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Published: 2020-10-27 16:53:42 ET
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denn-20200923
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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 September 23, 2020
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-20200923_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 October 22, 2020, 63,768,120 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.




TABLE OF CONTENTS
 
 Page
 
  
 
  
 
  
  
2

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements
 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 September 23, 2020December 25, 2019
 (In thousands)
Assets  
Current assets:  
Cash and cash equivalents$11,217 $3,372 
Investments2,266 3,649 
Receivables, net20,637 27,488 
Inventories1,017 1,325 
Assets held for sale3,206 1,925 
Prepaid and other current assets18,838 14,974 
Total current assets57,181 52,733 
Property, net of accumulated depreciation of $147,510 and $147,445, respectively
89,466 97,626 
Financing lease right-of-use assets, net of accumulated amortization of $9,484 and $8,468, respectively
10,284 11,720 
Operating lease right-of-use assets, net145,302 158,550 
Goodwill36,884 36,832 
Intangible assets, net52,100 53,956 
Deferred financing costs, net2,119 1,727 
Deferred income taxes, net27,047 14,718 
Other noncurrent assets30,414 32,525 
Total assets$450,797 $460,387 
Liabilities  
Current liabilities:  
Current finance lease liabilities$1,963 $1,674 
Current operating lease liabilities18,253 16,344 
Accounts payable10,898 20,256 
Other current liabilities41,346 57,307 
Total current liabilities72,460 95,581 
Long-term liabilities:  
Long-term debt230,000 240,000 
Noncurrent finance lease liabilities13,805 14,779 
Noncurrent operating lease liabilities142,110 152,750 
Liability for insurance claims, less current portion10,572 11,454 
Other noncurrent liabilities120,221 83,887 
Total long-term liabilities516,708 502,870 
Total liabilities589,168 598,451 
Shareholders' deficit  
Common stock $0.01 par value; 135,000 shares authorized; September 23, 2020: 117,778 shares issued and 63,768 shares outstanding; December 25, 2019: 109,415 shares issued and 57,095 shares outstanding
$1,178 $1,094 
Paid-in capital672,502 603,980 
Deficit(196,873)(189,398)
Accumulated other comprehensive loss, net of tax(61,205)(33,960)
Treasury stock, at cost, 54,010 and 52,320 shares, respectively
(553,973)(519,780)
Total shareholders' deficit(138,371)(138,064)
Total liabilities and shareholders' deficit$450,797 $460,387 

See accompanying notes
3

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands, except per share amounts)
Revenue:    
Company restaurant sales$27,849 $63,582 $85,268 $257,574 
Franchise and license revenue43,795 60,676 123,232 169,979 
Total operating revenue71,644 124,258 208,500 427,553 
Costs of company restaurant sales, excluding depreciation and amortization:
    
Product costs7,106 15,603 21,541 62,871 
Payroll and benefits11,925 23,777 37,070 100,475 
Occupancy2,638 4,301 8,529 15,583 
Other operating expenses5,701 10,625 15,954 39,320 
Total costs of company restaurant sales27,370 54,306 83,094 218,249 
Costs of franchise and license revenue, excluding depreciation and amortization
24,073 31,136 68,487 87,065 
General and administrative expenses13,694 16,395 34,589 53,659 
Depreciation and amortization4,048 4,338 12,252 15,619 
Operating (gains), losses and other charges, net
(781)(50,091)2,319 (85,459)
Total operating costs and expenses, net
68,404 56,084 200,741 289,133 
Operating income3,240 68,174 7,759 138,420 
Interest expense, net4,422 4,188 13,320 14,977 
Other nonoperating expense (income), net(8,477)(415)3,851 (2,111)
Income (loss) before income taxes7,295 64,401 (9,412)125,554 
Provision for (benefit from) income taxes818 15,279 (1,937)26,703 
Net income (loss)$6,477 $49,122 $(7,475)$98,851 
Basic net income (loss) per share$0.10 $0.83 $(0.13)$1.64 
Diluted net income (loss) per share$0.10 $0.80 $(0.13)$1.58 
Basic weighted average shares outstanding
63,793 59,430 59,350 60,457 
Diluted weighted average shares outstanding
64,027 61,189 59,350 62,370 
 
See accompanying notes
4

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Net income (loss)$6,477 $49,122 $(7,475)$98,851 
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment, net of tax of $5, $6, $17 and $17, respectively
17 16 50 48 
Changes in the fair value of cash flow derivatives, net of tax of $151, $(5,251), $(12,416) and $(13,574), respectively
435 (15,067)(34,723)(37,838)
Reclassification of cash flow derivatives to interest expense, net of tax of $121, $21, $541 and $11, respectively
350 57 1,556 29 
Reclassification of loss related to dedesignation of derivatives to other nonoperating expense (income), net of tax of $0, $0, $1,892 and $0, respectively
— — 5,462 — 
Amortization of unrealized losses related to dedesignated derivatives to interest expense, net of tax of $73, $0, $142 and $0, respectively
210 — 410 — 
Other comprehensive income (loss)1,012 (14,994)(27,245)(37,761)
Total comprehensive income (loss)$7,489 $34,128 $(34,720)$61,090 

See accompanying notes
5

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended September 23, 2020 and September 25, 2019
(Unaudited)
 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, June 24, 2020109,719 $1,097 (54,010)$(553,973)$600,936 $(203,350)$(62,217)$(217,507)
Net income— — — — — 6,477 — 6,477 
Other comprehensive income— — — — — — 1,012 1,012 
Issuance of common stock8,000 80 — — 69,491 — — 69,571 
Share-based compensation on equity classified awards, net of withholding tax— — — — 1,930 — — 1,930 
Issuance of common stock for share-based compensation22 — — — — — — — 
Exercise of common stock options37 1 — — 145 — — 146 
Balance, September 23, 2020117,778 $1,178 (54,010)$(553,973)$672,502 $(196,873)$(61,205)$(138,371)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, June 26, 2019109,291 $1,093 (49,484)$(461,575)$601,902 $(257,079)$(26,913)$(142,572)
Net income— — — — — 49,122 — 49,122 
Other comprehensive loss— — — — — — (14,994)(14,994)
Share-based compensation on equity classified awards, net of withholding tax— — — — 2,089 — — 2,089 
Purchase of treasury stock— — (589)(12,807)— — — (12,807)
Issuance of common stock for share-based compensation3 — — — — — — — 
Exercise of common stock options119 1 — — 415 — — 416 
Balance, September 25, 2019109,413 $1,094 (50,073)$(474,382)$604,406 $(207,957)$(41,907)$(118,746)


See accompanying notes


6

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Three Quarters Ended September 23, 2020 and September 25, 2019
(Unaudited)
 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 25, 2019109,415 $1,094 (52,320)$(519,780)$603,980 $(189,398)$(33,960)$(138,064)
Net loss— — — — — (7,475)— (7,475)
Other comprehensive loss— — — — — — (27,245)(27,245)
Issuance of common stock8,000 80 — — 69,491 — — 69,571 
Share-based compensation on equity classified awards, net of withholding tax
— — — — (1,177)— — (1,177)
Purchase of treasury stock— — (1,690)(34,193)— — — (34,193)
Issuance of common stock for share-based compensation309 3 — — (3)— — — 
Exercise of common stock options54 1 — — 211 — — 212 
Balance, September 23, 2020
117,778 $1,178 (54,010)$(553,973)$672,502 $(196,873)$(61,205)$(138,371)

 Common StockTreasury StockPaid-in CapitalDeficitAccumulated
Other
Comprehensive Loss, Net		Total
Shareholders’
Deficit
 SharesAmountSharesAmount
 (In thousands)
Balance, December 26, 2018108,585 $1,086 (47,052)$(416,815)$592,944 $(306,414)$(4,146)$(133,345)
Cumulative effect adjustment— — — — — (394)— (394)
Net income— — — — — 98,851 — 98,851 
Other comprehensive loss— — — — — — (37,761)(37,761)
Share-based compensation on equity classified awards, net of withholding tax
— — — — 3,741 — — 3,741 
Purchase of treasury stock— — (2,632)(50,804)— — — (50,804)
Equity forward contract settlement— — (389)(6,763)6,763 — — — 
Issuance of common stock for share-based compensation468 5 — — (5)— — — 
Exercise of common stock options360 3 — — 963 — — 966 
Balance, September 25, 2019
109,413 $1,094 (50,073)$(474,382)$604,406 $(207,957)$(41,907)$(118,746)
 
See accompanying notes

7

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Three Quarters Ended
 September 23, 2020September 25, 2019
 (In thousands)
Cash flows from operating activities:  
Net income (loss)$(7,475)$98,851 
Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities:  
Depreciation and amortization12,252 15,619 
Operating (gains), losses and other charges, net2,319 (85,459)
Loss on interest rate swap derivatives4,185 — 
Amortization of deferred financing costs591 456 
Gains on investments(117)(179)
Losses (gains) on termination of leases43 (157)
Deferred income tax expense (benefit)(2,505)9,594 
Share-based compensation expense1,972 7,142 
Changes in assets and liabilities:  
Receivables7,465 8,095 
Inventories265 1,525 
Other current assets(3,865)(168)
Other noncurrent assets474 (3,081)
   Operating lease assets and liabilities1,231 (577)
Accounts payable(8,540)(9,411)
Accrued payroll(8,739)(6,224)
Accrued taxes971 (524)
Other accrued liabilities(6,512)(5,544)
Other noncurrent liabilities(5,625)2,068 
Net cash flows provided by (used in) operating activities(11,610)32,026 
Cash flows from investing activities:  
Capital expenditures(5,476)(12,646)
Acquisitions of real estate— (9,456)
Deposits on acquisitions of real estate— (1,538)
Proceeds from sales of restaurants, real estate and other assets4,536 118,370 
Investment purchases(1,400)(1,300)
Proceeds from sale of investments2,900 — 
Collections on notes receivable1,385 3,027 
Issuance of notes receivable(670)(822)
Net cash flows provided by investing activities1,275 95,635 
Cash flows from financing activities:  
Revolver borrowings140,500 102,500 
Revolver payments(150,500)(176,000)
Long-term debt payments(1,115)(2,044)
Proceeds from exercise of stock options212 966 
Tax withholding on share-based payments(3,049)(3,206)
Deferred financing costs(982)— 
Purchase of treasury stock(36,008)(50,649)
Proceeds from issuance of common stock69,571 — 
Net bank overdrafts(449)(2,234)
Net cash flows provided by (used in) financing activities18,180 (130,667)
Increase (decrease) in cash and cash equivalents7,845 (3,006)
Cash and cash equivalents at beginning of period3,372 5,026 
Cash and cash equivalents at end of period$11,217 $2,020 
See accompanying notes
8

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

Note 1.     Introduction and Basis of Presentation

Denny’s Corporation, or Denny’s or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At September 23, 2020, the Denny's brand consisted of 1,664 restaurants, 1,598 of which were franchised/licensed restaurants and 66 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 for the three quarters ended September 23, 2020, which is expected to continue with the timing of a recovery uncertain. During the three quarters ended September 23, 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 the fourth quarter of 2020. 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 the balance of 2020. 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.

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

These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the fiscal year ended December 25, 2019 which are contained in our audited Annual Report on Form 10-K for the fiscal year ended December 25, 2019. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 30, 2020. 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 June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform financial statement users of credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 (our fiscal 2020). The adoption of this guidance on December 26, 2019 did not have a material impact on our condensed 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.

9

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.

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.

Note 3.     Receivables
 
Receivables consisted of the following:
 
 September 23, 2020December 25, 2019
 (In thousands)
Receivables, net:  
Trade accounts receivable from franchisees$17,306 $14,551 
Financing receivables from franchisees1,283 2,230 
Vendor receivables894 3,260 
Credit card receivables587 6,806 
Other2,266 915 
Allowance for doubtful accounts(1,699)(274)
Total receivables, net$20,637 $27,488 
Other noncurrent assets:
  
Financing receivables from franchisees$188 $364 

We recorded $0.5 million and $1.4 million of bad debt expense during the quarter and three quarters ended September 23, 2020, respectively, 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.    Goodwill and Other Intangible Assets
(In thousands)
Balance, December 25, 2019$36,832 
Reclassification from assets held for sale52 
Balance, September 23, 2020$36,884 





10

Other intangible assets consisted of the following:

 September 23, 2020December 25, 2019
 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 rights15,064 7,171 15,516 5,767 
Intangible assets, net$59,271 $7,171 $59,723 $5,767 

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 three quarters ended September 23, 2020. As such, the Company performed an impairment assessment 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 less than $0.1 million and approximately $0.1 million of impairment related to reacquired franchise rights during the quarter and three quarters ended September 23, 2020, respectively. See Note 9.

Note 5.     Other Current Liabilities
 
Other current liabilities consisted of the following:
 September 23, 2020December 25, 2019
 (In thousands)
Accrued payroll$11,116 $19,689 
Current portion of liability for insurance claims
5,488 6,515 
Accrued taxes6,595 5,624 
Accrued advertising3,348 6,753 
Gift cards4,758 6,469 
Other10,041 12,257 
Other current liabilities$41,346 $57,307 

11

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 September 23, 2020:
Deferred compensation plan investments (1)
$11,958 $11,958 $— $— 
Interest rate swaps (2)
(85,054)— (85,054)— 
Investments (3)
2,266 — 2,266 — 
Total$(70,830)$11,958 $(82,788)$— 
Fair value measurements as of December 25, 2019:
Deferred compensation plan investments (1)
$13,517 $13,517 $— $— 
Interest rate swaps (2)
(44,670)— (44,670)— 
Investments (3)
3,649 — 3,649 — 
Total$(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 as reported by our counterparties. 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 nonrecurring basis are summarized below:
 
 Significant Unobservable Inputs
(Level 3)		Impairment Charges
 (In thousands)
Fair value measurements for the three quarters ended September 23, 2020:
Assets held and used (1)
$2,575 $2,519 

(1)During the first and third quarters of 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, 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 quarter and three quarters ended September 23, 2020, we recognized impairment charges of $0.3 million and $2.5 million, respectively, related to certain of these assets. See Note 9.

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

12

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 $30 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million, subject to approval. As of September 23, 2020, we had outstanding revolver loans of $230.0 million and outstanding letters of credit under the credit facility of $17.3 million. These balances resulted in availability of $152.7 million under the credit facility prior to considering the liquidity covenant in our credit facility. Factoring in the liquidity covenant, our availability was $92.7 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).

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, which is paid on the unused portion of the credit facility, was increased to 0.40%. During this period, we will also have supplemental monthly reporting obligations to our lenders and will be prohibited from paying dividends and making stock repurchases and other general investments. Additionally, capital expenditures will be restricted to $10 million in the aggregate from May 13, 2020 through the fiscal quarter ending March 31, 2021.

The Second Amendment temporarily waives certain financial covenants. The consolidated fixed charge coverage ratio is waived until the fiscal quarter ending March 31, 2021, at which point the covenant level will revert to a minimum of 1.50x. The consolidated leverage ratio covenant is waived until the fiscal quarter ending March 31, 2021, at which point the covenant level will 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 adds 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. We were in compliance with all financial covenants as of September 23, 2020.

Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 3.16% and 3.47% as of September 23, 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 4.85% and 3.99% as of September 23, 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 September 23, 2020 is as follows:
Trade DateEffective DateMaturity DateNotional AmountFixed Rate
(In thousands)
Swaps designated as cash flow hedges
March 20, 2015March 29, 2018March 31, 2025$120,000 2.44 %
October 1, 2015March 29, 2018March 31, 202650,000 2.46 %
Dedesignated swaps
February 15, 2018March 31, 2020December 31, 203380,000 (1)3.19 %

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase annually beginning September 30, 2020 until they reach the maximum notional amount of $425.0 million on September 28, 2029.

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.

13

As of September 23, 2020, the fair value of swaps designated as cash flow hedges was $17.2 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 income, net in our Condensed Consolidated Balance Sheets. 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 13 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 three quarters ended September 23, 2020 related to the portion of the forecasted transaction no longer considered probable of occurring. 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 quarter and three quarters ended September 23, 2020, we reclassified unrealized losses of approximately $0.3 million and $0.6 million, respectively, to interest expense, net related to the 2018 Swaps. At September 23, 2020, approximately $64.6 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 quarter and three quarters ended September 23, 2020, we recorded income of approximately $7.8 million and $3.7 million, respectively, as a component of nonoperating expense (income) related to the 2018 Swaps resulting from changes in fair value.

As of September 23, 2020, the fair value of the dedesignated interest rate swaps was $67.8 million and was recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets. We expect to amortize approximately $0.4 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 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 EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Company restaurant sales$27,849 $63,582 $85,268 $257,574 
Franchise and license revenue:
Royalties17,896 27,830 48,462 79,742 
Advertising revenue13,927 20,756 38,685 59,582 
Initial and other fees1,890 1,356 4,933 4,250 
Occupancy revenue 10,082 10,734 31,152 26,405 
Franchise and license revenue 
43,795 60,676 123,232 169,979 
Total operating revenue$71,644 $124,258 $208,500 $427,553 



14

Franchise occupancy revenue consisted of the following:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Operating lease revenue$8,277 $7,964 $24,959 $19,235 
Variable lease revenue
1,805 2,770 6,193 7,170 
Total occupancy revenue
$10,082 $10,734 $31,152 $26,405 

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.
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. Initial franchise fees are amortized over the term of the related franchise agreement, generally 10-20 years. 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:
 (In thousands)
Balance, December 25, 2019$23,256 
Fees received from franchisees535 
Revenue recognized (1)
(2,474)
Balance, September 23, 202021,317 
Less current portion included in other current liabilities2,112 
Deferred franchise revenue included in other noncurrent liabilities$19,205 

(1) Of this amount $2.4 million was included in the deferred franchise revenue balance as of December 25, 2019.

Gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. The balance of gift card liabilities represents our remaining performance obligations to our customers. The balance of gift card liabilities as of September 23, 2020 and December 25, 2019 was $4.8 million and $6.5 million, respectively. During the three quarters ended September 23, 2020, we recognized revenue of $0.3 million from gift card redemptions at company restaurants.

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

Operating (gains), losses and other charges, net consisted of the following:
 
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Gains on sales of assets and other, net$(1,202)$(51,183)$(2,260)$(87,497)
Restructuring charges and exit costs
83 1,092 2,060 2,038 
Impairment charges338 — 2,519 — 
Operating (gains), losses and other charges, net
$(781)$(50,091)$2,319 $(85,459)
 
Gains on sales of assets and other, net were primarily related to the sale of three parcels of real estate during the quarter and five parcels of real estate during the three quarters ended September 23, 2020. During the quarter ended September 25, 2019, gains on sale of assets and other, net included $50.4 million in gains on the sale of 56 company restaurants and $1.3 million in gains on the sales of two parcels of real estate. During the three quarters ended September 25, 2019, gains on sales of assets and other, net included $76.8 million in gains on the sales of 96 company restaurants and $11.9 million on the sale of six parcels of real estate.

15

As of September 23, 2020, we had recorded assets held for sale at their carrying amount of $3.2 million (consists of property of $2.5 million and other assets of $0.7 million) related to seven parcels of real estate. As of December 25, 2019, we had recorded assets held for sale at their carrying amount of $1.9 million (comprised 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. During the three quarters ended September 23, 2020, five pieces of real estate were sold and the four company restaurants were reclassified out of assets held for sale, as they were no longer expected to be sold in the next 12 months.

Restructuring charges and exit costs consisted of the following:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Exit costs$75 $20 $169 $194 
Severance and other restructuring charges
8 1,072 1,891 1,844 
Total restructuring charges and exit costs
$83 $1,092 $2,060 $2,038 

Exit cost liabilities were $0.1 million as of September 23, 2020 and $0.2 million as of December 25, 2019. Exit cost liabilities related to lease costs are included as a component of operating lease liabilities in our Condensed Consolidated Balance Sheets.

As of September 23, 2020 and December 25, 2019, we had accrued severance and other restructuring charges of $0.7 million and $0.9 million, respectively. The balance as of September 23, 2020 is expected to be paid during the next 12 months.

We review our property, right-of-use assets ("ROU assets") and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. Based on our review, we recorded impairment charges of $0.3 million and $2.5 million, respectively, for the quarter and three quarters ended September 23, 2020 resulting from the impacts of the COVID-19 pandemic. The $2.5 million included $1.3 million related to property, $1.1 million related to operating lease ROU assets and less than $0.1 million related to each of finance lease ROU assets and reacquired franchise rights.

Note 10.     Share-Based Compensation

Total share-based compensation included as a component of general and administrative expenses was as follows:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Employee share awards$1,784 $1,957 $1,364 $6,418 
Restricted stock units for board members
214 219 608 724 
Total share-based compensation
$1,998 $2,176 $1,972 $7,142 
 
Employee Share Awards

Employee share awards consist of performance share units and restricted stock units (which are equity classified). During the three quarters ended September 23, 2020, as a component of our annual compensation program, we granted certain employees approximately 0.8 million restricted stock units with a grant date fair value of $10.46 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.

During the three quarters ended September 23, 2020, we issued 0.3 million shares of common stock related to vested performance share units. In addition, 0.2 million shares of common stock were withheld in lieu of taxes related to vested performance share units.
 
As of September 23, 2020, we had approximately $9.8 million of unrecognized compensation cost related to unvested performance share awards and restricted share awards outstanding, which have a weighted average remaining contractual term of 1.5 years.
 
Subsequent to the end of the quarter ended September 23, 2020, certain employee share awards were modified. See Note 16.
16


Restricted Stock Units for Board Members

During the three quarters ended September 23, 2020, we granted less than 0.1 million restricted stock units (which are equity classified) with a weighted average grant date fair value of $10.46 per unit to non-employee members of our Board of Directors. The restricted stock units vest after a one year service period. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of our Board of Directors), 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.

During the three quarters ended September 23, 2020, less than 0.1 million restricted stock units were converted into shares of common stock.

As of September 23, 2020, we had approximately $0.6 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which have a weighted average remaining contractual term of 0.7 years.

Note 11.     Income Taxes

The effective income tax rate was 11.2% for the quarter ended and 20.6% for the three quarters ended September 23, 2020, compared to 23.7% and 21.3% for the prior year periods, respectively. The 2020 year-to-date rate included a net benefit of 22.2% from the reclassification of cash flow derivatives from accumulated other comprehensive loss. The 2019 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 1.0% and 1.8%, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law as a response to the economic impacts of the COVID-19 pandemic. There is no significant impact on the Company's tax rate from the CARES Act for the quarter and three quarters ended September 23, 2020.

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 EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands, except for per share amounts)
Net income (loss)
$6,477 $49,122 $(7,475)$98,851 
Weighted average shares outstanding - basic
63,793 59,430 59,350 60,457 
Effect of dilutive share-based compensation awards (1)
234 1,759 — 1,913 
Weighted average shares outstanding - diluted
64,027 61,189 59,350 62,370 
Basic net income (loss) per share
$0.10 $0.83 $(0.13)$1.64 
Diluted net income (loss) per share
$0.10 $0.80 $(0.13)$1.58 
Anti-dilutive share-based compensation awards(1)
568 274 1,975 226 
    
(1) For the three quarters ended September 23, 2020, share-based compensation awards have been omitted from the calculations because they have an anti-dilutive effect on loss per share.

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Note 13.     Shareholders' Deficit

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 June 30, 2021, from making any stock repurchases.

Prior to entering into our amended credit agreement, during the quarter ended March 25, 2020, we repurchased a total of 1.7 million shares of our common stock for approximately $34.2 million. During the quarter ended March 25, 2020, we completed the $200 million share repurchase program that was approved by the Board of Directors in October 2017. In December 2019, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $250 million of our common stock (in addition to the October 2017 authorization). At September 23, 2020, there was approximately $248.0 million remaining that can be used to repurchase our common stock under the current program. Repurchased shares are included as treasury stock in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statement of Shareholders' Deficit.

In November 2018, as part of our previously authorized share repurchase programs, we entered into a $25 million accelerated share repurchase (the "ASR") agreement with MUFG Securities EMEA plc (“MUFG”). 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 the quarter ended March 27, 2019, we settled the ASR agreement with MUFG. As a result, we received final delivery of an additional 0.4 million shares of our common stock. The total number of shares repurchased was based on a combined discounted volume-weighted average price (“VWAP”) of $17.04 per share, which was determined based on the average of the daily VWAP of our common stock, less a fixed discount, over the term of the ASR agreement. As a result of settling the ASR agreement, we recorded $6.8 million of treasury stock related to the settlement of the equity forward contract related to the ASR agreement.

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.


18

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 25, 2019$(781)$(33,179)$(33,960)
Amortization of net loss (1)
67 — 67 
Changes in the fair value of cash flow derivatives— (47,139)(47,139)
Reclassification of cash flow derivatives to interest expense, net (2)
— 2,097 2,097 
Reclassification of loss related to dedesignation of derivatives to other nonoperating expense (income)(3)
— 7,354 7,354 
Amortization of unrealized losses related to dedesignated derivatives to interest expense, net(3)
— 552 552 
Income tax (expense) benefit related to items of other comprehensive loss
(17)9,841 9,824 
Balance as of September 23, 2020$(731)$(60,474)$(61,205)

(1)    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 Condensed Consolidated Statements of Operations during the three quarters ended September 23, 2020.
(2)    Amounts reclassified from accumulated other comprehensive loss, net into interest expense, net in our Condensed Consolidated Statements of Operations represent payments either received from or made to the counterparty for the interest rate swaps. See Note 7 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 Condensed 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 Condensed Consolidated Statements of Operations over the remaining term of the 2018 Swaps. For the three quarters ended September 23, 2020, we amortized approximately $0.6 million of losses to interest expense, net related to the 2018 Swaps. See Note 7 for additional details.


Note 14.     Commitments and Contingencies

We have guarantees related to certain franchisee loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through September 23, 2020, no events had occurred that caused us to make payments under these guarantees. There were $0.4 million and $0.6 million of loans outstanding under these programs as of September 23, 2020 and December 25, 2019, respectively. As of September 23, 2020, the maximum amount payable under the loan guarantees was $0.4 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both September 23, 2020 and December 25, 2019, which are included as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets.

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. 

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Note 15.     Supplemental Cash Flow Information
 Three Quarters Ended
 September 23, 2020September 25, 2019
 (In thousands)
Income taxes paid, net$545 $17,853 
Interest paid$11,851 $14,393 
Noncash investing and financing activities:  
Issuance of common stock, pursuant to share-based compensation plans$6,042 $7,522 
Noncash consideration received in connection with the sale of real estate$— $3,000 
Execution of finance leases$95 $305 
Treasury stock payable$— $228 
Receivables in connection with disposition of property$— $3,446 
Insurance proceeds receivable$— $48 
 

Note 16. Subsequent Events

Modification of Performance Share Units

On September 30, 2020, the Company’s Board of Directors (the "Board") approved adjustments to certain performance share units (“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 will vest and be expensed over the three-month period ending December 30, 2020 (the remaining term of the original award), subject to continued employment. Prior to the modification, the fair value of the award was zero.

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 an estimated fair value of approximately $2.4 million to $3.2 million at the modification date. The fair value will be based on a Monte Carlo valuation, which will be completed during the fourth quarter of 2020, as the modified awards contain a market condition. 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 will be accounted for as modifications beginning in the fourth quarter of 2020.
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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 Securities Exchange Act of 1934, as amended. 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 rapidly 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; competitive pressures from within the restaurant industry; 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 (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 25, 2019, the Company's Quarterly Reports on Form 10-Q for the quarters ended March 25, 2020 and June 24, 2020, this report on Form 10-Q and in the Company’s subsequent quarterly reports on Form 10-Q.
Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. Following the pandemic declaration, 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 quarter and three quarters ended September 23, 2020.

Operating Initiatives

In response to various government orders restricting dine-in restaurant food service, 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.

The Company remains focused on the safety and wellbeing of its guests, restaurant teams, franchisees, employees, and suppliers. Retraining materials and communications have been distributed to the entire system of restaurants, reinforcing strict food safety procedures, handwashing and personal hygiene standards, and enhanced daily deep cleaning protocols. Restaurant teams are subject to daily temperature checks, are expected to wear face masks and gloves, and must wash their hands with alcohol-based sanitizer at regular intervals throughout their shift. The Company has remained in close contact with public health officials and government agencies to ensure all public health 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.

The Company has also worked closely with its suppliers to address contingency plans and has not experienced any significant supply chain disruptions.



21

Current Trends

Domestic system-wide same-store sales1 sequentially improved during the third quarter ended September 23, 2020, as compared to the equivalent periods during 2019, despite approximately 25% of the domestic system in California being limited to off-premise only sales channels.

Average unit volumes of off-premise sales have increased over 95% since the beginning of the COVID-19 pandemic, supported by temporarily waived delivery fees, curbside service programs, and shareable family meal packs.

The following table presents monthly sales results compared to the equivalent fiscal months in 2019:

Domestic System-Wide Same-Store Sales1 for 2020 Fiscal Periods:
Q1 2020: (6%)Q2 2020: (57%)Q3 2020: (34%)Q4 2020
JanFebMarAprMayJunJulAugSepOct
3%2%(19%)(76%)(65%)(41%)(39%)(35%)(28%)
(26%)*
*Preliminary results

The following table presents domestic capacity restrictions:

Average Domestic Capacity Restrictions for Fiscal October 2020*:

Number of Units% of Domestic System
25% Capacity22984%
50-75% Capacity667
Social Distancing378
Off-Premise Only20714%
No Restrictions151%
Temporarily Closed191%
Total1515100%
*Preliminary results

Franchisee Support

Direct financial relief to Denny’s franchise partners has included: deferral of remodels until January 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 such fees for weeks 12 and 13 of the 2020 fiscal year; a $3 million royalty abatement in the second fiscal quarter of 2020; 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 has secured rent relief in the form of abatements or 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 will be extending the same relief to the franchisees as a pass through.

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 franchise restaurants have received funding under the Paycheck Protection Program.

Cost Savings Initiatives and Capital Allocation

In response to the COVID-19 pandemic, the Company implemented the following cost savings measures: suspended travel, canceled in-person field meetings, placed holds on all open corporate and field positions, significantly reduced restaurant level staffing across the Company portfolio, meaningfully reduced compensation for the Company’s board of directors and multiple levels of management, and furloughed over 25% of the employees at its corporate office, approximately half of which were
22

subsequently separated from the Company. The Company subsequently eased certain of these cost savings measures. For example, the Company has resumed recruiting for certain corporate and field positions. In addition, the compensation reductions expired on June 25, 2020.

The Company is also analyzing whether federal tax credits available in connection with the COVID-19 pandemic apply to wages paid to retained employees during the crisis. In addition, the Company suspended share repurchases as of February 27, 2020, and terminated its Rule 10b5-1 Plan effective March 16, 2020, in light of uncertain market conditions arising from the COVID-19 pandemic.

For the quarter ended March 25, 2020, the Company was in compliance with its financial covenants related to its credit facility, but projected that it would not be in compliance with certain financial covenants beginning for the quarter ended June 24, 2020 due to the impact of the COVID-19 pandemic. Effective May 13, 2020, the Company and certain of its subsidiaries entered into a second amendment to the current credit facility which amended the current credit agreement dated as of October 26, 2017. See Liquidity and Capital Resources - Credit Facility. As of September 23, 2020, the Company was in compliance with its financial covenants related to the amended credit facility.

On July 6, 2020, the Company 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.
______________

(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 the prior year. Total operating revenue is limited to company restaurant sales and royalties, advertising revenue, fees and occupancy revenue from non-consolidated franchised and licensed restaurants. Accordingly, domestic system-wide same-store sales should be considered as a supplement to, not a substitute for, the Company's results as reported under GAAP.





23

Statements of Operations
 
The following table contains information derived from our Condensed Consolidated Statements of Operations expressed as a percentage of total operating revenue, except as noted below. Percentages may not add due to rounding.
 
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (Dollars in thousands)
Revenue:        
Company restaurant sales$27,849 38.9 %$63,582 51.2 %$85,268 40.9 %$257,574 60.2 %
Franchise and license revenue43,795 61.1 %60,676 48.8 %123,232 59.1 %169,979 39.8 %
Total operating revenue71,644 100.0 %124,258 100.0 %208,500 100.0 %427,553 100.0 %
Costs of company restaurant sales, excluding depreciation and amortization (a):
    
Product costs7,106 25.5 %15,603 24.5 %21,541 25.3 %62,871 24.4 %
Payroll and benefits11,925 42.8 %23,777 37.4 %37,070 43.5 %100,475 39.0 %
Occupancy2,638 9.5 %4,301 6.8 %8,529 10.0 %15,583 6.0 %
Other operating expenses5,701 20.5 %10,625 16.7 %15,954 18.7 %39,320 15.3 %
Total costs of company restaurant sales
27,370 98.3 %54,306 85.4 %83,094 97.5 %218,249 84.7 %
Costs of franchise and license revenue, excluding depreciation and amortization (a)
24,073 55.0 %31,136 51.3 %68,487 55.6 %87,065 51.2 %
General and administrative expenses13,694 19.1 %16,395 13.2 %34,589 16.6 %53,659 12.6 %
Depreciation and amortization4,048 5.7 %4,338 3.5 %12,252 5.9 %15,619 3.7 %
Operating (gains), losses and other charges, net
(781)(1.1)%(50,091)(40.3)%2,319 1.1 %(85,459)(20.0)%
Total operating costs and expenses, net
68,404 95.5 %56,084 45.1 %200,741 96.3 %289,133 67.6 %
Operating income3,240 4.5 %68,174 54.9 %7,759 3.7 %138,420 32.4 %
Interest expense, net4,422 6.2 %4,188 3.4 %13,320 6.4 %14,977 3.5 %
Other nonoperating expense (income), net
(8,477)(11.8)%(415)(0.3)%3,851 1.8 %(2,111)(0.5)%
Income (loss) before income taxes7,295 10.2 %64,401 51.8 %(9,412)(4.5)%125,554 29.4 %
Provision for (benefit from) income taxes818 1.1 %15,279 12.3 %(1,937)(0.9)%26,703 6.2 %
Net income (loss)$6,477 9.0 %$49,122 39.5 %$(7,475)(3.6)%$98,851 23.1 %
Other Data:        
Company average unit sales$423  $640  $1,313  $1,820  
Franchise average unit sales$282  $421  $868  $1,242  
Company equivalent units (b)
66  99  65  141  
Franchise equivalent units (b)1,608  1,603  1,620  1,560  
Company same-store sales increase (decrease) (c)(d)
(40.2)% (0.2)% (37.4)% 2.1 % 
Domestic franchise same-store sales increase (decrease) (c)(d)
(33.1)% 1.2 % (30.1)% 2.0 % 
            
(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.
(d)Prior year amounts have not been restated for 2020 comparable units.
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Unit Activity
 
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
Company restaurants, beginning of period
67 133 68 173 
Units opened— — — — 
Units sold to franchisees— (56)— (96)
Units closed(1)— (2)— 
End of period66 77 66 77 
Franchised and licensed restaurants, beginning of period
1,616 1,569 1,635 1,536 
Units opened 5 13 16 21 
Units purchased from Company
— 56 — 96 
Units closed(23)(9)(53)(24)
End of period1,598 1,629 1,598 1,629 
Total restaurants, end of period1,664 1,706 1,664 1,706 

Company Restaurant Operations
 
During the quarter ended September 23, 2020, company restaurant sales decreased $35.7 million, or 56.2%, primarily resulting from 33 fewer equivalent company restaurants as compared to the prior year period and a 40.2% decrease in company same-store sales caused primarily by dine-in restrictions and temporary closures related to the COVID-19 pandemic. During the three quarters ended September 23, 2020, company restaurant sales decreased $172.3 million, or 66.9%, primarily resulting from 76 fewer equivalent company restaurants as compared to the prior year period and a 37.4% decrease in company same-store sales. The decreases in equivalent company restaurants were the result of our refranchising and development strategy during 2019.

Total costs of company restaurant sales as a percentage of company restaurant sales was 98.3% for the quarter and 97.5% year-to-date compared to 85.4% and 84.7%, respectively, for the prior year periods.

Product costs were 25.5% for the quarter and 25.3% year-to-date compared to 24.5% and 24.4%, respectively, for the prior year periods as a result of increases in paper products due to the increase in delivery and to-go orders related to the COVID-19 pandemic.

Payroll and benefits were 42.8% for the quarter and 43.5% year-to-date compared to 37.4% and 39.0%, respectively, in the prior year periods. The increases as a percentage of sales were primarily the result of sales deleveraging caused by lower sales resulting from the COVID-19 pandemic. For the quarter and year-to-date periods, management and staff payroll, including incentive compensation and payroll taxes, increased 5.7 percentage points and 4.5 percentage points as a percentage of sales. The primary driver of these increases was management labor as we retained a significant portion of our management staff during the time that restaurants were closed or operating under government restrictions. In addition, for the quarter and year-to-date periods, group benefit costs increased 0.9 percentage points and 0.3 percentage points. The negative impact of lower sales has been partially offset by lower workers' compensation costs and tax credits related to the CARES Act. For the quarter and year-to-date periods, workers' compensation costs decreased 1.2 percentage points and 0.3 percentage points as a result of fewer claims and positive claims development. Tax credits related to the CARES Act were approximately $0.6 million for the quarter and year-to-date periods.

Occupancy costs were 9.5% for the quarter and 10.0% year-to-date compared to 6.8% and 6.0%, respectively, for the prior year periods. The increases as a percentage of sales were primarily due to the sales deleveraging effect caused by the COVID-19 pandemic. Additionally, the impact of last year's refranchising of restaurants where we owned the real estate is contributing to the rate increase. The current year quarter also benefited from $0.4 million of positive general liability claims development compared to $0.4 million of negative claims development in the prior year period.

25

Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (Dollars in thousands)
Utilities$1,281 4.6 %$2,438 3.8 %$3,815 4.5 %$8,916 3.5 %
Repairs and maintenance711 2.6 %1,774 2.8 %1,928 2.3 %5,742 2.2 %
Marketing1,045 3.8 %2,411 3.8 %2,771 3.2 %9,357 3.6 %
Other direct costs2,664 9.6 %4,002 6.3 %7,440 8.7 %15,305 5.9 %
Other operating expenses$5,701 20.5 %$10,625 16.7 %$15,954 18.7 %$39,320 15.3 %

Other direct costs were higher as a percentage of sales 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.

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 EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (Dollars in thousands)
Royalties$17,896 40.9 %$27,830 45.9 %$48,462 39.3 %$79,742 46.9 %
Advertising revenue13,927 31.8 %20,756 34.2 %38,685 31.4 %59,582 35.1 %
Initial and other fees1,890 4.3 %1,356 2.2 %4,933 4.0 %4,250 2.5 %
Occupancy revenue 10,082 23.0 %10,734 17.7 %31,152 25.3 %26,405 15.5 %
Franchise and license revenue 
$43,795 100.0 %$60,676 100.0 %$123,232 100.0 %$169,979 100.0 %
Advertising costs$13,927 31.8 %$20,757 34.2 %$38,685 31.4 %$59,583 35.1 %
Occupancy costs 6,858 15.7 %7,257 12.0 %20,096 16.3 %18,018 10.6 %
Other direct costs 3,288 7.5 %3,122 5.1 %9,706 7.9 %9,464 5.6 %
Costs of franchise and license revenue 
$24,073 55.0 %$31,136 51.3 %$68,487 55.6 %$87,065 51.2 %

Franchise and license revenue decreased $16.9 million, or 27.8%, for the quarter and $46.7 million, or 27.5%, year-to-date compared to the prior year periods. Royalties decreased $9.9 million, or 35.7%, and $31.3 million, or 39.2%, for the quarter and year-to-date periods, respectively, compared to the prior year periods. Advertising revenue decreased $6.8 million, or 32.9%, for the quarter and $20.9 million, or 35.1%, year-to-date compared to the prior year periods. The decreases in royalty and advertising revenue primarily resulted from 33.1% and 30.1% decreases in domestic same-store sales for the respective periods. Additionally, we abated $0.2 million of royalties during the quarter and $5.0 million of royalties and $1.3 million of advertising fees year-to-date to help our franchisees weather the impact of the COVID-19 pandemic. Partially offsetting these decreases for both periods were increases in equivalent units of five and 60 on a quarter-to-date and year-to-date basis, respectively, resulting from our refranchising and development strategy in 2019.

Initial and other fees increased $0.5 million, or 39.4%, for the quarter and $0.7 million, or 16.1%, year-to-date compared to the prior year periods. Occupancy revenue decreased $0.7 million, or 6.1%, for the quarter and increased $4.7 million, or 18.0%, year-to-date compared to the prior year periods. The decrease in occupancy revenue for the quarter primarily resulted from lower percentage rents as a result of sales decreases. The increase in occupancy revenue year-to-date resulted from additional leases and subleases to franchisees as a result of our refranchising and development strategy in 2019.

Costs of franchise and license revenue decreased $7.1 million, or 22.7%, for the quarter and $18.6 million, or 21.3%, year-to-date compared to the prior year periods. The decreases were primarily related to the decrease in advertising costs, which corresponded to the related advertising revenue decreases noted above. Occupancy costs decreased $0.4 million, or 5.5%, for the quarter and increased $2.1 million, or 11.5%, year-to-date compared to prior year periods. The decrease in occupancy costs for the quarter primarily resulted from lower percentage rent expense as a result of sales decreases. The increase in occupancy
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costs year-to-date were 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 franchise costs increased $0.2 million, or 5.3%, for the quarter and $0.2 million, or 2.5%, year-to-date compared to the prior year periods. The increases in other direct franchise costs for the quarter and year-to-date periods were primarily due to $0.5 million and $1.4 million, respectively, of bad debt allowances resulting from actual and expected losses on franchise-related receivables due to the COVID-19 pandemic. These increases were partially offset by reductions in franchise administrative costs. As a result, costs of franchise and license revenue increased to 55.0% and 55.6% for the quarter and year-to-date periods ended September 23, 2020 from 51.3% and 51.2% 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.

General and administrative expenses consisted of the following:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Corporate administrative expenses
$9,820 $12,091 $31,302 $37,396 
Share-based compensation1,998 2,176 1,972 7,142 
Incentive compensation
1,290 1,872 1,305 7,329 
Deferred compensation valuation adjustments
586 256 10 1,792 
Total general and administrative expenses
$13,694 $16,395 $34,589 $53,659 

Corporate administrative expenses decreased $2.3 million for the quarter and $6.1 million year-to-date primarily due to cost savings initiatives related to the COVID-19 pandemic, including tax credits related to the CARES Act of approximately $0.8 million for the quarter and year-to-date periods, and the rationalization of certain business costs in connection with our refranchising and development strategy. Share-based compensation decreased $0.2 million for the quarter and $5.2 million year-to-date. Incentive compensation decreased $0.6 million for the quarter and $6.0 million year-to-date. The decreases in share-based compensation and incentive compensation primarily resulted from lower expectations of meeting performance measures due to the impacts of the COVID-19 pandemic. Subsequent to the end of the quarter ended September 23, 2020, certain employee share awards were modified. See Note 16 to our unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details. 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 EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Depreciation of property and equipment
$2,834 $2,865 $8,525 $10,415 
Amortization of financing lease right-of-use assets
456 592 1,423 2,473 
Amortization of intangible and other assets
758 881 2,304 2,731 
Total depreciation and amortization expense
$4,048 $4,338 $12,252 $15,619 

The decreases in depreciation and amortization expense during the current quarter and year-to-date periods were primarily related to refranchising restaurants as part of our refranchising and development strategy during 2019.
 
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Operating (gains), losses and other charges, net consisted of the following:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Gains on sales of assets and other, net$(1,202)$(51,183)$(2,260)$(87,497)
Restructuring charges and exit costs
831,0922,0602,038
Impairment charges
338—2,519—
Operating (gains), losses and other charges, net
$(781)$(50,091)$2,319$(85,459)

Gains on sales of assets and other, net were primarily related to the sale of three parcels of real estate during the quarter and five parcels of real estate during the three quarters ended September 23, 2020. During the quarter ended September 25, 2019, gains on sale of assets and other, net included $50.4 million in gains on the sale of 56 company restaurants and $1.3 million in gains on the sales of two parcels of real estate. During the three quarters ended September 25, 2019, gains on sales of assets and other, net included $76.8 million in gains on the sales of 96 company restaurants and $11.9 million on the sale of six parcels of real estate. These sales were part of our refranchising and development strategy.

Restructuring charges and exit costs consisted of the following:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Exit costs$75 $20 $169 $194 
Severance and other restructuring charges
8 1,072 1,891 1,844 
Total restructuring and exit costs
$83 $1,092 $2,060 $2,038 

During the three quarters ended September 23, 2020, the Company permanently separated approximately 50 support center staff resulting in increased severance and other restructuring charges for the year. During the quarter and three quarters ended September 25, 2019, severance and other restructuring charges were the result of cost reduction efforts as the Company moved to a more heavily franchised model.

Impairment charges of $0.3 million during the quarter and $2.5 million year-to-date were the result of an assessment of the recoverability of assets resulting from the impact of the COVID-19 pandemic.

Operating income was $3.2 million for the quarter and $7.8 million year-to-date compared to income of $68.2 million and $138.4 million, respectively, for the prior year periods.

Interest expense, net consisted of the following:
 Quarter EndedThree Quarters Ended
 September 23, 2020September 25, 2019September 23, 2020September 25, 2019
 (In thousands)
Interest on credit facilities
$2,251 $2,698 $6,790 $9,633 
Interest on interest rate swaps, net
471 78 2,097 40 
Interest on financing lease liabilities
789 906 2,348 3,740 
Letters of credit and other fees
349 327 860 951 
Interest income
(11)(60)(78)(145)
Total cash interest, net3,849 3,949 12,017 14,219 
Amortization of deferred financing costs
251 152 591 456 
Amortization of interest rate swap losses283 — 552 — 
Interest accretion on other liabilities
39 87 160 302 
Total interest expense, net
$4,422 $4,188 $13,320 $14,977 
    
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Interest expense, net increased by $0.2 million for the quarter and decreased by $1.7 million year-to-date compared to the prior year periods. The increase in interest expense for the quarter was primarily due to the amortization of dedesignated interest rate swap losses from accumulated other comprehensive income, net. The year-to-date decrease was primarily due to lower net interest rates on borrowings and a reduction in financing lease interest resulting from sales of restaurants to franchisees during the prior year.

Other nonoperating expense (income), net was income of $8.5 million for the quarter and a loss of $3.9 million year-to-date, compared to income of $0.4 million and $2.1 million, respectively, for the prior year periods. Other nonoperating expense (income) for the quarter primarily consisted of $7.8 million in income related to interest rate swap valuation adjustments. The year-to-date period 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 $3.7 million related to interest rate swap valuation adjustments on dedesignated interest rate swaps. Additionally, nonoperating expense increased by $1.8 million year-to-date as compared to the prior year period due to lower gains on deferred compensation plan investments. For additional details related to the interest rate swaps, see Note 7 to our unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Provision for (benefit from) income taxes was expense of $0.8 million for the quarter and a benefit of $1.9 million year-to-date, compared to expense of $15.3 million and $26.7 million for the prior year periods. These decreases were primarily due to the significant gains in the prior year from the Company's refranchising and development strategy. The 2020 year-to-date rate included a net benefit of 22.2% from the reclassification of cash flow derivatives from accumulated other comprehensive loss. The effective tax rate was 11.2% for the quarter and 20.6% year-to-date, compared to 23.7% and 21.3%, respectively, for the prior year periods. The 2019 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 1.0% and 1.8%, respectively.

Net income (loss) was net income of $6.5 million for the quarter and a net loss of $7.5 million year-to-date compared with net income of $49.1 million and $98.9 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, 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:
 Three Quarters Ended
 September 23, 2020September 25, 2019
 (In thousands)
Net cash provided by (used in) operating activities$(11,610)$32,026 
Net cash provided by investing activities1,275 95,635 
Net cash provided by (used in) financing activities18,180 (130,667)
Increase (decrease) in cash and cash equivalents$7,845 $(3,006)
  
Net cash flows used in operating activities were $11.6 million for the three quarters ended September 23, 2020 compared to net cash flows provided by operating activities of $32.0 million for the three quarters ended September 25, 2019. The decrease in cash flows provided by (used in) operating activities was primarily due to impacts of the COVID-19 pandemic and the timing of prior year accrual payments during the three quarters ended September 23, 2020. We believe that our estimated cash flows from operations for 2020, 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 provided by investing activities were $1.3 million for the three quarters ended September 23, 2020. These cash flows were primarily comprised of proceeds from sales of real estate of $4.5 million and proceeds from the sale of investments of $2.9 million, partially offset by capital expenditures of $5.5 million and investment purchases of $1.4 million. Net cash flows provided by investing activities were $95.6 million for the three quarters ended September 25, 2019. These cash flows were primarily comprised of proceeds from sales of restaurants and real estate of $118.4 million and the collections of notes receivable of $3.0 million, partially offset by capital expenditures of $12.6 million, acquisitions of real estate of $9.5 million, deposits on acquisitions of real estate of $1.5 million, and investment purchases of $1.3 million.

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Our principal capital requirements have been largely associated with the following:
  
 Three Quarters Ended
 September 23, 2020September 25, 2019
 (In thousands)
Facilities$2,808 $8,285 
New construction 114 1,999 
Remodeling991 1,104 
Information technology1,164 941 
Other399 317 
Capital expenditures (excluding acquisitions)$5,476 $12,646 
 
Cash flows provided by financing activities were $18.2 million for the three quarters ended September 23, 2020, which included proceeds of $69.6 million from the issuance of common stock, partially offset by net long-term debt repayments of $11.1 million and cash payments for stock repurchases of $36.0 million. Cash flows used in financing activities were $130.7 million for the three quarters ended September 25, 2019, which included cash payments for stock repurchases of $50.6 million, and net long-term debt repayments of $75.5 million.

Our working capital deficit was $15.3 million at September 23, 2020 compared to $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 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 $30 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million, subject to approval. As of September 23, 2020, we had outstanding revolver loans of $230.0 million and outstanding letters of credit under the credit facility of $17.3 million. These balances resulted in availability of $152.7 million under the credit facility prior to considering the liquidity covenant in our credit facility. Factoring in the liquidity covenant, our availability was $92.7 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).

On May 13, 2020, we entered into 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, which is paid on the unused portion of the credit facility, was increased to 0.40%. During this period, we will also have supplemental monthly reporting obligations to our lenders and will be prohibited from paying dividends and making stock repurchases and other general investments. Additionally, capital expenditures will be restricted to $10 million in the aggregate, from May 13, 2020 through the fiscal quarter ending March 31, 2021.

The Second Amendment temporarily waives certain financial covenants. The consolidated fixed charge coverage ratio is waived until the fiscal quarter ending March 31, 2021, at which point the covenant level will revert to a minimum of 1.50x. The consolidated leverage ratio covenant is waived until the fiscal quarter ending March 31, 2021, at which point the covenant level will 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 adds 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. We were in compliance with all financial covenants as of September 23, 2020.

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Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 3.16% and 3.47% as of September 23, 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 4.85% and 3.99% as of September 23, 2020 and December 25, 2019, respectively.

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.

Implementation of New Accounting Standards

Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our unaudited Condensed 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 September 23, 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 September 23, 2020 is as follows:
Trade DateEffective DateMaturity DateNotional AmountFixed Rate
(In thousands)
Swaps designated as cash flow hedges
March 20, 2015March 29, 2018March 31, 2025$120,000 2.44 %
October 1, 2015March 29, 2018March 31, 202650,000 2.46 %
Dedesignated swaps
February 15, 2018March 31, 2020December 31, 203380,000 (1)3.19 %

(1)     The notional amounts of the swaps entered into on February 15, 2018 increase annually beginning September 30, 2020 until they reach the maximum notional amount of $425.0 million on September 28, 2029.

As of September 23, 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 September 23, 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 6, 7 and 13 to our unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
  
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Item 4.     Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management conducted an evaluation (under the supervision and with the participation of our Chief Executive Officer, John C. Miller, and our Senior 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, Messrs. Miller and 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 Messrs. Miller and Verostek, as appropriate to allow timely decisions regarding required disclosure.

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.

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 14 to our unaudited Condensed 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 25, 2019, (the “Annual Report”) and the Quarterly Reports on Form 10-Q for the fiscal quarters ended March 25, 2020 and June 24, 2020. The following risk factors should be read in conjunction with the Risk Factors disclosed in the Annual Report and such other reports.

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 has 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:

•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.
•customer reluctance to return to in-restaurant dining.

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 the quarters ended June 24, 2020
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and September 23, 2020, many state and local governments started to ease certain restrictions on our Company operated and franchise restaurants and we began to reopen dining rooms with capacity limitations. 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 a “second wave” or recurrence 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 franchise 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.

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Item 6.     Exhibits
 
The following are included as exhibits to this report: 
Exhibit No.Description 
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)
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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:October 27, 2020By:    /s/ Robert P. Verostek 
  Robert P. Verostek 
  Senior Vice President and
Chief Financial Officer		 
    
Date:October 27, 2020By:    /s/ Jay C. Gilmore 
  Jay C. Gilmore 
  Vice President,
Chief Accounting Officer and
Corporate Controller		 
35