 $435,527 
See accompanying notes
3

Denny’s Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands, except per share amounts)
Revenue:   
Company restaurant sales$49,167 $47,572 $93,143 $81,141 
Franchise and license revenue65,850 58,593 124,981 105,600 
Total operating revenue115,017 106,165 218,124 186,741 
Costs of company restaurant sales, excluding depreciation and amortization:
    
Product costs13,168 11,447 24,412 19,719 
Payroll and benefits18,336 16,970 35,422 29,935 
Occupancy3,782 2,844 7,022 5,694 
Other operating expenses9,542 6,552 16,597 12,629 
Total costs of company restaurant sales, excluding depreciation and amortization44,828 37,813 83,453 67,977 
Costs of franchise and license revenue, excluding depreciation and amortization35,265 28,735 65,934 52,493 
General and administrative expenses16,623 17,548 33,581 34,495 
Depreciation and amortization3,590 3,897 7,138 7,558 
Operating (gains), losses and other charges, net
846 (113)846 419 
Total operating costs and expenses, net
101,152 87,880 190,952 162,942 
Operating income13,865 18,285 27,172 23,799 
Interest expense, net2,878 4,066 5,838 8,343 
Other nonoperating expense (income), net(19,795)16,251 (39,410)(13,797)
Income (loss) before income taxes30,782 (2,032)60,744 29,253 
Provision for (benefit from) income taxes7,779 (1,204)15,886 6,900 
Net income (loss)$23,003 $(828)$44,858 $22,353 
Net income (loss) per share - basic$0.37 $(0.01)$0.71 $0.34 
Net income (loss) per share - diluted$0.37 $(0.01)$0.71 $0.34 
Basic weighted average shares outstanding
62,306 65,294 62,822 65,273 
Diluted weighted average shares outstanding
62,430 65,294 63,003 65,789 
 
See accompanying notes
4

Denny’s Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Net income (loss)$23,003 $(828)$44,858 $22,353 
Other comprehensive income, net of tax:
Minimum pension liability adjustment, net of tax of $7, $11, $15 and $21, respectively
22 29 46 59 
Changes in the fair value of cash flow hedges, net of tax of $613, $(192), $2,286 and $571, respectively
1,840 (561)6,855 1,654 
Reclassification of cash flow hedges to interest expense, net of tax of $180, $257, $428 and $512, respectively
541 748 1,283 1,488 
Amortization of unrealized losses related to dedesignated swaps to interest expense, net of tax of $1, $11, $1 and $42, respectively
5 34 5 124 
Other comprehensive income2,408 250 8,189 3,325 
Total comprehensive income (loss)$25,411 $(578)$53,047 $25,678 

See accompanying notes
5

Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended June 29, 2022 and June 30, 2021
(Unaudited)
 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, March 30, 202264,457 $645 (2,744)$(42,457)$137,332 $(94,586)$(48,689)(47,755)
Net income— — — — — 23,003 — 23,003 
Other comprehensive income— — — — — — 2,408 2,408 
Share-based compensation on equity classified awards, net of withholding tax— — — — 1,020 — — 1,020 
Purchase of treasury stock— — (3,910)(37,384)— — — (37,384)
Issuance of common stock for share-based compensation541 5 — — (5)— — — 
Balance, June 29, 2022
64,998 $650 (6,654)$(79,841)$138,347 $(71,583)$(46,281)$(58,708)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, March 31, 202164,145 $641 — $— $125,950 $(171,333)$(57,330)$(102,072)
Net loss— — — — — (828)— (828)
Other comprehensive income— — — — — — 250 250 
Share-based compensation on equity classified awards, net of withholding tax— — — — 3,227 — — 3,227 
Issuance of common stock for share-based compensation55 1 — — (1)— — — 
Balance, June 30, 2021
64,200 $642 — $— $129,176 $(172,161)$(57,080)$(99,423)

See accompanying notes







6

Denny’s Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Deficit
For the Two Quarters Ended June 29, 2022 and June 30, 2021
(Unaudited)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 29, 202164,200 $642 (1,990)$(30,592)$135,596 $(116,441)$(54,470)$(65,265)
Net income— — — — — 44,858 — 44,858 
Other comprehensive income— — — — — — 8,189 8,189 
Share-based compensation on equity classified awards, net of withholding tax
— — — — 2,759 — — 2,759 
Purchase of treasury stock— — (4,664)(49,249)— — — (49,249)
Issuance of common stock for share-based compensation798 8 — — (8)— — — 
Balance, June 29, 2022
64,998 $650 (6,654)$(79,841)$138,347 $(71,583)$(46,281)$(58,708)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 30, 202063,962 $640 — $— $123,833 $(194,514)$(60,405)$(130,446)
Net income— — — — — 22,353 — 22,353 
Other comprehensive income— — — — — — 3,325 3,325 
Share-based compensation on equity classified awards, net of withholding tax
— — — — 5,229 — — 5,229 
Issuance of common stock for share-based compensation208 2 — — (2)— — — 
Exercise of common stock options30 — — — 116 — — 116 
Balance, June 30, 2021
64,200 $642 — $— $129,176 $(172,161)$(57,080)$(99,423)

See accompanying notes
7

Denny’s Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Two Quarters Ended
 June 29, 2022June 30, 2021
 (In thousands)
Cash flows from operating activities:  
Net income$44,858 $22,353 
Adjustments to reconcile net income to cash flows provided by operating activities:  
Depreciation and amortization7,138 7,558 
Operating (gains), losses and other charges, net846 419 
Gains and amortization on dedesignated interest rate swaps, net(41,924)(12,506)
Amortization of deferred financing costs317 688 
Losses on investments223 3 
Losses (gains) on early termination of debt and leases24 (72)
Deferred income tax expense10,766 2,211 
Share-based compensation expense7,520 6,860 
Changes in assets and liabilities:  
Receivables(3,419)757 
Inventories(7,148)(98)
Prepaids and other current assets3,563 6,677 
Other noncurrent assets6,125 (1,317)
   Operating lease assets and liabilities(466)(821)
Accounts payable(1,541)5,620 
Accrued payroll(5,721)1,992 
Accrued taxes(338)434 
Other accrued liabilities(5,003)4,649 
Other noncurrent liabilities(6,211)(2,036)
Net cash flows provided by operating activities9,609 43,371 
Cash flows from investing activities:  
Capital expenditures(5,771)(3,108)
Proceeds from sales of restaurants, real estate and other assets170 1,612 
Investment purchases(1,200)— 
Proceeds from sale of investments— 200 
Collections on notes receivable126 383 
Issuance of notes receivable— (94)
Net cash flows used in investing activities(6,675)(1,007)
Cash flows from financing activities:  
Revolver borrowings45,325 9,500 
Revolver payments(28,325)(39,500)
Repayments of finance leases(1,018)(980)
Proceeds from exercise of stock options— 116 
Tax withholding on share-based payments(4,782)(1,377)
Deferred financing costs— (8)
Purchase of treasury stock(46,249)— 
Net bank overdrafts2,851 (3,125)
Net cash flows used in financing activities(32,198)(35,374)
Increase (decrease) in cash and cash equivalents(29,264)6,990 
Cash and cash equivalents at beginning of period30,624 3,892 
Cash and cash equivalents at end of period$1,360 $10,882 

See accompanying notes
8

Denny’s Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At June 29, 2022, the Denny's brand consisted of 1,631 restaurants, 1,566 of which were franchised/licensed restaurants and 65 of which were company operated.

The global crisis resulting from the spread of coronavirus ("COVID-19") has had a substantial impact on our restaurant operations starting in the quarter ended March 25, 2020 with continuing impacts into the current quarter ended June 29, 2022. While we have seen improvements compared to earlier periods during the COVID-19 pandemic, we cannot currently estimate the duration or future financial impact of the COVID-19 pandemic on our business. 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, property, right-of-use assets, goodwill and intangible assets.

Our unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable.

These interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto as of and for the fiscal year ended December 29, 2021 which are contained in our audited Annual Report on Form 10-K for the fiscal year ended December 29, 2021. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 28, 2022. Our significant interim accounting policies include the recognition of advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective rate.

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which was later clarified in January 2021 by ASU 2021-01, “Reference Rate Reform (Topic 848): Scope”. The guidance provides optional guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The Company adopted ASU 2020-04 on March 12, 2020. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on the Company’s consolidated financial position or results of operations. The guidance is effective through December 31, 2022.

Accounting Standards to be Adopted

We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements as a result of future adoption.

9

Note 3.     Receivables
 
Receivables consisted of the following:
 
 June 29, 2022December 29, 2021
 (In thousands)
Receivables, net:  
Trade accounts receivable from franchisees$13,435 $13,430 
Financing receivables from franchisees6,310 1,027 
Vendor receivables2,107 4,041 
Credit card receivables623 747 
Other1,267 950 
Allowance for doubtful accounts(549)(574)
Total receivables, net$23,193 $19,621 
Other noncurrent assets:
  
Financing receivables from franchisees$14 $293 


Note 4.    Intangible Assets

Intangible assets consisted of the following:

 June 29, 2022December 29, 2021
 Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
 (In thousands)
Intangible assets with indefinite lives:
    
Trade names$44,087 $— $44,087 $— 
Liquor licenses120 — 120 — 
Intangible assets with definite lives:
    
Reacquired franchise rights11,801 6,427 12,218 6,199 
Intangible assets, net$56,008 $6,427 $56,425 $6,199 


Note 5.     Other Current Liabilities
 
Other current liabilities consisted of the following:

 June 29, 2022December 29, 2021
 (In thousands)
Accrued payroll$14,949 $20,676 
Current portion of liability for insurance claims
3,652 4,285 
Accrued taxes4,195 4,533 
Accrued advertising10,476 15,355 
Gift cards5,805 7,170 
Other17,603 12,127 
Other current liabilities$56,680 $64,146 

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Note 6.     Fair Value of Financial Instruments

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
 TotalQuoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
 
(In thousands)
Fair value measurements as of June 29, 2022:
Deferred compensation plan investments (1)
$10,930 $10,930 $— $— 
Interest rate swaps, net (2)
2,419 — 2,419 — 
Investments (3)
3,529 — 3,529 — 
Total$16,878 $10,930 $5,948 $— 
Fair value measurements as of December 29, 2021:
Deferred compensation plan investments (1)
$13,726 $13,726 $— $— 
Interest rate swaps (2)
(52,121)— (52,121)— 
Investments (3)
2,551 — 2,551 — 
Total$(35,844)$13,726 $(49,570)$— 

(1)    The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments and are included in other noncurrent assets in our Consolidated Balance Sheets.
(2)    The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. See Note 7 for details on the interest rate swaps.
(3)    The fair values of our investments are valued using a readily determinable net asset value per share based on the fair value of the underlying securities. There are no significant redemption restrictions associated with these investments.

Those assets and liabilities measured at fair value on a non-recurring basis are summarized below:
 
 Significant Unobservable Inputs
(Level 3)		Impairment Charges
 
Fair value measurements for the year-to-date period ended June 29, 2022:
Assets held and used (1)
$— $266 

(1)As of June 29, 2022, 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, the Company 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-to-date period ended June 29, 2022, we recognized impairment charges of $0.3 million related to certain of these assets. See Note 9.

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses are deemed to approximate fair value due to the immediate or short-term maturity of these instruments. The fair value of notes receivable approximates the carrying value after consideration of recorded allowances and related risk-based interest rates. The outstanding senior secured revolver is carried at historical cost, which approximates fair value. The fair value of our senior secured revolver approximates its carrying value since it is a variable rate facility (Level 2).

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Note 7.     Long-Term Debt

Denny's and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $25 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the facility to $450 million. Borrowings bear a tiered interest rate, which is based on the Company's consolidated leverage ratio. The maturity date for the credit facility is August 26, 2026.

The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than its insurance captive subsidiary). It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We were in compliance with all financial covenants as of June 29, 2022.

As of June 29, 2022, we had outstanding revolver loans of $187.0 million and outstanding letters of credit under the credit facility of $14.2 million. These balances resulted in unused commitments of $198.8 million as of June 29, 2022 under the credit facility.

As of June 29, 2022, borrowings under the credit facility bore interest at a rate of LIBOR plus 1.75% and the commitment fee, paid on the unused portion of the credit facility, was set to 0.25%.

Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.91% and 2.09% as of June 29, 2022 and December 29, 2021, respectively. Taking into consideration our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 4.17% and 4.44% as of June 29, 2022 and December 29, 2021, 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 June 29, 2022 is as follows:

Trade DateEffective DateMaturity DateNotional AmountFair ValueFixed Rate
(In thousands)
Swaps designated as cash flow hedges
March 20, 2015March 29, 2018March 31, 2025$120,000 $2,165 2.44 %
October 1, 2015March 29, 2018March 31, 2026$50,000 $1,055 2.46 %
Dedesignated swaps
February 15, 2018March 31, 2020December 31, 2033$120,000 (1)$(801)3.19 %
Total$290,000 $2,419 

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase periodically until they reach the maximum notional amount of $425.0 million on September 28, 2029.

Swaps Designated as Cash Flow Hedges

To the extent the swaps are highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in the Consolidated Statements of Operations but are reported as a component of other comprehensive income. The interest rate swaps entered into in 2015 are designated as cash flow hedges with unrealized gains and losses recorded as a component of accumulated other comprehensive loss, net.

12

As of June 29, 2022, the fair value of the swaps designated as cash flow hedges was an asset of $3.2 million, recorded as a component of other noncurrent assets. The designated swaps have an offsetting amount (before taxes) recorded as a component of accumulated other comprehensive loss, net in our Consolidated Balance Sheets. See Note 13 for amounts recorded in accumulated other comprehensive loss related to interest rate swaps. We expect to reclassify approximately $1.3 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 12 months.

Dedesignated Interest Rate Swaps

During the year ended December 30, 2020, we determined that a portion of the underlying cash flows related to our hedging relationship entered into in 2018 (“2018 Swaps”) were no longer probable of occurring over the term of the interest rate swaps. Accordingly, we dedesignated the cash flow relationship and discontinued hedge accounting treatment for the 2018 Swaps. As a result, we reclassified a portion of losses from accumulated other comprehensive loss, net to other nonoperating income, net in our Consolidated Statements of Operations and began amortizing the remaining amounts of unrealized losses related to the 2018 Swaps from accumulated other comprehensive loss, net into our Consolidated Statements of Operations as a component of interest expense, net over the remaining term of the 2018 Swaps. For the quarter and two quarters ended June 29, 2022, unrealized losses of less than $0.1 million were reclassified to interest expense, net related to the 2018 Swaps. For the quarter and two quarters ended June 30, 2021, we reclassified unrealized losses of less than $0.1 million and $0.2 million, respectively, to interest expense, net related to the 2018 Swaps. At June 29, 2022, $64.2 million (before taxes) of unrealized losses remained in accumulated other comprehensive loss, net. We expect to amortize approximately $0.1 million from accumulated other comprehensive loss, net to interest expense, net in our Consolidated Statements of Operations related to dedesignated interest rate swaps during the next 12 months.

As a result of the dedesignated cash flow relationship related to the 2018 Swaps, changes in the fair value of the 2018 Swaps are recorded as a component of other nonoperating income, net in our Consolidated Statements of Operations. For the quarter and two quarters ended June 29, 2022, we recorded income of approximately $21.7 million and $41.9 million, respectively, as a component of other nonoperating income, net related to the 2018 Swaps resulting from changes in fair value. For the quarter and two quarters ended June 30, 2021, we recorded approximately $17.2 million of expense and $12.7 million of income, respectively, as a component of other nonoperating income, net related to the 2018 Swaps resulting from changes in fair value. As of June 29, 2022, the fair value of the dedesignated interest rate swaps was a liability of $0.8 million, $0.2 million of which was recorded as a component of other current liabilities and $0.6 million of which was recorded as a component of other noncurrent liabilities in our Consolidated Balance Sheets.

Note 8.     Revenues

Our revenues are derived primarily from 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:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Company restaurant sales$49,167 $47,572 $93,143 $81,141 
Franchise and license revenue:
Royalties28,759 27,117 55,284 47,961 
Advertising revenue19,486 18,600 37,692 32,711 
Initial and other fees7,779 2,066 12,286 3,904 
Occupancy revenue 9,826 10,810 19,719 21,024 
Franchise and license revenue 
65,850 58,593 124,981 105,600 
Total operating revenue$115,017 $106,165 $218,124 $186,741 

13

Franchise occupancy revenue consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Operating lease revenue$7,253 $7,668 $14,671 $15,581 
Variable lease revenue
2,573 3,142 5,048 5,443 
Total occupancy revenue
$9,826 $10,810 $19,719 $21,024 

Balances related to contracts with customers consist of receivables, deferred franchise revenue and deferred gift card revenue. See Note 3 for details on our receivables.
The components of the change in deferred franchise revenue are as follows:

 (In thousands)
Balance, December 29, 2021$19,896 
Fees received from franchisees2,224 
Franchisee deferred costs (1)
(1,722)
Revenue recognized, net (2)
(1,302)
Balance, June 29, 202219,096 
Less current portion included in other current liabilities1,804 
Deferred franchise revenue included in other noncurrent liabilities$17,292 

(1)    Deferred costs are contract assets consisting of incentives given to franchisees related to the rollout of kitchen equipment to all franchise locations.
(2)    Of this amount $1.2 million was included in the deferred franchise revenue balance as of December 29, 2021.

Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being amortized into revenue and amounts related to development agreements and unopened restaurants that we will begin amortizing into revenue when the related restaurants are opened net of certain deferred costs. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sales-based royalties and advertising.

The Company has entered into equipment purchase contracts of approximately $19.3 million related to the rollout of kitchen equipment for franchise restaurants, which will be billed to the franchisee and recognized as revenue as the equipment is installed, less approximately $5.7 million in commitments from the Company. Amounts committed from the Company are contract assets that have been netted against deferred revenue and will be recognized as a component of franchise and license revenue over the remaining term of the related franchise agreements. As of June 29, 2022, our remaining obligation under these contracts was approximately $2.5 million, $0.7 million of which is included in accounts payable. As of June 29, 2022, we had approximately $10.7 million in inventory and $1.6 million in contract assets related to the kitchen equipment rollout.

Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The balance of deferred gift card liabilities as of June 29, 2022 and December 29, 2021 was $5.8 million and $7.2 million, respectively. During the year-to-date period ended June 29, 2022, we recognized revenue of $0.3 million from gift card redemptions at company restaurants.

14


Note 9.     Operating (Gains), Losses and Other Charges, Net

Operating (gains), losses and other charges, net consisted of the following:
 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Gains on sales of assets and other, net$(99)$(65)$(245)$(1,007)
Restructuring charges and exit costs
679 (48)825 1,426 
Impairment charges266 — 266 — 
Operating (gains), losses and other charges, net
$846 $(113)$846 $419 
 
As of June 29, 2022, we had recorded assets held for sale at their carrying amount of $1.3 million (consisting of property of $1.0 million and other assets of $0.3 million) related to three parcels of real estate. There were no assets held for sale as of December 29, 2021.

Restructuring charges and exit costs consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Exit costs$38 $141 $50 $223 
Severance and other restructuring charges
641 (189)775 1,203 
Total restructuring charges and exit costs
$679 $(48)$825 $1,426 

Exit costs primarily consist of costs related to closed restaurants. Exit cost liabilities related to lease costs are included as a component of operating lease liabilities in our Consolidated Balance Sheets.

As of June 29, 2022 and December 29, 2021, we had accrued severance and other restructuring charges of $0.7 million and $0.1 million, respectively. The balance as of June 29, 2022 is expected to be paid during the next 12 months.

We recorded impairment charges of $0.3 million (consisting of property and right-of-use assets) during the quarter and year-to-date period ended June 29, 2022 resulting from our assessment of underperforming restaurants.

Note 10.     Share-Based Compensation

Total share-based compensation included as a component of general and administrative expenses was as follows:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Employee share awards$3,284 $3,164 $7,078 $6,417 
Restricted stock units for board members
221 224 442 443 
Total share-based compensation
$3,505 $3,388 $7,520 $6,860 
 
15

Employee Share Awards

During the quarter ended March 30, 2022, we granted certain employees approximately 233,000 performance share units ("PSUs") with a grant date fair value of $24.51 per share that vest based on the total shareholder return (“TSR”) of our common stock compared to the TSRs of a group of peer companies and approximately 233,000 PSUs with a grant date fair value of $15.59 per share that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based PSUs contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value. The performance period for these PSUs is the three year fiscal period beginning December 30, 2021 and ending December 25, 2024. The PSUs will completely vest and be earned at the end of the performance period at which point the relative TSR and Adjusted EPS growth rate achievement percentages will be applied to the vested units (from 0% to 200% of the target award). We recognize compensation cost associated with approximately 312,000 of these PSU awards over the entire performance period on a straight-line basis, with compensation cost for the remaining 154,000 PSU awards recognized on a graded-vesting basis due to the accelerated vesting terms for certain retirement eligible individuals.

During the quarter ended March 30, 2022, we also granted certain employees approximately 310,000 restricted stock units ("RSUs") with a grant date fair value of $15.59 per share. The RSUs vest evenly over the three year fiscal period beginning December 30, 2021 and ending December 25, 2024. We recognize compensation cost associated with these RSU awards on a straight-line basis over the entire performance period of the award.

During the quarter ended June 29, 2022, we granted PSUs and RSUs to our newly appointed Chief Executive Officer and President, Kelli A. Valade. The grants included approximately 69,000 PSUs with a grant date fair value of $12.18 per share that vest based on the TSR of our common stock compared to the TSRs of a group of peer companies and approximately 69,000 PSUs with a grant date fair value of $9.89 per share that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. As the TSR based PSUs contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value. The performance period and application of achievement percentages for these PSUs are the same as mentioned above. We recognize compensation cost associated with these PSU awards on a straight-line basis. In addition, the grants included approximately 93,000 RSUs with a grant date fair value of $9.89 per share.

During the two quarters ended June 29, 2022, we issued approximately 768,000 shares of common stock related to vested PSUs and RSUs. In addition, approximately 24,000 shares of common stock were deferred and approximately 407,000 shares of common stock were withheld in lieu of taxes related to vested PSUs and RSUs.
 
As of June 29, 2022, we had approximately $19.3 million of unrecognized compensation cost related to unvested PSU awards and RSU awards outstanding, which have a weighted average remaining contractual term of 2.1 years.

Restricted Stock Units for Board Members

During the quarter and two quarters ended June 29, 2022, we granted less than 0.1 million RSUs (which are equity classified) with a weighted average grant date fair value of $9.95 per unit to non-employee members of our Board of Directors. The RSUs vest after a one year service period. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of our Board of Directors), upon termination as a member of our Board of Directors, or in three equal annual installments commencing after termination of service as a member of our Board of Directors.

During the quarter and two quarters ended June 29, 2022, less than 0.1 million RSUs were converted into shares of common stock.

As of June 29, 2022, we had approximately $0.8 million of unrecognized compensation cost related to these unvested RSU awards outstanding, which have a weighted average remaining contractual term of 0.9 years.

Note 11.     Income Taxes

The effective income tax rate was 25.3% for the quarter and 26.2% for the year-to-date period ended June 29, 2022, compared to 59.3% and 23.6% for the prior year periods, respectively. The 2021 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 13.4% and (1.2)%, respectively.
16

Note 12.     Net Income (Loss) Per Share
 
The amounts used for the basic and diluted net income (loss) per share calculations are summarized below:
 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands, except per share amounts)
Net income (loss)$23,003 $(828)$44,858 $22,353 
Weighted average shares outstanding - basic
62,306 65,294 62,822 65,273 
Effect of dilutive share-based compensation awards124 — 181 516 
Weighted average shares outstanding - diluted
62,430 65,294 63,003 65,789 
Net income (loss) per share - basic$0.37 $(0.01)$0.71 $0.34 
Net income (loss) per share - diluted$0.37 $(0.01)$0.71 $0.34 
Anti-dilutive share-based compensation awards740 998 785 483 

Note 13.     Shareholders' Deficit

Share Repurchases

Our credit facility permits the repurchase of Denny’s stock and the payment of cash dividends subject to certain limitations. Our Board of Directors approves share repurchases of our common stock. Under these authorizations, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or in privately negotiated transactions, subject to market and business conditions. Currently, we are operating under a $250 million share repurchase authorization approved by the Board of Directors in December 2019.

During the two quarters ended June 29, 2022, we repurchased a total of 4.7 million shares of our common stock for approximately $49.2 million. This brings the total amount repurchased under the current authorization to approximately $81.8 million, leaving approximately $168.2 million that can be used to repurchase our common stock under this authorization as of June 29, 2022. Repurchased shares are included as treasury stock in our Consolidated Balance Sheets and our Consolidated Statements of Shareholders' Deficit.

As of June 29, 2022, 6.7 million shares were held in treasury stock.

17

Accumulated Other Comprehensive Loss, Net

The components of the change in accumulated other comprehensive loss, net were as follows:

Defined Benefit PlansDerivativesAccumulated Other Comprehensive Loss, Net
(In thousands)
Balance as of December 29, 2021$(900)$(53,570)$(54,470)
Amortization of net loss (1)
61 — 61 
Changes in the fair value of cash flow hedges— 9,141 9,141 
Reclassification of cash flow hedges to interest expense, net (2)
— 1,711 1,711 
Amortization of unrealized losses related to dedesignated swaps to interest expense, net— 6 6 
Income tax expense related to items of other comprehensive income(15)(2,715)(2,730)
Balance as of June 29, 2022$(854)$(45,427)$(46,281)

(1)    Before-tax amount related to our defined benefit plans that was reclassified from accumulated other comprehensive loss, net and included as a component of pension expense within general and administrative expenses in our Consolidated Statements of Operations during the two quarters ended June 29, 2022.
(2)    Amounts reclassified from accumulated other comprehensive loss, net into interest expense, net in our Consolidated Statements of Operations represent payments either received from or made to the counterparty for the interest rate hedges. See Note 7 for additional details.

Note 14.     Commitments and Contingencies

Legal Proceedings

There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect our consolidated results of operations or financial position. 

Note 15.     Supplemental Cash Flow Information
 Two Quarters Ended
 June 29, 2022June 30, 2021
 (In thousands)
Income taxes paid, net$4,644 $1,942 
Interest paid$5,617 $8,478 
Noncash investing and financing activities:  
Issuance of common stock, pursuant to share-based compensation plans$9,547 $3,087 
Receipt of real estate receivable$3,000 $— 
Execution of finance leases$311 $464 
Treasury stock payable$3,633 $— 
 
Note 16. Subsequent Events

On July 20, 2022, the Company completed its previously announced acquisition of Keke's Breakfast Cafe ("Keke's") pursuant to the Asset Purchase Agreement (the "Purchase Agreement"), dated May 3, 2022, which was subsequently amended by the First Amendment to Asset Purchase Agreement (the "First Amendment"), dated July 11, 2022, by and between the Company, as purchaser, and K2 Restaurants, Inc. together with the other sellers and principals party thereto for the acquisition of certain assets and assumption of certain liabilities of the franchise business, Keke's, and eight Keke’s restaurants owned and operated by the sellers.

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Keke’s is the franchisor and operator of a full-service A.M. eatery concept, currently consisting of 52 domestic restaurants in Florida, including 44 franchised locations. We believe Keke’s is a brand with attractive unit economics and strong potential. This acquisition provides an opportunity to participate in the fast-growing A.M. eatery segment through a complementary concept we believe our experienced team can develop across multiple states with the goal of becoming the A.M. eatery franchisor of choice. We believe this acquisition will also enhance value for our shareholders.

Pursuant to the Purchase Agreement, we agreed to purchase Keke's for an aggregate purchase price of $82.5 million. Of the aggregate purchase price, $81.5 million was funded by utilizing cash on hand as well as funds from the Company's revolving credit facility, with the remaining $1.0 million to be paid as part of the post closing adjustments.

We estimate that approximately $2.0 million of the purchase price will be allocated to fixed assets and leasehold improvements, $0.7 million to deferred franchise revenue, with the balance allocated to intangible assets as follows: $34.9 million to trade names, $9.3 million to franchise rights and $37.0 million to goodwill. In addition, we recorded approximately $8.6 million of operating lease right-of-use assets and liabilities. These amounts are subject to subsequent adjustment as we continue to gather information during the measurement period.

The Company’s Consolidated Balance Sheet as of June 29, 2022 and the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the periods ended June 29, 2022 do not reflect the impacts of Keke’s as the acquisition was completed after the balance sheet date.


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

Forward-Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company urges caution in considering its current trends and any outlook on its operations and financial results disclosed in this report. In addition, certain matters discussed in this report may constitute forward-looking statements. These forward-looking statements, which reflect management's best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny’s Corporation, its subsidiaries, and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as “expect”, “anticipate”, “believe”, “intend”, “plan”, “hope”, "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the evolving COVID-19 pandemic and related containment measures, including the potential for further operational disruption from government mandates affecting restaurants; economic, public health and political conditions that impact consumer confidence and spending, including COVID-19; commodity and labor inflation; the ability to effectively staff restaurants; our ability to maintain adequate levels of liquidity for our cash needs, including debt obligations, payment of dividends, planned share repurchases and capital expenditures as well as the ability of our customers, suppliers, franchisees and lenders to access sources of liquidity to provide for their own cash needs; competitive pressures from within the restaurant industry; our ability to integrate and derive the expected benefits from our acquisition of Keke's; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment and geopolitical events (including acts of war and terrorism); and other factors from time to time set forth in the Company’s SEC reports and other filings, including but not limited to the discussion in Management’s Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 29, 2021, this report on Form 10-Q and in the Company's subsequent quarterly reports on Form 10-Q.

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Statements of Operations
 
The following table contains information derived from our Consolidated Statements of Operations expressed as a percentage of total operating revenue, except as noted below. Percentages may not add due to rounding.

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Revenue:        
Company restaurant sales$49,167 42.7 %$47,572 44.8 %$93,143 42.7 %$81,141 43.5 %
Franchise and license revenue65,850 57.3 %58,593 55.2 %124,981 57.3 %105,600 56.5 %
Total operating revenue115,017 100.0 %106,165 100.0 %218,124 100.0 %186,741 100.0 %
Costs of company restaurant sales, excluding depreciation and amortization (a):
    
Product costs13,168 26.8 %11,447 24.1 %24,412 26.2 %19,719 24.3 %
Payroll and benefits18,336 37.3 %16,970 35.7 %35,422 38.0 %29,935 36.9 %
Occupancy3,782 7.7 %2,844 6.0 %7,022 7.5 %5,694 7.0 %
Other operating expenses9,542 19.4 %6,552 13.8 %16,597 17.8 %12,629 15.6 %
Total costs of company restaurant sales, excluding depreciation and amortization44,828 91.2 %37,813 79.5 %83,453 89.6 %67,977 83.8 %
Costs of franchise and license revenue, excluding depreciation and amortization (a)35,265 53.6 %28,735 49.0 %65,934 52.8 %52,493 49.7 %
General and administrative expenses16,623 14.5 %17,548 16.5 %33,581 15.4 %34,495 18.5 %
Depreciation and amortization3,590 3.1 %3,897 3.7 %7,138 3.3 %7,558 4.0 %
Operating (gains), losses and other charges, net
846 0.7 %(113)(0.1)%846 0.4 %419 0.2 %
Total operating costs and expenses, net
101,152 87.9 %87,880 82.8 %190,952 87.5 %162,942 87.3 %
Operating income13,865 12.1 %18,285 17.2 %27,172 12.5 %23,799 12.7 %
Interest expense, net2,878 2.5 %4,066 3.8 %5,838 2.7 %8,343 4.5 %
Other nonoperating expense (income), net(19,795)(17.2)%16,251 15.3 %(39,410)(18.1)%(13,797)(7.4)%
Income (loss) before income taxes30,782 26.8 %(2,032)(1.9)%60,744 27.8 %29,253 15.7 %
Provision for (benefit from) income taxes7,779 6.8 %(1,204)(1.1)%15,886 7.3 %6,900 3.7 %
Net income (loss)$23,003 20.0 %$(828)(0.8)%$44,858 20.6 %$22,353 12.0 %
Other Data:        
Company average unit sales$761  $732  $1,443  $1,257  
Franchise average unit sales$442  $416  $846  $742  
Company equivalent units (b)
64  65  64  65  
Franchise equivalent units (b)1,567  1,582  1,570  1,583  
Company same-store sales increase vs. prior year (c)(d)3.8 % 172.1 % 14.9 % 46.8 % 
Domestic franchise same-store sales increase vs. prior year (c)(d)2.4 % 113.2 % 11.2 % 30.8 % 
            
(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 during the comparable periods noted.
(d)Prior year amounts have not been restated for 2022 comparable units.
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Unit Activity
 
 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
Company restaurants, beginning of period
65 65 65 65 
Units opened— — — — 
Units closed— — — — 
End of period65 65 65 65 
Franchised and licensed restaurants, beginning of period
1,569 1,584 1,575 1,585 
Units opened 4 3 9 6 
Units closed(7)(7)(18)(11)
End of period1,566 1,580 1,566 1,580 
Total restaurants, end of period1,631 1,645 1,631 1,645 

Company Restaurant Operations
 
Company restaurant sales increased $1.6 million, or 3.4%, for the quarter ended June 29, 2022 and $12.0 million, or 14.8%, year-to-date compared to the prior year periods. The increases in sales were primarily due to increases in guest check average resulting from price increases to offset inflationary costs. Sales also benefited from changes in product mix. Company same-store sales increased 3.8% for the current year quarter and 14.9% year-to-date as compared to the prior year periods.

Total costs of company restaurant sales as a percentage of company restaurant sales were 91.2% for the quarter ended June 29, 2022 and 89.6% year-to-date compared to 79.5% and 83.8%, respectively, for the prior year periods.

Product costs as a percentage of company restaurant sales were 26.8% for the quarter ended June 29, 2022 and 26.2% year-to-date compared to 24.1% and 24.3%, respectively, for the prior year periods, primarily due to increased commodity costs.

Payroll and benefits as a percentage of company restaurant sales were 37.3% for the quarter ended June 29, 2022 and 38.0% year-to-date compared to 35.7% and 36.9%, respectively, in the prior year periods. The current quarter increase was primarily due to a 2.4 percentage point increase in management and staff payroll, including payroll taxes, partially offset by a 0.6 percentage point decrease in workers' compensation costs related to claims development. The year-to-date increase was primarily due to a 1.8 percentage point increase in staff payroll, partially offset by a 0.5 percentage point decrease in management labor as a result of the leveraging effect of higher sales in the current year-to-date period.

Occupancy costs as a percentage of company restaurant sales were 7.7% for the quarter ended June 29, 2022 and 7.5% year-to-date compared to 6.0% and 7.0%, respectively, in the prior year periods. The quarter and year-to-date increases as a percentage of sales were primarily due to increases in general liability insurance costs from negative claims development in the current periods and positive developments in the prior year periods.

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

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Utilities$1,650 3.4 %$1,390 2.9 %$3,227 3.5 %$2,615 3.2 %
Repairs and maintenance889 1.8 %635 1.3 %1,714 1.8 %1,168 1.4 %
Marketing1,330 2.7 %1,365 2.9 %2,537 2.7 %2,332 2.9 %
Other direct costs5,673 11.5 %3,162 6.6 %9,119 9.8 %6,514 8.0 %
Other operating expenses$9,542 19.4 %$6,552 13.8 %$16,597 17.8 %$12,629 15.6 %

Other direct costs were higher as a percentage of sales as compared to the prior year primarily due to unfavorable developments in certain legal claims of 4.5 percentage points for the quarter and 1.7 percentage points for the year-to-date period.
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Franchise Operations
 
Franchise and license revenue and costs of franchise and license revenue consisted of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Royalties$28,759 43.7 %$27,117 46.3 %$55,284 44.2 %$47,961 45.4 %
Advertising revenue19,486 29.6 %18,600 31.7 %37,692 30.2 %32,711 31.0 %
Initial and other fees7,779 11.8 %2,066 3.5 %12,286 9.8 %3,904 3.7 %
Occupancy revenue 9,826 14.9 %10,810 18.4 %19,719 15.8 %21,024 19.9 %
Franchise and license revenue 
$65,850 100.0 %$58,593 100.0 %$124,981 100.0 %$105,600 100.0 %
Advertising costs$19,486 29.6 %$18,600 31.7 %$37,692 30.2 %$32,711 31.0 %
Occupancy costs 6,064 9.2 %6,879 11.7 %12,441 10.0 %13,418 12.7 %
Other direct costs 9,715 14.8 %3,256 5.6 %15,801 12.6 %6,364 6.0 %
Costs of franchise and license revenue 
$35,265 53.6 %$28,735 49.0 %$65,934 52.8 %$52,493 49.7 %

Franchise and license revenue increased $7.3 million, or 12.4%, for the quarter ended June 29, 2022 and $19.4 million, or 18.4%, year-to-date compared to the prior year periods. Royalties increased $1.6 million, or 6.1%, and $7.3 million, or 15.3%, for the current quarter and year-to-date period, respectively, compared to the prior year periods. Advertising revenue increased $0.9 million, or 4.8%, for the current quarter and $5.0 million, or 15.2%, year-to-date compared to the prior year periods. The increases in royalty and advertising revenue primarily resulted from 2.4% and 11.2% increases in domestic same-store sales for the respective periods. These increases were partially offset by the impacts of fewer equivalent units for the quarter and year-to-date period.

Initial and other fees increased $5.7 million, or 276.5%, for the quarter ended June 29, 2022 and $8.4 million, or 214.7%, year-to-date compared to the prior year periods. The increase in initial and other fees primarily resulted from the recognition of $5.7 million and $7.9 million of revenue for the quarter and year-to-date period, respectively, from the sale and installation of kitchen equipment purchased by franchisees. The revenue recorded related to the sale of equipment has an equal and offsetting expense recorded in other direct costs as described below. Occupancy revenue decreased $1.0 million, or 9.1%, for the current quarter and decreased $1.3 million, or 6.2%, year-to-date compared to the prior year periods. The decreases in occupancy revenue primarily resulted from lease terminations.

Costs of franchise and license revenue increased $6.5 million, or 22.7%, for the quarter ended June 29, 2022 and $13.4 million, or 25.6%, year-to-date compared to the prior year periods. Advertising costs increased $0.9 million, or 4.8%, for the current quarter and $5.0 million, or 15.2%, year-to-date, which corresponds to the related advertising revenue increases noted above. Occupancy costs decreased $0.8 million, or 11.8%, for the current quarter and $1.0 million, or 7.3%, year-to-date compared to the prior year periods. The decreases in occupancy costs for the current quarter and year-to-date period primarily resulted from lease terminations, which corresponds to the related occupancy revenue decreases noted above. Other direct franchise costs increased $6.5 million, or 198.4%, for the current quarter and $9.4 million, or 148.3%, year-to-date compared to the prior year periods. The increases in other direct franchise costs were primarily due to $5.7 million of expense for the quarter and $7.9 million of expense year-to-date as part of the sale and installation of kitchen equipment purchased by franchisees as mentioned above. As a result, costs of franchise and license revenue increased to 53.6% and 52.8% for the respective quarter and year-to-date period ended June 29, 2022 from 49.0% and 49.7% for the respective prior year periods.

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.

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General and administrative expenses consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Corporate administrative expenses
$13,162 $10,345 $24,545 $21,217 
Share-based compensation3,505 3,388 7,520 6,860 
Incentive compensation
1,639 3,032 3,758 5,118 
Deferred compensation valuation adjustments
(1,683)783 (2,242)1,300 
Total general and administrative expenses
$16,623 $17,548 $33,581 $34,495 

Corporate administrative expenses increased $2.8 million for the quarter ended June 29, 2022 and increased $3.3 million year-to-date. The increases are primarily due to compensation increases in the current year and temporary cost reductions in the prior year related to the COVID-19 pandemic. Share-based compensation increased $0.1 million for the current quarter and $0.7 million year-to-date. Incentive compensation decreased $1.4 million for the current quarter and year-to-date period primarily resulting from our performance against plan metrics. Changes in deferred compensation valuation adjustments have offsetting gains or losses on the underlying nonqualified deferred plan investments included as a component of other non-operating expense (income), net, for the corresponding periods.
 
Depreciation and amortization consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Depreciation of property and equipment
$2,702 $2,938 $5,349 $5,653 
Amortization of financing lease right-of-use assets
437 428 879 856 
Amortization of intangible and other assets
451 531 910 1,049 
Total depreciation and amortization expense
$3,590 $3,897 $7,138 $7,558 

The decreases in depreciation and amortization expense during the quarter and year-to-date period ended June 29, 2022 are primarily due to certain assets becoming fully depreciated.
 
Operating (gains), losses and other charges, net consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Gains on sales of assets and other, net$(99)$(65)$(245)$(1,007)
Restructuring charges and exit costs
679 (48)825 1,426 
Impairment charges
266 — 266 —
Operating (gains), losses and other charges, net
$846 $(113)$846 $419 

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Restructuring charges and exit costs consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Exit costs$38 $141 $50 $223 
Severance and other restructuring charges
641 (189)775 1,203 
Total restructuring and exit costs
$679 $(48)$825 $1,426 

Restructuring and exit costs increased $0.7 million for the current quarter and decreased $0.6 million year-to-date compared to the prior year periods. The current quarter increase was primarily due to severance costs and the year-to-date decrease was primarily due to prior period relocation costs.

We recorded impairment charges of $0.3 million (consisting of property and right-of-use assets) during the quarter and year-to-date period ended June 29, 2022 resulting from our assessment of underperforming restaurants.

Operating income was $13.9 million for the current quarter and $27.2 million year-to-date compared to $18.3 million and $23.8 million, respectively, for the prior year periods.

Interest expense, net consisted of the following:

 Quarter EndedTwo Quarters Ended
 June 29, 2022June 30, 2021June 29, 2022June 30, 2021
 (In thousands)
Interest on credit facility$1,130 $1,554 $2,029 $3,255 
Interest on interest rate swaps721 1,006 1,711 2,001 
Interest on financing lease liabilities
595 746 1,202 1,514 
Letters of credit and other fees
279 377 588 732 
Interest income
(12)(7)(16)(15)
Total cash interest, net2,713 3,676 5,514 7,487 
Amortization of deferred financing costs
159 344 317 688 
Amortization of interest rate swap losses6 46 6 167 
Interest accretion on other liabilities
— — 1 1 
Total interest expense, net
$2,878 $4,066 $5,838 $8,343 
    
Total cash interest expense, net decreased by $1.0 million for the current quarter and $2.0 million year-to-date compared to the prior year periods. Interest on credit facility borrowings decreased by $0.4 million for the current quarter and $1.2 million year-to-date compared to the prior year periods. These decreases primarily resulted from decreased average borrowings and lower average interest rates in the current quarter compared to the respective prior year period. Interest rates on our borrowings primarily decreased as a result of our credit facility refinancing on August 26, 2021.

Other nonoperating expense (income), net was income of $19.8 million for the current quarter and $39.4 million year-to-date, compared to expense of $16.3 million and income of $13.8 million, respectively, for the prior year periods. Other nonoperating income, net for the current quarter primarily consisted of $21.7 million of gains related to valuation adjustments for dedesignated interest rate hedges, partly offset by losses of $1.7 million on deferred compensation plan investments. The year-to-date period primarily consisted of $41.9 million of gains on interest rate swap valuation adjustments, partially offset by $2.3 million of losses on deferred compensation plan investments. Prior year other nonoperating expense, net for the quarter primarily consisted of $17.2 million of losses related to interest rate swap valuation adjustments, partially offset by $0.8 million of gains on deferred compensation plan investments. The prior year-to-date period primarily consisted of $12.7 million of gains on interest rate swap valuation adjustments in addition to $1.4 million of gains on deferred compensation plan investments.

25

Provision for (benefit from) income taxes was a provision of $7.8 million for the quarter ended June 29, 2022 and provision of $15.9 million year-to-date, compared to a benefit of $1.2 million and a provision of $6.9 million for the prior year periods, respectively. The effective tax rate was 25.3% for the current quarter and 26.2% year-to-date, compared to 59.3% and 23.6%, respectively, for the prior year periods. The 2021 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 13.4% and (1.2%), respectively.

Net income (loss) was net income of $23.0 million for the quarter ended June 29, 2022 and net income of $44.9 million year-to-date compared to a net loss of $0.8 million and net income of $22.4 million, respectively, for the prior year periods.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash generated from operations and borrowings under our credit facility (as described below). Principal uses of cash are operating expenses, capital expenditures and the repurchase of shares of our common stock.
 
The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:

 Two Quarters Ended
 June 29, 2022June 30, 2021
 (In thousands)
Net cash provided by operating activities$9,609 $43,371 
Net cash used in investing activities(6,675)(1,007)
Net cash used in financing activities(32,198)(35,374)
Increase (decrease) in cash and cash equivalents$(29,264)$6,990 
  
Net cash flows provided by operating activities were $9.6 million for the two quarters ended June 29, 2022 compared to $43.4 million for the two quarters ended June 30, 2021. The decrease in cash flows provided by operating activities was primarily due to the timing of prior year accrual payments, collections of receivables and purchases of inventory for our kitchen equipment project. We believe that our estimated cash flows from operations for 2022, combined with our capacity for additional borrowings under our credit facility and cash on hand, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next 12 months.
 
Net cash flows used in investing activities were $6.7 million for the two quarters ended June 29, 2022. These cash flows primarily consisted of capital expenditures of $5.8 million and investments purchases of $1.2 million. Net cash flows used in investing activities were $1.0 million for the two quarters ended June 30, 2021. These cash flows primarily consisted of capital expenditures of $3.1 million, partially offset by proceeds from sales of restaurants, real estate and other assets of $1.6 million, collections on notes receivable of $0.4 million, and proceeds from sales of investments of $0.2 million.

Our principal capital requirements have been largely associated with the following:
  
 Two Quarters Ended
 June 29, 2022June 30, 2021
 (In thousands)
Facilities$2,004 $1,626 
Remodeling2,524 356 
Information technology824 842 
Other419 284 
Capital expenditures$5,771 $3,108 
 
Net cash flows used in financing activities were $32.2 million for the two quarters ended June 29, 2022, which included cash payments for stock repurchases of $46.2 million and payments of tax withholding on share-based compensation of $4.8 million, partially offset by net long-term debt borrowings of $16.0 million and net bank overdrafts payments of $2.9 million. Net cash flows used in financing activities were $35.4 million for the two quarters ended June 30, 2021, which included net long-term debt repayments of $31.0 million, in addition to net bank overdraft payments of $3.1 million and payments of tax withholdings on share-based compensation of $1.4 million.
26


Our working capital deficit was $40.9 million at June 29, 2022 compared to $28.3 million at December 29, 2021. We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows for a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually becomes due after the receipt of cash from the related sales.

Credit Facility

Denny's and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $25 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the facility to $450 million. Borrowings bear a tiered interest rate, which is based on the Company's consolidated leverage ratio. The maturity date for the credit facility is August 26, 2026.

The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by Denny's and its material subsidiaries and is secured by assets of Denny's and its subsidiaries, including the stock of its subsidiaries (other than its insurance captive subsidiary). It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. We were in compliance with all financial covenants as of June 29, 2022.

As of June 29, 2022, we had outstanding revolver loans of $187.0 million and outstanding letters of credit under the credit facility of $14.2 million. These balances resulted in unused commitments of $198.8 million as of June 29, 2022 under the credit facility.

As of June 29, 2022, borrowings under the credit facility bore interest at a rate of LIBOR plus 1.75% and the commitment fee, paid on the unused portion of the credit facility, was set to 0.25%.

Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.91% and 2.09% as of June 29, 2022 and December 29, 2021, respectively. Taking into consideration our interest rate swaps that are designated as cash flow hedges, the weighted-average interest rate of outstanding revolver loans was 4.17% and 4.44% as of June 29, 2022 and December 29, 2021, respectively.

Kitchen Modernization and Technology Transformation Initiatives

The Company is currently in the process of upgrading and improving its kitchen equipment throughout the domestic system. The rollout began during the first quarter of 2022 and is expected to be substantially complete by the end of 2022. This investment is expected to yield long-term benefits through menu enhancements across all dayparts, but especially the dinner daypart, with new and improved food offerings. The new equipment is also expected to provide immediate benefits through increased kitchen efficiency and productivity while also reducing food waste.

The Company has entered into equipment purchase contracts of approximately $19.3 million related to the rollout of kitchen equipment for franchise restaurants, which will be billed to the franchisee and recognized as revenue as the equipment is installed, less approximately $5.7 million in commitments from the Company. Amounts committed from the Company are contract assets that have been netted against deferred revenue and will be recognized as a component of franchise and license revenue over the remaining term of the related franchise agreements. As of June 29, 2022, our remaining obligation under these contracts was approximately $2.5 million, $0.7 million of which is included in accounts payable. As of June 29, 2022, we had approximately $10.7 million in inventory and $1.6 million in contract assets related to the kitchen equipment rollout.

The Company intends to initiate the rollout of a new cloud-based restaurant technology platform throughout the domestic system which will lay the foundation for future technology initiatives to further enhance the guest experience. The rollout is expected to begin during the second half of 2022 and continue throughout 2023.

The Company has committed to investing approximately $10 million towards the cost and installation of the kitchen equipment package (approximately $5.7 million) and the new cloud-based restaurant technology platform (approximately $4.3 million) in domestic franchise restaurants. Additionally, the Company has negotiated favorable financing terms on behalf of its franchisees for the remaining cost.

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Critical Accounting Policies and Estimates

For information regarding our Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 29, 2021.

Implementation of New Accounting Standards

Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our unaudited Consolidated Financial Statements set forth in Part I, Item 1 of this report.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, as of June 29, 2022, borrowings under our credit facility bore interest at variable rates based on LIBOR plus 1.75% 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 June 29, 2022 is as follows:

Trade DateEffective DateMaturity DateNotional AmountFair ValueFixed Rate
(In thousands)
Swaps designated as cash flow hedges
March 20, 2015March 29, 2018March 31, 2025$120,000 $2,165 2.44 %
October 1, 2015March 29, 2018March 31, 2026$50,000 $1,055 2.46 %
Dedesignated swaps
February 15, 2018March 31, 2020December 31, 2033$120,000 (1)$(801)3.19 %
Total$290,000 $2,419 

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase periodically until they reach the maximum notional amount of $425.0 million on September 28, 2029.

As of June 29, 2022, the total notional amount of our interest rate swaps was in excess of 100% of our floating rate debt. Based on the portion of the swaps in excess of our floating rate debt as of June 29, 2022, a hypothetical change of 100 basis points in LIBOR would change our annual cash flow by approximately $1.0 million. 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 6, 7 and 13 to our unaudited Consolidated Financial Statements in Part I, Item 1 of this report.
  
Item 4.     Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management conducted an evaluation (under the supervision and with the participation of our Chief Executive Officer and President, Kelli A. Valade, and our Executive Vice President and Chief Financial Officer, Robert P. Verostek) as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Ms. Valade and Mr. Verostek each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Ms. Valade and Mr. Verostek, as appropriate to allow timely decisions regarding required disclosure.

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There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our fiscal quarter ended June 29, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 14 to our unaudited Consolidated Financial Statements set forth in Part I, Item 1 of this report.

Item 1A.     Risk Factors

The Company is supplementing the Risk Factors previously disclosed in Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 29, 2021, (the “Annual Report”) and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2022. The following risk factors should be read in conjunction with the Risk Factors disclosed in the Annual Report.

The failure to successfully integrate the business and operations of Keke's Breakfast Cafe in the expected time frame may adversely affect our future results.

We believe that the acquisition of Keke's Breakfast Café, or Keke’s, will result in certain benefits, including expansion opportunities through a complementary concept, the opportunity to participate in the fast-growing A.M. eatery segment, and enhance value for our shareholders.

The success of the acquisition will depend on our ability to realize these anticipated benefits. We may fail to realize the anticipated benefits of the acquisition of Keke’s for a variety of reasons, including the following:

•failure to grow the brand in a timely manner through current and new franchisees;
•failure of customers to accept any changes that we may implement at Keke’s or to continue as customers of Keke’s following the acquisition; and
•failure to leverage the increased scale of our company quickly and effectively.

If we are not able to successfully integrate Keke’s business and operations, or if there are delays in combining the businesses, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The table below provides information concerning repurchases of shares of our common stock during the quarter ended June 29, 2022.
Period 
Total Number of Shares Purchased
 Average Price Paid Per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced Programs (2)
Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs (2)
 (In thousands, except per share amounts)
March 31, 2022 - April 27, 2022— $— — $205,547 
April 28, 2022 - May 25, 20221,414 9.88 1,414 $191,549 
May 26, 2022 - June 29, 20222,496 9.35 2,496 $168,162 
Total3,910 $9.54 3,910  
(1)Average price paid per share excludes commissions.
(2)On December 2, 2019, we announced that our Board of Directors approved a share repurchase program, authorizing us to repurchase up to an additional $250 million of our common stock (in addition to prior authorizations). Such repurchases may take place from time to time in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended June 29, 2022, we purchased 3.9 million shares of our common stock for an aggregate consideration of approximately $37.4 million pursuant to the share repurchase program.
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Item 6.     Exhibits
 
The following are included as exhibits to this report: 
Exhibit No.Description 
2.1*
2.2
10.1
31.1
  
31.2
  
32.1
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
  
101.SCHInline XBRL Taxonomy Extension Schema Document
  
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
  
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
  
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
  
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The omitted schedules and exhibits will be furnished to the Securities and Exchange Commission upon request.
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 DENNY'S CORPORATION 
    
Date:August 2, 2022By:    /s/ Robert P. Verostek 
  Robert P. Verostek 
  Executive Vice President and
Chief Financial Officer		 
    
Date:August 2, 2022By:    /s/ Jay C. Gilmore 
  Jay C. Gilmore 
  Senior Vice President,
Chief Accounting Officer and
Corporate Controller		 
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