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.
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:
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September 23, 2020
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|
December 25, 2019
|
|
(In thousands)
|
|
|
Receivables, net:
|
|
|
|
Trade accounts receivable from franchisees
|
$
|
17,306
|
|
|
$
|
14,551
|
|
Financing receivables from franchisees
|
1,283
|
|
|
2,230
|
|
|
|
|
|
Vendor receivables
|
894
|
|
|
3,260
|
|
Credit card receivables
|
587
|
|
|
6,806
|
|
Other
|
2,266
|
|
|
915
|
|
Allowance for doubtful accounts
|
(1,699)
|
|
|
(274)
|
|
Total receivables, net
|
$
|
20,637
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|
|
$
|
27,488
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|
|
|
|
|
Other noncurrent assets:
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|
|
Financing receivables from franchisees
|
$
|
188
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|
|
$
|
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
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(In thousands)
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Balance, December 25, 2019
|
$
|
36,832
|
|
|
|
Reclassification from assets held for sale
|
52
|
|
Balance, September 23, 2020
|
$
|
36,884
|
|
Other intangible assets consisted of the following:
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September 23, 2020
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|
December 25, 2019
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Gross Carrying Amount
|
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Accumulated Amortization
|
|
Gross Carrying Amount
|
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Accumulated Amortization
|
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(In thousands)
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|
|
|
|
|
|
Intangible assets with indefinite lives:
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|
|
|
|
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Trade names
|
$
|
44,087
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|
|
$
|
—
|
|
|
$
|
44,087
|
|
|
$
|
—
|
|
Liquor licenses
|
120
|
|
|
—
|
|
|
120
|
|
|
—
|
|
Intangible assets with definite lives:
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|
|
|
|
|
|
Reacquired franchise rights
|
15,064
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|
|
7,171
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|
|
15,516
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|
|
5,767
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|
Intangible assets, net
|
$
|
59,271
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|
|
$
|
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:
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|
|
September 23, 2020
|
|
December 25, 2019
|
|
(In thousands)
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|
|
Accrued payroll
|
$
|
11,116
|
|
|
$
|
19,689
|
|
Current portion of liability for insurance claims
|
5,488
|
|
|
6,515
|
|
Accrued taxes
|
6,595
|
|
|
5,624
|
|
Accrued advertising
|
3,348
|
|
|
6,753
|
|
Gift cards
|
4,758
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|
|
6,469
|
|
Other
|
10,041
|
|
|
12,257
|
|
Other current liabilities
|
$
|
41,346
|
|
|
$
|
57,307
|
|
Note 6. Fair Value of Financial Instruments
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
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Total
|
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Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
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Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
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(In thousands)
|
|
|
|
|
|
|
Fair value measurements as of September 23, 2020:
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|
|
|
|
|
|
|
Deferred compensation plan investments (1)
|
$
|
11,958
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|
|
$
|
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:
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|
|
|
|
|
|
|
Deferred compensation plan investments (1)
|
$
|
13,517
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|
|
$
|
13,517
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps (2)
|
(44,670)
|
|
|
—
|
|
|
(44,670)
|
|
|
—
|
|
Investments (3)
|
3,649
|
|
|
—
|
|
|
3,649
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|
|
—
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|
Total
|
$
|
(27,504)
|
|
|
$
|
13,517
|
|
|
$
|
(41,021)
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|
|
$
|
—
|
|
(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:
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Significant Unobservable Inputs
(Level 3)
|
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Impairment Charges
|
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(In thousands)
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|
|
Fair value measurements for the three quarters ended September 23, 2020:
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|
|
|
|
Assets held and used (1)
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|
|
$
|
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).
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:
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|
|
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|
|
Trade Date
|
|
Effective Date
|
|
Maturity Date
|
|
Notional Amount
|
|
Fixed Rate
|
|
|
|
|
|
|
(In thousands)
|
|
|
Swaps designated as cash flow hedges
|
|
|
|
|
|
|
|
|
March 20, 2015
|
|
March 29, 2018
|
|
March 31, 2025
|
|
$
|
120,000
|
|
|
2.44
|
%
|
October 1, 2015
|
|
March 29, 2018
|
|
March 31, 2026
|
|
50,000
|
|
|
2.46
|
%
|
Dedesignated swaps
|
|
|
|
|
|
|
|
|
February 15, 2018
|
|
March 31, 2020
|
|
December 31, 2033
|
|
80,000
|
|
(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.
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:
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|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 25, 2019
|
|
September 23, 2020
|
|
September 25, 2019
|
|
(In thousands)
|
|
|
|
|
|
|
Company restaurant sales
|
$
|
27,849
|
|
|
$
|
63,582
|
|
|
$
|
85,268
|
|
|
$
|
257,574
|
|
Franchise and license revenue:
|
|
|
|
|
|
|
|
Royalties
|
17,896
|
|
|
27,830
|
|
|
48,462
|
|
|
79,742
|
|
Advertising revenue
|
13,927
|
|
|
20,756
|
|
|
38,685
|
|
|
59,582
|
|
Initial and other fees
|
1,890
|
|
|
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
|
|
Franchise occupancy revenue consisted of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 25, 2019
|
|
September 23, 2020
|
|
September 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 franchisees
|
535
|
|
Revenue recognized (1)
|
(2,474)
|
|
Balance, September 23, 2020
|
21,317
|
|
Less current portion included in other current liabilities
|
2,112
|
|
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 Ended
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 25, 2019
|
|
September 23, 2020
|
|
September 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 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.
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 Ended
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 25, 2019
|
|
September 23, 2020
|
|
September 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 Ended
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 25, 2019
|
|
September 23, 2020
|
|
September 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.
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 Ended
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 25, 2019
|
|
September 23, 2020
|
|
September 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.
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.
Accumulated Other Comprehensive Loss, Net
The components of the change in accumulated other comprehensive loss, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Derivatives
|
|
Accumulated Other Comprehensive Loss, Net
|
|
(In thousands)
|
|
|
|
|
Balance as of December 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.
Note 15. Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended
|
|
|
|
September 23, 2020
|
|
September 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.